Can shale come to the rescue?

May 18, 2016 08:07 AM
Daily Energy Market Analysis

As crude oil prices hit another 7-month high on renewed concerns about risks to global supply, the question becomes whether shale oil producers can come to the rescue. Around the globe we are seeing the loss of millions of barrels of global production offline causing many to worry about the sustainability of production in a time when global demand is rising. Canada, Nigeria, Venezuela and other producing regions have reduced oil production by an estimated 3.8 million barrels a day. Can the shale patch ramp up and save the day? 

Oil prices rallied after wildfires north of Fort McMurray Alberta, Canada headed back toward oil sand installations that caused Suncor Energy to shut its main oil sands mine, dashing hopes for a quick rebound in Canada’s oil production. Right now the loss of Canadian oil is costing the market 1.2 million barrels of oil a day, and that’s costing Canada almost $985 million in gross domestic product in the last two weeks.

Venezuela is in shambles causing one oil analyst to predict that their production of oil might fall to zero. Oil production, which peaked at 3.4 million barrels per day in Venezuela, has probably fallen over a million barrels a day to just 2.78 million barrels in 2015. It is estimated that this year Venezuela’s output has fallen by at least another 188,000 barrels a day. Lack of maintenance and electricity issues is causing major problems. Oil companies like Schlumberger shut down operations in Venezuela because they have not been paid. Venezuelan oil production “could go all the way to zero,” said Philip Verleger, president of PK Verleger, according to Bloomberg News.

Nigeria’s oil output is not only under attack by militants but also by labor unions. It is estimated that militants in Nigeria's oil-rich Niger Delta region have cut oil production by 800,000 barrels a day of oil output. Though there has been some talk of restarts, the attacks continue. The Associated Press reports that Nigeria's oil output dropped to 1.4 million barrels a day, Oil Minister Ibe Kachikwu said Monday, endangering a budget based on production of 2.2 million barrels. The slump means Angola is now Africa's biggest oil producer, with a steady production of nearly 1.8 million barrels daily, according to the Organization of Petroleum Exporting Countries.

Nigeria's National Labor Congress and the Trade Union Congress, which say they represent 6.5 million workers, and some civic organizations, have called for a strike Wednesday to protest a 70% increase in gasoline prices, prompted by the removal of a government subsidy on gas and shortages of foreign currency. Nigeria is dependent on imports with oil accounting for 70 percent of government revenue according to AP.

There are also questions about Iraq’s production. There has been a major success story with Iraq raising output. Yet with ongoing terror attacks and the lack of investment dollars, it is likely that Iraqi production has peaked.

So, why does’t shale come to the rescue? They don’t have the money or the sustainability to replace these lost barrels anytime soon.

Haynes and Boone reported that it has tracked 77 North American oil and gas producers that have filed for bankruptcy since the beginning of 2015. These bankruptcies, including Chapter 7, Chapter 11, Chapter 15, and Canadian cases, involve approximately $51.9 billion in cumulative secured and unsecured debt. As of May 16, 2016, 35 producers have filed bankruptcy so far this year, representing approximately $34.7 billion in cumulative secured and unsecured debt. Despite the modest recovery in energy prices, all indications suggest many more producer bankruptcy filings will occur during 2016.

During the month of May, Texas bankruptcy courts surged to the top of the venue leaderboard, surpassing Delaware in terms of cumulative debt administered. Texas bankruptcy courts now lead the way both in terms of the number of E&P filings and cumulative debt. Thirty-nine E&P bankruptcies have been filed in Texas, representing approximately $24 billion in cumulative secured and unsecured debt. And there will be more.

Dow Jones reported that independent Texas oilman Mike Shellman tells WSJ the oil downturn means lights out permanently for all but a tiny fraction of the U.S. shale-oil industry. "It's a bust. It's done. It's over," says Shellman, who operates 60 marginal wells around San Marcos. With 50 years in the business, he says he knows dollars and cents, and says shale can only be profitable with oil well over $100.00 per barrel, "not the magic number" of $50 or $60 estimated by Wall Street and the shale industry itself. "I have interests in some shale wells, so would like to see it succeed. But America needs to be told the truth.”

The truth is what I have been saying. We have seen a price crash that will have long-term consequences for oil production, geopolitics and a new price spike in the future. From boom to bust and back again!

Oil will watch the dollar and Fed minutes but most of all inventory. The Energy Information Administration releases its report today, The American Petroleum Institute report was friendly, reporting crude down 1.14 million barrels, gas down 1.9 million barrels ad distillates down 2 million barrels. They pegged Cushing, Okla., at up 508,000. 

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.