The American shale industry experienced landmark stress in the second quarter of this year. April-recorded negative costs of WTI oil undermined the economy of many projects and had been scaring away those investing in the already unstable sector for a long time. A series of bankruptcy claims followed. According to the Haynes & Boone law firm, several dozen oil and gas companies with a total debt of more than $25 billion have initiated insolvency proceedings since January. These include major shale oil and gas producers Whiting Petroleum, California Resources, and Chesapeake Energy.
The failure of Chesapeake Energy deserves special attention, as it is one of the founders of the oil and gas shale revolution. The company with a thirty-year history focused on gas production, with oil extraction being more of an applied business. In late June, the giant filed for bankruptcy in the southern district of Texas. The company's market cap does not exceed $120 million for the time being, although it used to cost over $30 billion at its best. However, instead of winding up the firm, its assets will be transferred to key creditors. In compliance with the scheme, part of the obligations will be written off and part will be restructured by attracting new borrowed funds. That is, injections will continue. The Chesapeake case is a projection of actions with a rapidly replenishing pool of bankrupt shale sector players in recent months – they will be rehabilitated, with huge charge-offs and activity restarts by attracting new loans. These investment cycles do not have a clear horizon – quick profits can be secured with a barrel of oil exceeding the $50 level. But predicting the development pathway of the global oil market is akin to crystal-ball gazing in the present-day context of the 2020 pandemic shock factor.
However, this does not cancel the planned attempts to forecast the market situation by industry expert panels. Thus, in its July report, the Energy Information Administration of the US Department of Energy (EIA) raised the country's 2021 predicted oil production by 200 thousand barrels per day as compared to the previous (June) forecast – up to 11 million barrels per day. At the same time, the predicted oil production in the United States for 2020 remains at 11.6 million barrels per day.
As for gas, the EIA forecast is regressive: it is emphasized that its production in the United States will decrease by 3% by the end of 2020 due to low drilling activity caused by the fall in gas prices. And next year, gas production in the country will keep declining, even though the EIA expects an increase over recovering gas prices in the second half of 2021.
It is not just the 2020 collapse of oil prices that affects the prospects for unconventional hydrocarbon production in North America. Environmental concerns of the shale industry are also highly relevant, with complaints regarding not only barbaric hydro-fracturing, when toxic components of chemical solutions infect subsoil waters at the fields, but also the transport infrastructure. Thus, July 6 saw the Federal Court of the District of Columbia find that operational service of the Dakota Access oil pipeline should be suspended until another environment impact assessment. According to the Wall Street Journal, the study may take more than a year. Moreover, the court recognized that pipeline suspension might significantly disrupt the oil industry in North Dakota and possibly in other states as well, even with the current low petroleum demand. However, these reservations are secondary in the court's understanding when it comes to the environmental agenda.
The court explained that the building and operation permit for the pipeline, issued by the US army Engineer Corps, violates the National Environmental Policy Act (NEPA) due to the lack of proper ecological appraisal. The pipeline's operator Energy Transfer LP is going to appeal against the resolution.
The US federal authorities stand with the oil industry. US Energy Secretary Dan Brouillette blamed environmental lobbyists for the pipeline shutdown. He noted that the functioning of Dakota Access is economically beneficial, since it allowed to finance the social sphere in North and South Dakota, Iowa and Illinois. "The Trump administration will continue fighting for the expansion of American energy infrastructure, well-paying jobs for the American people, and the strengthening of our energy security and reliability," the Minister said in a statement.
Brouillette's message is another public confirmation that the US authorities will keep heading for the oil and gas industry development and the export of hydrocarbons, even under unfavorable price conditions for producers in the hydrocarbon market. And it does not matter whether US leader Donald Trump is re-elected for a new presidential term in the fall – subsidies to the shale industry will continue. The current substantial inflows into the economy during the pandemic period provide for this to be done with great enthusiasm even despite low oil prices. The US authorities cover the national financial deficit with dollar emission waves, but there are no clear strategies for their effective investments. Another thing is that the new avalanche of loss charge-offs of shale companies as part of their bankruptcy procedures is a sobering business motive. The accumulated distortions have yet to manifest themselves. Business logic is opposed to the political and geopolitical strategies of the US authorities that started a major energy expansion but ignored the obvious financial risks.