Patrick Bond: Coronavirus plus oil wars = fracking collapse, degrowth and slight breather on climate catastrophe?

Terrible times have engulfed the world, yet a silver lining would be if suddenly due to $30/barrel oil prices, the fracking industry dies, and if the massive contraction in the world economy now underway reduces greenhouse emissions. Of course the crisis will bounce right back once a vaccine is discovered and distributed. Is anyone thinking of ways that economic restructuring towards a Green New Deal or, at minimum, much greater economic localisation can result from the madness?

Oil price war puts squeeze on US shale companies

Market rout leaves most producers facing prices below production costs

16 March 2020 – 10:01 Jennifer Hiller

Houston — For the last five years, US shale oil producers have been battling suppliers for lower costs, and running equipment and crews hard to drive drilling costs down by about $20 a barrel.

The oil market rout last week has left most shale companies facing prices below their costs of production. Opec and major oil producers including Russia have turned on each other to launch a price war that threatens to sink shale companies burdened with higher costs.

The cause of Opec and Russia’s disagreement was what to do about plummeting oil demand as coronavirus curbs travel and economic activity worldwide. When oil producers failed to agree on co-ordinated cuts, they abandoned all attempts to keep global markets balanced.

With US crude falling 50% this year to near $31 a barrel, only a handful of the hundreds of US shale companies can profit from their newest wells, according to a Reuters analysis of field-by-field data provided by consultancy Rystad Energy.

Shale producers, most of which budgeted $55-$65 per barrel oil in 2020, have moved quickly to idle rigs, cut staff and generate cash for expenses. The industry is on the ropes for the second time since 2014, when de facto Opec leader Saudi Arabia launched the last price war to drive shale producers out of the market.

That effort pushed many shale producers into bankruptcy but ultimately failed because the industry made quick technological advances that drove costs down.

Lowest costs

Just 16 US shale companies operate in fields where the average new well costs are less than $35 per barrel, according to Rystad. Among those, Chevron, Devon Energy and EOG Resources said they plan or are weighing new spending cuts.

The largest US oil producer, ExxonMobil, turns a profit at $26.90 per barrel on its New Mexico properties, which are about a quarter of its Permian holdings, according to Rystad. The company declined to comment for this story, but said earlier in March it would slow its development in the Permian Basin, the largest US shale field that spans Texas and New Mexico.

Occidental Petroleum and privately held CrownQuest Operating both have costs below $30 per barrel, according to Rystad Energy.

But just covering output costs leaves producers lacking cash for shareholder dividends and corporate costs. Despite Occidental’s low-cost advantage, its shares traded on Friday at $14.26, down about 65% this year over worries it will not be able to shoulder its $40bn debt load.

In Oklahoma, Continental Resources can profit below $40 per barrel while EOG, Magnolia Oil & Gas and Murphy Oil can withstand the price onslaught in South Texas’ Eagle Ford shale play, according to Rystad.

In North Dakota only six producers can cover costs at that level. In the Permian, a dozen can.

The very few able to cover production costs will lead to a wholesale reduction in industry spending as unprofitable producers stop drilling, say analysts.

Already, producers are asking oil service companies, which supply them with what they need for drilling in the shale patch to cut the price they charge for those services by 25%.

Producers are already working with restructuring firms, hoping to cut deals with creditors, people familiar with the matter said, and others are checking the value of their hedges, a means of locking in prices for future output.

Redoubling cost cuts

“A limited amount of activity will be able to go on,” said Matt Gallagher, CEO of Parsley Energy, estimating that “activity levels will likely decrease 50% plus”.

Parsley last week led the charge of shale producers pressuring oilfield service companies for price cuts.

Most US shale production is “at risk with the current oil prices”, and new drilling projects are likely “to be put on hold relatively quickly”, said Artem Abramov, head of shale research at researcher Rystad Energy.

Parsley Energy is one of the few that can cover its costs with oil in the $30s, according to analysts’ estimates. But, said Gallagher, that is not good enough. “We fully expect that [cost] structure to reduce quickly from here,” he said.

Gallagher plans to cut spending and idle equipment, though the magnitude of the latest price collapse has not allowed him or others to precisely say how much and for how long. It will take six months for service costs to decrease, he said.

Competitors are still deciding how deeply they need to go. EOG Resources, one of the largest US shale producers, is “evaluating our activity” and “in the process of finalising our specific plans”, CEO Bill Thomas said.

Denver-based shale producer SM Energy has hedged 80% of 2020’s oil production, giving it a guaranteed price of about $55-$58 per barrel, and does not need to make quick cuts, said vice-president Jennifer Martin Samuels. Still, it is “evaluating the current plan in terms of modifying activity”.

“There are no good answers for the industry in a $30-per-barrel environment,” Stephen Richardson, a shale analyst at Evercore ISI, wrote on Thursday in a report titled: “Let’s not fool ourselves, it’s all uneconomic and likely to stay that way.”

Reuters

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Coronavirus poses threat to climate action, says watchdog

IEA warns that Covid-19 could cause a slowdown in world’s clean energy transition

Jillian Ambrose

Thu 12 Mar 2020

The coronavirus health crisis may lead to a slump in global carbon emissions this year but the outbreak poses a threat to long-term climate action by undermining investment in clean energy, according to the global energy watchdog.

The International Energy Agency (IEA) expects the economic fallout of Covid-19 to wipe out the world’s oil demand growth for the year ahead, which should cap the fossil fuel emissions that contribute to the climate crisis.

But Fatih Birol, IEA’s executive director, has warned the outbreak could spell a slowdown in the world’s clean energy transition unless governments use green investments to help support economic growth through the global slowdown.

“There is nothing to celebrate in a likely decline in emissions driven by economic crisis because in the absence of the right policies and structural measures this decline will not be sustainable,” he said.

The virus has stoked fears of a global economic recession and helped to ignite one of the sharpest oil price collapses in the last 30 years, wiping billions of dollars from the world’s largest energy companies.

The economic contagion is likely to stall many infrastructure projects, including the multibillion-dollar investments in clean energy needed to avert a climate catastrophe by the end of the decade.

The year ahead could mark the first time the world’s solar power growth falls since the 1980s, according to a report from Bloomberg New Energy Finance. The analysts on Thursday slashed forecasts for new solar power projects by 8%. It expected sales of electric vehicles to stall too.

“We should not allow today’s crisis to compromise the clean energy transition,” Birol said. He said global governments should use the economic stimulus packages which are being planned to help countries weather the downturn to invest in clean energy technologies.

He added: “We have an important window of opportunity. Major economies around the world are preparing stimulus packages. A well designed stimulus package could offer economic benefits and facilitate a turnover of energy capital which have huge benefits for the clean energy transition.”

The IEA’s analysis has shown 70% of the world’s clean energy investments are government-driven, either through direct government finance or in response to policies such as subsidies or taxes. The watchdog has also found government fossil fuel subsidies total $400bn (£300bn) each year.

Birol urged global governments to invest in energy efficiency measures, which might not offer good short-term returns while energy prices are low but would prove a lucrative investment in the longer-term.

The IEA head also urged policymakers to use the downturn in global oil prices to phase out or scrap fossil fuels subsidies, which could be used to boost healthcare spending.

“These challenging market conditions will be a clear test for government commitments,” he said. “But the good news is that compared to economic stimulus packages of the past we have much cheaper renewable technologies, have made major progress in electric vehicles, and there is a supportive financial community for the clean energy transition.

“If the right policies are put in place there are opportunities to make the best of this situation,” he added.

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