US shale oil producers have so far held up admirably, clinging to life amid the collapse of the largest oil demand in history. US producers continued to pump to record levels in March, even after dozens of drillers had plans to limit production.
But with US storage poised to hit the longshoremen in a few weeks and the world deep in the greatest pandemic in modern history, the inevitable has begun to unfold: the arduous and costly process of well closures. .
Oil production in the country fell sharply to 12.2 million bpd in the third week of April, a good 900,000 bpd lower than the record high of 13.1 million bpd / j registered only one month before. This is a 7% drop in production in just a few weeks and the lowest level since July.
Many more may be on their way.
No more production cuts
Oklahoma based Continental resources (NYSE: CLR), the company controlled by billionaire Harold Hamm, has ceased all shale operations in North Dakota and has closed most of the wells in its Bakken oil field totaling approximately 200,000 bpd.
The company, however, refused to sell its contract oil to pipelines at negative prices by stating force majeure.
Continental defended its position by stressing that the coronavirus epidemic has “…resulted in the application of force majeure ” while adding that the sale of its oil at negative prices is a waste.
Continental took the risky gamble of wagering that economic growth would drive up prices and, therefore, left itself highly exposed to low oil prices by not using the usual industry manual to hedge future production with derivatives.
Continental is however in good company.
Rystad Energy via CNBC has announced that six major US shale producers will close 300,000 bpd of crude in May and June. This is about 100,000 bpd more than the reductions in April, bringing the reductions in total production in the country to 1.2 million bpd. The cuts will come from Continental Resources, ConocoPhillips (NYSE: COP), Cimarex Energy (NYSE: XEC), Enerplus Corporation (NYSE: ERF), Parsley Energy (NYSE: PE) and PDC Energy (NYSE: PDCE).
Continental Resources is expected to cut 69,000 bpd in April and nearly 150,000 bpd in May and June, while ConocoPhillips will cut production by 125,000 bpd of oil equivalent, including 60,000 bpd.
Premium: the oil sector that will suffer the most
Rystad Shale Research Manager, Artem Abramov, estimated that the largest shale deposits – Permian, Eagle Ford and Bakken – will reduce 900,000 bpd, 250,000 bpd and 400,000 bpd respectively in 2Q20, with closures accounting for 60%. In the early stages.
A closed well is considered a drastic last resort action, mainly because it can cause a huge, if not total, loss of production.
This is a big consideration in these difficult times, where even the values of the oil fields are going down into negative territory due to responsibilities such as plugging wells and cleaning up land.
Chris Atherton, President of EnergyNet, a company that exploits oil and gas activities, undeveloped land and royalty interests, told Forbes that prices for oil fields fell from an average price of $ 42,000 per barrel net flow per day when oil prices were around $ 60 / barrel to less than $ 20,000 today. Buyers started to get picky and sellers more desperate in 2019 while oil prices were still relatively high.
Things have gone to dogs now, with a closed field bringing in only half the price of an almost identical field but with oil still flowing.
As Bob Bracket of Bernstein Research revealed last week, “Closings are not easy decisions. When production stops, problems arise. Multiphase well flows are starting to separate, as problematic hydrates, waxes and asphaltenes are forming, which will have serious economic implications, “ citing many examples of fairly large wells with flows greater than 1000 barrels / day that could not be brought back to life after being closed.
This is the main reason why even the heavily indebted shale companies, including those in bankruptcy like Whiting Corp. (NYSE: WLL), insist on continuing to pump at all costs. Related: The Death Of American Oil
California Resources Corp. (NYSE: CRC) is a $ 133.7 million (market capitalization) company that was drowning in debt to the tune of more than $ 4 billion at the end of 2022. The global average cost of $ 35 per barrel of the company means it loses ~ $ 20 for each barrel of crude it pumps. However, the company is unable to close its wells because they require a continuous injection of steam to keep them alive.
A closed well is also a difficult proposition for a potential buyer of an oil field, as it is difficult to determine how much oil can be brought in, especially after a long layoff.
The only consolation for the besieged oil sector is that there will likely be no shortage of takers when the worst is finally over.
Atherton says his company has 40,000 registered users with access to $ 17 billion in cash ready to make deals. He predicted that struggling businesses will “turn into a flood of available assets” in about a year.
Bottomhunters will certainly wait to jump, the downside being that many investments in space could become worthless due to the wave of bankruptcy.
By Alex Kimani for Oilprice.com
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