Production, Consumption Declines Strangle Shale Producers

Offshore

In February, oil production in the U.S. was on a record-setting roll, topping 13 million barrels per day before it and the rest of the U.S. economy fell off a cliff as COVID-19 oozed across the country and around the world.

While WTI and Brent prices are slowly improving, U.S. production and consumption figures remain anemic, with few signs of recovering any time soon, experts say.

The nation’s drivers entered November paying an average of $2.11 per gallon for regular gasoline, and diesel paying an average of $2.37, according to the U.S. Energy Information Administration. 

Gasoline consumption has come a long way from its low point in April, when the rate dropped to 5.85 million barrels per day, the lowest level since 1974.    

But the climb back has been arduous. Efforts to slow the spread of COVID-19 were most widespread in April, dropping total U.S. gasoline consumption by 37% from the same period in 2019. Since then, demand has increased to about 90% of what it was before the pandemic began.

The EIA forecasts higher fuel consumption through the end of 2021, with an average of nearly 19 million barrels per day in the third quarter of this year. Though a vast improvement over April, that number is still down 1.8 million from the third quarter of 2019. 

The agency expects consumption to reach an average of 20 million barrels per day in 2021, which is still .4 million barrels per day less than the 2019 average.

Meanwhile, U.S. oil production remains far below the all-time high set in February, and the EIA does not see much growth in the second half of 2020, and it sees a further drop in 2021.

U.S. oil production in August was 9.7 million barrels per day, 3.4 million barrels below February’s record, and the lowest production the industry has seen since January 2018.

EIA has lowered U.S. crude oil production estimates for 2020 by 370,000 barrels per day from an estimate of 11.7 million that it released in May. The agency expects crude production to average 11.3 million barrels per day in 2020 and 11.1 million in 2021, down from an average of 12.2 million barrels per day in 2019.

And rig count reports affirm the EIA’s outlook. The most recent rig count reporting before publication in this issue, according to Baker Hughes, as of Oct 30, 2020, is that 221 rigs oil, 72 rigs gas, and 3 rigs miscellaneous.  This is a most recent publication count of total drilling rig count as of Oct 30th at 296.  In February, when the bottom fell out, there were nearly 680 rigs operating across the country.    

The sustained shutdown has resulted in a dramatic drop in U.S. crude oil supplies, which is contributing to stronger U.S. oil prices, which are trending near the $40 per barrel mark, according to the Wall Street Journal.        

But those higher prices are not enough for many of the industry’s shale producers. Prices haven’t risen far enough to help ease the strain of debt taken on during boom times, according to the Journal. And the pandemic has forced producers to cut output, which prevents them from pumping their way out of trouble.

“I don’t think that $40 oil is enough to turn around the shale industry,” said Andy Lipow, president of Houston-based consulting firm Lipow Oil Associates. 

That price is still not enough to cover all the debt and costs that have been incurred during the boom, Lipow told the Journal.

“The turmoil is rippling through the sector,” the Journal says, citing a recent Deloitte LLP analysis that predicts U.S. independents, such as Occidental and Concho could have to impair the value of their assets by as much as $300 billion. 

The industry burned through tens of billions of dollars annually in recent years to increase production, and many producers took on heavy debt, prompting industry watchers to speculate about which companies will make it through the crisis. 

Denver-based Whiting Petroleum became the first major shale bankruptcy of the pandemic earlier this year, and Chesapeake Energy Corp. filed for bankruptcy protection in June.

Numerous other oil and gas, along with service providers have succumbed to bankruptcies in recent months.  As stimulus money has dried up, the pricing for servicing has remained extremely low, and completion activity has only slowly increased, it has forced many companies to seek bankruptcy protection.

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