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Difficult Period
for American shale
Having increased oil production almost
twice in 2008-2015, the United States have
an active impact on the global oil market.
They have become a driver for conservation
of sustainable imbalances in the global
market, contributing to a significant
increase in oil supply.
The fall in oil prices in the last two years
has not led to collapse of the US shale
sector, for which some of the key oil-
producing countries were hoping especially
those detonated the «price war» of the
Persian Gulf monarchy. However, the
unfavorable external processes have
more noticeable impact on the long-
term sustainability of the US oil industry,
especially given the high debt ratio of
subsoil users and capital capacity of shale
projects. Shale revolution has already not
so clear and optimistic prospects as a
couple of years ago.
T
he American oil industry shows all
the signs of a protracted depression
in an unfavorable pricing environ-
ment in 2015-2016. In particular, a long
fall of performance indicators is marked
for the first time in the last decade, as
well as scale reduction of capital invest-
ment in exploration and production by
mining companies.
After the highs reached in April last year,
the US has almost steady decline in pro-
duction of raw materials, mainly due to
shale and hard-to-recover oil. So, during
a year, by mid-July 2016, production fig-
ures fell by 1.2 million barrels per day, or
by 12.4% - to 8.49 million barrels per day
(including shale oil in the amount of 4.7
million bpd). This level of production is
minimum since August, 2014. And since
March 2016, there has been a significant
increase in the rate of decline, despite
some recovery in price quotations. In the
coming months, volatility in mining indi-
cators will remain at a high level.
It is worth noting that three regions pro-
vide the bulk of US production - Texas
(3.23 million barrels per day according
to the data for April 2016), the Gulf of
Mexico (1.59 million barrels per day) and
North Dakota (1.04 million barrels per
day). Meanwhile, the key shale forma-
tions are Bakken in Texas, the Eagle Ford
in North Dakota and Wyoming, as well as
Spreberri in Texas and New Mexico (Per-
mian Basin), extraction of which in the
end of the second half of 2016 was 1.11
million, 0.99 million and 0.7 million bar-
rels respectively per day.
Under the pressure of unfavorable con-
ditions the US industry players drastical-
ly reduced the number of operating oil
rigs compared with the peak recorded in
October 2014. According to estimates of
Baker Hughes, in the middle of July this
year, this decline was more than 1.25
thousand units - only 357 rigs worked.
However, in the period from late May to
mid-July of this year their number has in-
creased slightly (41 per unit) under the
influence of the changing pricing envi-
ronment.
However, according to Capital One
Southcoast consulting company, not less
than 510 operating rigs are necessary to
guarantee overcoming of the produc-
tion recession. Achieving this level in the
coming months is difficult, in view of the
continued high price volatility and uncer-
tain market expectations of subsoil users.
Thus, despite the fact that shale projects
need only several weeks for vertical drill-
ing and hydraulic fracturing operations,
well operation period does not exceed
1-2 years. In such circumstances, the lack
of drilling activity should be positioned as
a significant risk to the shale projects.
As a consequence, according to forecasts
of the US Energy Information Administra-
tion, if the average production of crude
Picture 1.
Trends in US crude oil production and net imports in 2005-2015, th. bpd.
Source: US Energy Information Administration
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oil in the United States in the current
year will amount to 8.61 million barrels
per day, in 2017 - only 8.2 million barrels
per day. The same forecast expects aver-
age oil price in 2016 to reach $43.57 per
barrel, in 2017 - 52.15 dollars. However,
the decline of mining indices in a «bear»
market has not been as significant as ex-
pected for example by monarchies of the
Persian Gulf, deployed the «price» war
on the global oil market in recent years
(although it is not necessary to deny the
geopolitical conspiracy against Russia
and Iran).
If Saudi Arabia and its closest allies real-
ly expected to destabilize producers of
shale and hard-to-recover oil by the col-
lapse in prices, they are objectively mis-
calculated. Practice shows that any price
recovery in the global market in a fairly
short period of time leads to an increase
in activity in the US shale sector, whose
members are guided by the more com-
mercially viable production methods,
and actively optimize the investment
programs.
In addition, price volatility has forced the
US to change the business philosophy
of subsoil users, including more flexible
business models and breakthrough tech-
consumers are trying to compensate for
the decline in US production through in-
creased purchases in foreign markets.
In the near term, the US will not be able
to become net exporters of raw materi-
als. At the same time, the US market has
already formed a significant oversupply
of light and ultra-light oil production
which, as of April 2016, exceeded 5.8
million bpd in aggregate.
In May this year, crude oil exports
amounted to 0.66 million bpd, which was
the highest figure since 1920. The main
export target markets are Canada (0.31
million barrels) and the Netherlands
(0.11 million barrels).
Removing of existed during 40 years ban
on oil export by Obama administration in
December, for lobbying of which the in-
dustry companies spent only 129 million
dollars in 2015, also did not act as an in-
centive for exports due to oversaturation
of the global market and unfavorable
supply conditions. Part of this is caused
by narrowing of the spread between the
benchmark of Brent and WTI, as a conse-
quence of low price premium North Sea
oil to the American standard. For exam-
ple, in May and July of this year, the price
premium remained below 1.5 dollars per
barrel.
Given the high freight rates, this fact
makes commercially unprofitable export
of raw materials to Europe and Asian
markets. However, the increase in the
WTI-Brent spread may enhance the in-
terest of traders to build up oil supplies
from the US to foreign markets, including
in the framework of arbitrage.
It is important that the unfavorable situ-
ation on the global market has launched
a downward revision of oil resource base
nological solutions. At the same time,
sectoral confrontation between Saudi
Arabia and North American producers of
shale oil is not over yet, despite manifes-
tation of less consistent policy by Riyadh
in this direction in recent months.
Despite the shale revolution, the US re-
mains the largest crude oil net importer.
For example, according to available data
for the April 2016, imports amounted to
7.05 million bpd, mainly from Canada
(2.71 million bpd) and Saudi Arabia (1.14
million bpd). For comparison, at the end
of 2015 imports did not exceed 6.89 mil-
lion barrels per day. That is, domestic
in the United States. Proven reserves of
raw materials, which are one of the best
indicators for assessing the capabilities
of industry companies to pay debts and
dividends, are showing increasing reduc-
tion. Subsoil users in recent months have
re-classified proved reserves, as well
as massively reject the development of
shale formations areas with less favora-
ble production profitability and active
exploration.
At the same time, the declared evalu-
ation of oil reserves in major shale for-
mations are also called into question,
being based in some cases on assump-
tions and hypothetical calculations. For
example, the traditional calculation pa-
rameters (porosity, saturation, etc.) for
the non-reservoir shale like formations
are weakly applied, while the results of
search and exploration drilling, as well as
high-resolution seismic surveys, are not
possible to extend to the whole area of
shale formations.
According to Bloomberg, this year at least
59 US companies have written off 9.2 bil-
lion barrels, or more than 20% of total
proved reserves. In fact, this is the high-
est rate of write-offs since 2009, when
the Securities and Exchange Commission
revised regulatory standards, facilitating
the revision of proved reserves of subsoil
users. For comparison, in a few years after
the mentioned decision of the regulator,
the proven reserves in the United States
have grown by 67% compared with 2009.
At the same time it is important that the
Securities and Exchange Commission
has recently increased control over how
mining companies are positioning their
reserves, how they evaluate their quality
and what their real intentions are, in an
Picture 2.
Dynamics of production of crude oil in the US since April 2015 to July 2016, th. bpd.
Source: US Energy Information Administration
attempt to prevent fraud from the indus-
try business.
In some cases, American companies
continue to purposefully «cheat» the re-
source base to increase market capitali-
zation and investment interest, as well as
for debt financing. In other words, some
companies simply have to show constant
growth of proven reserves, including
taking into account the frequent bind-
ing provided credit lines to this indicator.
They have two main ways to expand the
resource base - namely, a great buy of
new assets, or to find more. The use of
hydraulic fracturing technology and ver-
tical drilling makes final journey easier.
As a result, the US subsoil users man-
aged to lobby the need to address the
undeveloped areas of shale formations
as the proven reserves in the Securities
and Exchange Commission, appealing to
the «predictability» of their distribution
within shale formations. The Securities
and Exchange Commission has made
concessions, but put forward two impor-
tant conditions. First, the well must be
profitable under the price determined
by a special formula. If in 2014 the price
reached about $95 per barrel, in the fu-
ture this advantage has disappeared - at
the end of last year it did not exceed $50.
Second, the regulator requires that un-
developed portions to be introduced into
commercial use no later than 5 years af-
ter taking on companies’ balance.
These circumstances can lead to a fur-
ther substantial reduction in proven re-
serves of shale oil, even in case of con-
servation of average annual value of the
benchmark grades to the psychologically
important mark of $50 per barrel.
Further significant tightening of the peri-
Picture 3.
Comparison extraction of crude oil in the United States (excluding Alaska), the API scale,
th. bpd.
Source: US Energy Information Administration
Picture 4.
Dynamics of US exports of crude oil from April 2015 to May 2016, th. bpd.
Source: US Energy Information Administration
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od of low oil prices will negatively affect
the financial stability of the US oil indus-
try. This is especially true of hundreds of
small producers of raw materials, which
do not have sufficient free liquidity and
operate on the «periphery» of major
shale formations. It is worth recalling
that, in contrast to traditional deposits,
timed to coincide with a porous and per-
meable rock reservoirs, shale suites are
characterized by uneven zoning forma-
tion of source and distribution of recov-
erable reserves, mainly concentrated in
the most attractive areas (so-called «tid-
bits» or sweet spots).
The average profitability of production
at all US shale suites in the current price
environment remains negative, exceed-
ing $50 per barrel. For example, accord-
ing to the estimates by KLR Group, in
2016 the Eagle Ford is characterized by a
break-even price of 52-59 dollars per bar-
rel (the eastern part of formation is less
expensive), Bakken is breakeven at $67
per barrel, Pool Midland - 51 dollars per
barrel, respectively. As a result, American
mining companies continue to receive
damages even at today’s prices, not to
mention the period of record in the last
decade of price lows recorded at the be-
ginning of 2016. However, it should be
recognized that «tidbits» of leading shale
formations, in some cases, determine
the price of «cut-off», providing their
minimum return, at the level of no more
than 35-40 dollars per barrel (including
the reduction of investment costs). The
companies developing it are less suscep-
tible to price shocks.
According to the forecast of Wood Mac-
kenzie, only in 2016-2017, industry capital
investment in the US will be reduced by
an impressive $150 billion (not including
Alaska). The most significant reduction in
investment is characteristic for American
companies developing key shale forma-
tions of Bakken in North Dakota and Ea-
gle Ford in Texas. They account for 36% of
the total projected amount of Capex cuts
in the United States. For comparison, the
total investment in the whole world will
demonstrate compression at 370 billion
dollars, that is, the share of the United
States will reach 40% of the global con-
traction.
The Wood Mackenzie is sure if prices re-
main at an average annual level of $50
per barrel, the investment in shale pro-
duction in the foreseeable future will be
«sluggish, with tend to reduce». Only in
case of increase in the cost of a barrel at
$60 per barrel, the situation will improve
in the entire sector.
However, taking into account the capital
and operational costs, logistics, and the
need to repay debt, much of the industri-
al companies are in need of much higher
long-term prices. So, evaluations of KLR
Group suggest that for generation of a
10 percent rate of profit without the use
of borrowed funds, companies operat-
ing in the eastern part of the Eagle Ford
formation and Midland basin require
a minimum of 80-85 dollars per barrel
WTI. For subsoil users developing less
commercially viable oil shale formation,
the market price of oil should reach up to
100 dollars per barrel.
Although part of investment reductions
are due to introduction of less expensive
technological solutions within the verti-
cal drilling and hydraulic fracturing, the
revision of investment programs by min-
ing companies have a negative impact on
medium-term indicators of production
and especially exploration, which takes
special importance as a part of shale oil
production. It should be borne in mind
that oil reserves in shale wells are being
depleted much faster than traditional -
they need to constantly drill new wells to
keep production of raw materials.
Insufficient amounts of Capex in this con-
text are able to deal a painful blow to the
US subsoil users in the sector of shale oil
production. If the industry producers in
the US continue to reduce investment,
then, according to some forecasts, the
reduction of oil shale oil production
could reach 60% a year.
American branch companies are actively
recording financial losses and continue to
focus on involvement of borrowed funds,
despite deterioration of covenants and
reinsurance approach from lenders. It is
important that a number of companies
is forced to regular issue of shares and
other transactions in the stock market
due to the lack of availability of sufficient
debt financing. In this case, an additional
challenge is to reduce the industry’s ca-
pacity to hedge price risks. Thus, accord-
ing to estimates of IHS Energy, in 2016,
North American mining companies were
able to hedge up to 14% of total oil pro-
duction, and the forecast for 2017 is only
2%.
In this context, we cannot deny the ongo-
ing formation of a large «shale bubble»
in US oil market, the collapse of which is
able to critically affect stability of the en-
tire US oil industry and cause an uncon-
trolled wave of massive defaults.
It is noteworthy that, according to
Haynes and Boone, during the period of
January 2015 to the end of June 2016,
85 North American oil and gas produc-
ers have already announced a default.
First of all, from Texas and Delaware - 43
and 15 subsoil users, respectively. Their
total payables amounted to 61.18 billion
dollars. Including for the first half of this
year, the number of bankruptcies has
reached 43, with total unfulfilled guar-
anteed and non-guaranteed debt in the
amount of 43.96 billion dollars. By mag-
nitude of debt, SandRidge Energy (8,26
billion) and included in the top 20 larg-
est oil and gas producers of the United
States Linn Energy (5,96 billion) become
the largest bankruptcy in the meantime,
they filed for bankruptcy in the middle
of last May. Also, massive defaults have
been recorded in the oilfield services sec-
tor of the US, the number of which from
the beginning of 2015 reached 72 with a
total accumulated debt in the amount of
11.67 billion dollars.
Despite a slight recovery in oil prices in
2016, expectations of further continua-
tion of series of bankruptcies in the US
of subsoil users remain widespread. For
example, Halcon Resources and a num-
ber of other major industry players are
on the verge of default.
To summarize, we can say that the sec-
ond half of 2016 and the beginning of
next year will be crucial for the US oil in-
dustry, when key shale projects will have
a final check for strength.
In view of the reinsurance approach of
lenders and the unwillingness of the US
government to intervene directly in sup-
port of the industry, the prolonged price
crisis has significantly thinned market
players and will lead to its accelerated
consolidation through large-scale screen-
ing of most small and medium-sized pro-
ducers became «pioneers» of shale revo-
lution a few years ago.
Accumulated debt,
USD
Bankruptcy declaration
date
SandRidge Energy
8 260 219 863.65
May 16, 2016
Linn Energy
5 962 000 000.00
May 11, 2016
Breitburn Operating
5 817 354 822.88
May 15, 2016
Pacific Exploration & Production 5 320 000 000.00
April 29, 2016
Samson Resources
4 331 775 489.15
September 16, 2015
Ultra Petroleum
3 794 864 530.00
April 29, 2016
Table 1.
The largest defaults of US subsoil users in 2015-2016.
Source: Haynes and Boone LLP
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«Global Gas Group»:
природный газ не должен
быть «привилегией»
на сегодняшний день больше половины жителей казахстана не
имеют доступа к природному газу. «Привилегия» использования
«голубого топлива» есть только у 42% населения в 9 регионах
страны, это около 7 млн. жителей. Для решения этой проблемы
власти республики разработали Генеральную схему газификации
Рк на 2015-2030 годы. Более актуальным этот вопрос стал после
подписания Парижского соглашения, а также взятых казахстаном
обязательств по сокращению выбросов на 15% к 2020 году от
уровня 1990 года.
Помимо этого, природный газ дешевле, экономичней и безопасней
других видов топлива. в этой связи, все чаще правительства
различных государств прибегают к широкому использованию
сжиженного природного газа (сПГ). его основные страны-
потребители - япония, Южная корея, испания, франция, сШа,
китай и индия.
в этом году в казахстане введут в эксплуатацию первую
станцию регазификации сПГ, предназначенную для обеспечения
газоснабжения потребителей отдельных районов астаны. Проект
реализует группа компаний Global Gas Group. в этой связи мы
обратились к генеральному директору компании олегу Гончарову,
чтобы выяснить детали и подробности проекта, а также его взгляд
на особенности газификации в казахстане.
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