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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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U.S. Shale Remains In Survival Mode For Another Year

Texas rigs

After slashing capex plans for 2020 and idling rigs by the dozen, U.S. shale drillers are still not ready to return to their default state of perpetual growth. Oil is simply too cheap for that, so they are staying in survival mode, maintaining production with no plans to start boosting it anytime soon. Shale producers are caving in to low oil prices and worried investors, pledging to stick to production maintenance for the time being, Bloomberg reported this week, citing updates by several of the larger shale drillers in the United States. Modest growth in production is the most that any of these producers can offer their shareholders, with some cutting their earlier production guidance for this year and declining to provide any update on 2021.

According to some, U.S. onshore oil production shed as much as 2 million bpd when the double blow of the Saudi-Russian price war and the coronavirus pandemic struck. It will be a while before it recovers, and analysts see this “while” as at least a couple of years. Some even doubt that the industry will recover to its pre-crisis state at all.

Prices are at the heart of the problem, of course. This week benchmarks have been trending higher, but the rally has been limited: after both the API and the EIA reported substantial inventory declines that pushed West Texas Intermediate higher, today the U.S. benchmark was down at the time of writing, albeit modestly. Oil prices will likely continue to move extra-dynamically in the coming months as the spread of Covid-19 continues to cast a thick shadow over the future of the energy industry.

Karr Ingham, Petroleum Economist for the Texas Alliance of Energy Producers and creator of the Texas Petro Index summarized the situation in a June news release:

“Petroleum energy demand dropped off the cliff sharply and rapidly at the same time crude oil production was peaking, particularly in Texas and the U.S.,” Ingham said. “That would have been bad enough; throw in a market share temper tantrum between Saudi Arabia and Russia at the worst possible time, and you have a thoroughly devastating impact on energy markets.”

Related: China Is Using The Pandemic As An Excuse To Not Buy U.S. Energy

It takes a lot of time to recover from such an impact, and this is becoming increasingly clear as prices remain stubbornly below $50, thwarting any hypothetical production growth plans. Layoffs, capex cuts, and bankruptcies are on the agenda right now, and this agenda will stay in place until WTI rises to at least $50, at least according to some industry executives who see that price level as high enough to restart drilling new wells. 

Even then, however, efforts will focus on development, that is, exploiting already proven reserves. Spending on new exploration, meaning, a substantial increase in new production, will have to wait as the industry grapples with a reality that may involve some permanent oil demand loss. This reality may force a rethinking of the whole shale business model.

“For most of my career, we would reinvest all our cash flow and then show our success by how much we could grow our production,” Bloomberg quoted the chief executive of Concho Resources as saying earlier this month. “Well, that’s not how it’s going to work in the future.”

Tim Leach is very likely right: with all that cash flow getting poured back into production, most shale producers have accumulated sizable debt piles, and now these debt piles are sinking them. In the first half of the year, 23 shale oil companies in the U.S. filed for bankruptcy protection, with a collective debt loan of over $30 billion. And more debt is maturing over the next two years, which means more bankruptcies. Those that survive will need to come with a more financially sustainable model after burning through billions of cash for the single purpose of boosting production to the record-high cliff it fell off in the spring.

By Irina Slav for Oilprice.com


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  • Mamdouh Salameh on August 07 2020 said:
    I have calculated that US oil production has lost an estimated 6.3 million barrels a day (mbd) this year so far as a result of the COVID-19 pandemic triggering a collapse of oil prices compared with a claim by the US Energy Information Administration (EIA) that the decline was only 2 mbd. This loss was totally incurred by the US shale oil industry. Therefore, US oil production will be struggling this year and the following years to reach 6-7 mbd.

    The EIA and analysts are giving us information by a drip about the virtual collapse of US shale oil production. The evidence is apparent to everybody to see in the form of hundreds of bankruptcies, a collapse of oil rigs from some 750 before the pandemic to 180 now, a huge slash of capes plans for 2020 and uncertainty about 2021 and a delay by shale drillers in restarting idling production wells.

    It is very possible that we may never see the US shale oil industry back to pre-pandemic levels again or ever. The industry is now paying the price of not only the destructive pandemic but also producing recklessly and excessively to achieve geopolitical gains at the expense of economic benefits.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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