Resilient shale: why the US oil industry will survive the collapse of prices

The continued drop in oil prices, which since June 2014 has reached almost 60%, raised questions about the well-being of the American oil shale industry.
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Since 2008, the shale revolution gathered momentum rapidly and unexpectedly brought the United States into world leaders in the production of hydrocarbons. But now the industry is faced with the first really serious test, and some observers even say that at stake is its survival. Is shale revolution threatened or the American Petroleum has a safety margin to withstand a period of low prices?

The last time the oil market is faced with a similar price collapse in 2008, when a barrel cost initially rose to $ 147 and then fallen to $ 30. American shale boom had just begun, and prices recovered fairly quickly. In 2011-2013, the average price of Brent crude oil exceeded $ 100 per barrel, which, according to BP's British, has been the most stable price since 1970. High prices kept shale boom, but such favorable conditions, seems to have ended: few expect the return of oil prices to three-digit figures in the coming years.

Forecasts gloomier

On Monday, one of the most influential in the commodities market, Goldman Sachs banksuschestvenno - for $ 20-33 - lowered forecasts for world oil prices. The bank's analysts forecast that Brent average price in 2015 is $ 50.4 and in 2016 - $ 70 (previously the bank had expected $ 83.8 and $ 90 respectively). American oil WTI, according to a new forecast of Goldman Sachs, will cost an average of $ 47.1 in 2015 and $ 65 in 2016 (instead of the previous estimate of $ 73.8 and $ 80).

Slightly more optimistic for this year, analysts Societe Generale and Deutsche Bank: they are written on 9 January that the average Brent price of $ 55 per barrel (Societe Generale) and $ 59,4 (Deutsche Bank).

So, investment banks expect the global benchmark Brent will cost an average of less than $ 60 in 2015. But the extraction of shale oil in the US profitable at a price above $ 65 per barrel of Brent (the national average, according to Rystad Energy and Morgan Stanley Commodity Research). On Tuesday, January 13, of Brent traded below $ 46, then there are many oil projects in America today are unprofitable, and will remain so at least until the end of 2015. Does this mean that companies go bankrupt, and the slate industry collapse?

Production continues to grow

Goldman Sachs believes that there is. Moreover, the fall in prices can go for the benefit of the industry - sdelatit more efficient and resistant to price fluctuations. Bank analysts believe that the price of WTI crude oil should remain at $ 40 per barrel (now - $ 45) in the six months to significantly slow down the production in the United States. But Brent and WTI reached bottom in the second quarter of 2015, says Goldman Sachs, and by early next year, they already will cost $ 70 and $ 65 respectively.

Now the US continue to increase oil production, which is already located on the thirty-year high. In December 2014 average daily oil production of 9.2 million barrels., Reported Jan. 13 US Energy Information Administration (EIA). In 2015, the agency expects to increase production to 9.3 million barrels. / Day. According to the November forecast of the International Energy Agency (IEA), in 2015, production in the United States will increase to 9.4 million bbl. / Day. (For comparison - in Russia, average daily production of crude oil (condensate) for 11 months of 2014 amounted to 10.5 million barrels.).

Low prices have not yet affected the current production, but the company began to reduce investment and delay the drilling of new wells. According to the latest Baker Hughes, who oilfield comanija publishes a weekly basis, for the week to 9 January the number of active rigs in the US fell by 61 - the largest decline since February 1991 - to 1421. The number of active drilling rigs will fall to 1,000 by March or April, if prices do not recover, the president of consulting firm WTRG Economics James Williams. "Production growth or slow down, or stop," - he told Bloomberg January 10.

There is no doubt that oil prices will rise again, but to no minimums, they will drop, as they last long and to what level will be able to recover, no one can say. "These futures markets suggest that oil prices will subsequently rise again, but will remain below the level of recent years - wrote in December, the IMF economists Rabah Aretski and Olivier Blanchard (pdf). - However, the further development of the situation is due to the significant uncertainty with respect to changes in supply and demand factors. "

Elusive breakeven price

What will happen to the US shale industry, if the quotes will be held, for example, at current levels ($ 45-50 per barrel)? In theory, the answer to this question is related to the concept of break-even price (breakeven price), ie the price of oil, in which the production is profitable. If the market price of oil falls below its cost, the producer becomes unprofitable to produce oil. The problem is that, although all analysts based on the concept of breakeven price, a precise definition of this indicator does not exist, companies and analysts use different methods of calculation. Broadly speaking, the break-even price must cover all costs of production of the company with full cycle of hydrocarbon production - from search and geological work to the implementation of raw materials on the market, tax deductions, etc. At the same time for companies part of such costs may be irrelevant (sunk costs), since the funds have already been spent on them is no longer possible to influence.

In addition, the profitability threshold varies from project to project, from site to site and from manufacturer to manufacturer. Even within the same field different manufacturers may have different threshold payback because they use different methods of drilling, their HP wellus may be more or less productive. In addition, they may have different leverage, and therefore resistance to low prices, too, are different. One of the largest US shale deposits - the Bakken in North Dakota - are working more than 100 companies. Analysts various investment banks, including UBS, Goldman Sachs and ScotiaBank, estimated breakeven price for Bucky to $ 60-80 per barrel. And according to the presentation (pdf.) Department of Mineral Resources in North Dakota, it ranges from $ 29 to $ 77.

Mass will not ruin

Many private companies, expects to earn on "shale Klondike", took to develop expensive projects loans, and now need to service that debt forces them to sell oil at a price even lower than the threshold of profitability. According to estimates of S & P Capital IQ, if in 2010 the total debt of US companies that are engaged exclusively in the production of oil and gas (this does not include vertically integrated giants like ExxonMobil) was $ 128 billion, this amount increased to $ 199 billion by the fourth quarter of 2014. On the last week was the newsbut the bankruptcy of the first US oil company, specializing in the production of oil shale: private Texas company WBH Energy could not discharge its liabilities by $ 50 million.

But while this is an isolated case. Goldman Sachs believes that the defaults zakreditovannyh most companies can begin only if WTI oil will last at $ 40 per barrel until mid-2015. "Companies with a higher credit load already in the preventive mode, when money is deposited only on the maintenance of the current fields" - the bank said in the report.

What is shale gas

The collapse of oil prices and may affect the natural gas market, while the US price of gas does not depend directly on oil prices. In the US, natural gas from shale rock began to produce oil before, in 2013, more than 40% of all natural gas produced in the United States, was the origin of the shale.

One-fifth of the total US production of gas is necessary for the gas associated with oil production, so the possible reduction in oil production due to low prices will inevitably impact on production rates hectaresa. In addition, lower oil prices threaten US plans to export natural gas. While US companies are only involved in infrastructure construction: the US built four LNG terminals, and shipping the first of them - Sabine Pass in Louisiana - will begin only at the end of 2015. Asia is considered to be a priority market for the US LNG. For example, after the disaster in Fukushima, Japan stopped operation of all nuclear reactors in the country, and the gas became her main source of energy, and the country - the main buyer of LNG in the region. In addition, the Asian gas prices spurred expensive oil.

In 2013, the average price for LNG supply to Japan was $ 16.45 per 1 million British thermal units (Btu), but in 2014 it dropped to $ 15.50 per 1 million BTU. According to analysts, to Reuters interviewed in December 2014, prices for Japanese gas contracts in 2015 could fall by 30% due to the collapse in oil prices.

Shale optimism

Goldman Sachs believes that the current period of low prices, is likely to give rise to a "new industry", which will be characterized not only for smallerratami on field service, and higher productivity. New Balance will require oil companies to abandon the most expensive deep water projects and projects for the development of the oil sands, as well as to adopt alternative, more efficient technologies. The bank predicts that companies will have to reduce costs by 20-30%. Branch is probably waiting for consolidation, larger players are in a good financial position, will get rid of unprofitable assets and choose a more promising projects.

Goldman Sachs emphasizes the "optimistic character" shale industry, "the views of manufacturers are unlikely to change, unless the situation will not be particularly hostile, and the prices are so low that call into question the very survival of the industry."

Shale production is characterized by more flexible and can be quickly re-established as soon as the pricing environment improves. If conventional well was closed, her return to the previous level of production may take "months, if not years," said directorPlatts in Houston Isa Ramasamy. But production recovery at the well, where it is used freking takes only a week, "so the American producers of shale oil may return to the market in the short term, as soon as prices start to rise."