“Believe me, it will be a sad day.”
This is the statement of the Minister of energy of Saudi Arabia Prince Abdul Aziz bin Salman, is made in the “black Friday” on the sixth of March OPEC meeting+ was proved right, as the world’s energy giants are entering into oil war that caused the collapse of prices and raised fears associated with the possibility of bankruptcy of the entire us shale industry.
If energy independence of America will be threatened if the oil and gas industry of the country to survive the effects of this crisis?
“Plan “B” no”
After the containment of deliveries from 2017 to maintain prices at a fateful meeting in Vienna the oil cartel OPEC tried to seek additional production cuts of 1.5 million barrels per day (b/d), starting in April.
it was Assumed that the core members of OPEC will cut production by one million b/d, while countries outside of OPEC, primarily Russia — on 500 thousand b/d.
before the start of negotiations the demand for oil has already started to fall due to a global pandemic coronavirus and unseasonably warm January. The Minister of oil of Iran Bijan Zanganeh (Bijan Zanganeh) stated that in case Russia or other countries not included in OPEC, will not accept this proposal, OPEC is “no plan B”.
However, according to available information, Russia has refused to participate in it on the grounds that as a result of further reduction of production is still a large market share will go to American manufacturers.
In response, Saudi Arabia decided to flood the market of crude oil by increasing production. It plans to increase production by 25% to 12.3 million b/d in April, starting a price war in an attempt to regain lost market share.
This oil-dependent middle East, the Kingdom lowered its selling price in April, putting pressure on Russia and other producers outside the OPEC, including the US. Neighbors Saudi Arabia also warned of increasing production — including a million barrels per day in the United Arab Emirates.
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the market Reaction was instantaneous. 18 Mar the already low price of oil has fallen by more than half to 18-year low and amounted to just over $ 20 per barrel. Previously, for almost a decade, prices remained at around $ 100 per barrel, and for nearly five years, oil traded at more than $ 50.
According to the forecasts of the financial conglomerate “Morgan Stanley” (Morgan Stanley), in the second quarter of 2023, Brent oil will trade at around $ 30 per barrel and other analysts warn that if the standoff between Saudi Arabia and Russia will continue, the price may UPAthere’s below $ 10 per barrel.
Oil is now under a “triple shock” because prices are determined by three main factors — price war, pandemic coronavirus COVID-19 and a glut in the market. And all this is happening at a time when the global economy is at its lowest level since the global financial crisis. It is expected that the pandemic will lead to a reduction in demand for fuel worldwide, at least 10% per cent, but the situation may deteriorate depending on the extent of the global crisis.
the glut in the market in the first half of this year could range from 800 million to 1.3 billion barrels, which the consulting company “ay-aitch-es Markit” (IHS, Markit) calls “the most extreme in the entire history of the glut in the world oil market”.
“the Global surplus of this magnitude has never been observed, — said Vice-President and head of the oil markets of London consulting company Jim Burkhard (Burkhard Jim).
“this is the world’s largest semiannual surplus in this century amounted to 360 million barrels. We expect to exceed this figure by half or more.”
on March 24, the U.S. oil brand, West Texas Intermediate (WTI) were trading at about $ 24 per barrel, while futures for Brent oil at 27 dollars per barrel on expectations of fiscal stimulus Washington in the amount of two trillion dollars to support the ailing U.S. economy.
However, analysts do not believe that the reduction process is stopped.
“we do not know how serious the global crisis,” — said in an interview with Reuters (Reuters) – senior andnalytic international brokerage OANDA in new York Edward Moya (Moya Edward).
“Probably, further stabilization of oil prices will be impossible.”
a Blow to shale industry in the USA
Shale boom has led to the fact that, in 2018, America has become the world’s largest producer of crude oil, exceeding the production volumes Saudi Arabia and Russia. After the previous oil shortage in the United States, formed in 2008 436 billion in September 2019 American manufacturers have surplus, with the result that President Donald trump said earlier this year that “we don’t need middle East oil”.
Even the collapse of prices in the years 2014-2016, which has led to the fact that dozens of American oil companies declared bankruptcy, and the dismissal of hundreds of thousands of workers are unable to weaken the dynamics of the growth of American industry.
Will this time be different?
According to the international consulting company “wood Mackenzie” (Wood Mackenzie), working in the energy sector, only to exit at break even for many companies it will be necessary for the average price of Brent crude oil was $ 53 per barrel. If by the end of 2023, the price of Brent oil on the average will be $ 35, the loss will amount to about 380 billion dollars.
“this time, after five years of rational investment and austerity, will have to reduce much less obvious excessive costs. And capital raising is now much more difficult, especially for independent companies in the U.S., while activity in the market of mergers and acquisitions is at a record low,” said Tom Ellacott (Tom Ellacott) from the “wood Mackenzie”.
“in addition, many companAI has already made the bulk of sales are obvious assets”
According to analysts of the news Agency “s & P global Platts” (S&P Global Platts), given the fact that companies are cutting production, jobs and investment to stay afloat, the American industry this year will lose about 500 thousand barrels per day and will increase to 1.3 million barrels per day in 2023.
the ContextWSJ: U.S. ready to negotiate on the reduction of oil production?The Wall Street Journal22.03.2020 WP: OPEC and Russia killed the oil shale optimismthe Washington Post10.03.2020 Bloomberg: Putin starts a war with shale oil the US?Bloomberg09.03.2020 OilPrice: good news for Russia — the growth of shale oil in the United States замедлилсяOilPrice23.10.2019 If prices will start to rise again, to rebuild American industry will be more difficult due to the high level of debt.
“what we are not seeing a recovery of the oil shale industry of the US at the same pace as it was in cycle of low oil prices in 2015-2016, partly due to the state financial institutions and the degree of their willingness to refinance the US shale industry,” said Director of the international analytical Department of Agency “s & P global Platts” Chris midgely (Chris Midgley).
“the Debt maturing in 2023 and 2023 ($20 billion and $ 30 billion respectively) will have to refinance, and at these prices it will be very difficult.”
According to Dave Ernsberger (Dave Ernsberger), head of pricing and market analysis, Agency “s & P GLthe was Platts”, the lack of support on the part of investors could be catastrophic.
“the Whole shale sector over the past two years under intense pressure from investors, who demanded to provide positive cash flow to dividends and to return profits to shareholders. Any company declaring that it will overdraw and greatly increase production, subjected to “punishment”, losing out on the cost reduction assets,” he said.
“Now after what has happened over the last couple of weeks, it is almost impossible to imagine that any profitable company will be able either to refinance on an unsecured or secured market… and bond Prices fell, the yield exceeds the limit, they are trading at 20% -21%, so we are waiting for a rampant non-compliance and bankruptcy.”
According to the law firm “Haynes and Boone” (Haynes & Boone), who works in the energy sector, last year was a record number of bankruptcies and reduce the rate of assets: bankruptcy announced 50 energy companies (among which 33 oil and gas companies), and in 2023 it is expected more such cases, given the impending wave of debt.
the industry is in a difficult position even in the declining productivity of wells in process of maturing of the shale regions. According to experts, “Ah-h-es Markit”, the annual decline in production from wells in shale deposits Permian basin (Permian Basin) is about 40%, and to restore the volumes required increased drilling, which is unlikely, however, it is expected that the rig count will be reduced by 30%.
Although over the past five years, U.S. oil companem managed to reduce drilling costs about $ 20 per barrel, only 16 of them work in the fields, where the cost of drilling new wells is less than 35 dollars. According to the Federal reserve Bank of Dallas, the break-even price for the industry is $ 50 per barrel, and this year, most of them budgeted rates of the order of 55-65 per barrel.
“Trying to find ways to improve efficiency, never bet on technology is necessary,… but in the coming months, expect serious shocks,” said midgely from the “s & P global Platts”.
Retreat whether Russia or Saudi Arabia? According to the “s & P global Platts” break-even price for Russia is $ 54 per barrel, and Saudi Arabia — $ 82, which means that in case of a prolonged price war, both countries have something to lose.
However, Russia has accumulated foreign exchange reserves, which are estimated at 520 billion dollars, and Saudi Arabia has the lowest cost of oil, along with gold reserves in the amount of about $ 500 billion and little debt. National oil company “Saudi Aramco” (Saudi Aramco) is known for the fact that it is the cost of production of one barrel is about 2.80 USD and Russian companies, including “Rosneft” and “Gazprom”, reported production costs of less than four dollars.
“both Russia And Saudi Arabia can wait it out long enough and soon you start to feel real economic damage,” concluded midgely. According to analysts, “the foreseeable future” price war will continue (if not there will be deterioration in market conditions), and likely to the detriment of American industry.
However, low prices threaten Saudi Arabia’s plans to diversify its economy, and lower government spending could cause public discontent with the repressive regimes in all the countries of the Persian Gulf, as well as in Russia and Venezuela.
According to the International monetary Fund, even if oil prices return to the level of 50-55 per barrel, by 2024, the foreign exchange reserves of Saudi Arabia will be reduced to the level of a five-month import cover, which will lead to potential balance of payments crisis and the abandonment of the dollar peg.
America is taking steps in response, and the trump has announced plans to buy up to 77 million barrels of crude oil and appoints Victoria Coates (Victoria Coates) special representative for the energy sector in Saudi Arabia amid speculation about a deal between the US and Saudi Arabia to stabilize oil markets. Some us lawmakers urged to impose an embargo on purchases of oil abroad, and the Texas railroad Commission even proposed to limit production in Texas to support prices.
President trump said that America is still able to exert “significant influence on the situation” and could still find a compromise. The American leader will need all his famed ability to make deals and even more to implement what could be the deal of the century with Saudi Arabia, to maintain energy independence and the shale industry in the USA.
the new York times contain estimates of the solely foreign media and do not reflect the views of the editorial Board of the new York times.