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The collapse in oil prices could force a reckoning for the boom in American fracking

The dramatic drop in oil prices could upset the American fracking industry, analysts said Monday, as panic over the coronavirus epidemic reduced global demand and Saudi Arabia and Russia flooded the market with new supplies.

Oil prices plummeted as much as 30% on Sunday, which is the steeper tail since the United States began bombing Iraq in the 1991 Gulf War. The Organization of Petroleum Exporting Countries, the cartel of 14 nations that, together with Russia, manage a large part of the world’s oil supply, failed to reach an agreement to reduce oil production, triggering a price war that threatens to shatter the United States laden with debt.

Now the fracking industry, which President Donald Trump has sought to expand with hard-line support to increase fossil fuel production, is facing potential ruin. The spread of coronavirus, which causes the disease known as COVID-19, is grounding flights and halting industrial production in China, while rival manufacturers oversupply the market to defend their share. Fracking, an unbalanced but financially fragile sector, struggled to stay afloat with crude oil sales at $ 50 a barrel. If prices stay around $ 30, or even drop starting at $ 20US frackers may simply not be able to keep up.

“It’s a financial bloodbath,” said Clark Williams-Derry, an analyst at the Institute for Energy Economics and Financial Analysis. “With oil prices at the current level, there is a real risk that many of them will simply fail.”

Sunflower stalks dot the snow in a field near dormant oil platforms that have been piled up in Dickinson, North Dako


Andrew Cullen / Reuters

Sunflower stalks dot the snow in a field near dormant oil rigs that have been piled up in Dickinson, North Dakota.

The share price of Occidental Petroleum Corp. almost halved when the negotiations ended on Monday. Debt-ridden companies such as Chesapeake Energy Corp. and Whiting Petroleum Corp. ended the day with stock prices falling between 30% and 41%. Behemoths large enough to withstand almost all shocks have also had great success as Exxon Mobil Corp. has dropped nearly 12% and Chevron Corp. has fallen 15%.

Meteorologists are still determining the extent of the likely effect that falling prices will have on the wider economy. But it could also have an effect on politics, which is particularly fraught with fracking, the colloquial term for hydraulic fracturing, a drilling practice that breaks rock with high pressure water and chemicals to free up hard-to-reach reserves of fossil fuels.

Fracking now accounts for 63% of U.S. oil production, according to estimates from the Energy Information Administration. This figure looks set to increase as oil and gas drilling increases faster in the United States than any other country, and 90% of this depends on fracking, according to a report by scientists from over a dozen environmental groups. The contenders for the 2020 presidential election are currently struggling to expand, preserve or progressively eliminate a sector whose growth almost guarantees the climate catastrophe.

The fracking sector has expanded rapidly over the past decade when Wall Street investors have focused heavily on growing demand for oil and gas. In a way, those bets have paid off. More than a decade after Congress rushed to shore U.S. supplies in the face of possible oil shortages, the country has pumped so much crude and crumbly gas that former President Barack Obama has lifted the export ban put in place during the 1970s oil crisis. It also gave the new geopolitical muscle to the United States which quickly overtook Saudi Arabia as the world’s leading oil exporter.

But market dominance has a high cost. Despite lax regulations and low-interest loans, the high cost of fracking pits, combined with oil prices hovering around $ 50 a barrel, made it impossible for perforators to make a profit. Between 2012 and 2017, the 30 largest shale producers lost over $ 50 billion, according to a Wall Street newspaper estimate. From 2015 to 2016, 91% of all corporate debt defaults in the United States were in the oil and gas sector, financial research firm Moody calculated last year.

The gushing source of money on Wall Street slowed. In 2018, consulting firm Dealogic anchored the total fracking sector raised in equity and debt financing to $ 22 billion, less than half of what it collected in 2016 and almost a third of the 2012 sum.

“Investors have strengthened access to capital and expect greater capital discipline for these companies,” said Anastacia Dialynas, lead analyst for the Bloomberg New Energy Finance research group. “So there isn’t much bandwidth to make a negative budget work for a long time.”

One answer would be to consolidate smaller fracking companies. Oil giants such as Exxon Mobil and Chevron, which are heavily invested in oil exploration in the Permian Basin of Texas, could reduce production but withstand the short-term storm due to their size. The share prices of frackers who mainly deal with gas in the Appalachians, such as Antero Resources Corp., Cabot Oil & Gas Corp. and EQT Corp., actually increased slightly on Monday, a sign that investors are seeing the possibility of slowing down production. of oil majors as a short-term advantage for smaller, gas-focused companies.

With oil prices at the current level, there is a real risk that many of them will simply fail.
Clark Williams-Derry, analyst at the Institute for Energy Economics and Financial Analysis

But stricter investment limits could have serious policy implications for the sector. Less liquidity to waste means less investment in jobs that the Trump administration considers worthy of the compromises that result from fracking, including greater pollution, threats to water resources and worsening climate change.

This also poses a major risk to Democrats, who seem increasingly inclined to appoint former Vice President Joe Biden as presidential candidate to hire Trump. Biden, whose campaign it is piled up with oil and gas boosters, he promised to preserve the fracking industry and attacked Senator Bernie Sanders (I-Vt.), his only rival who remained in office for the nomination, for proposing to ban fracking and ensure Transition work supported at federal level for the workers concerned.

Places that focus heavily on fracking as the engine of economic stability “will fall in tough times,” Williams-Derry said. He compared the effect of low oil prices on U.S. frackers to an unhealthy person who contracts rapidly spreading coronavirus.

“You think of someone with a weakened immune system and they are now facing coronavirus,” said Williams-Derry. “This was an area that was already touch-and-go financially, which already had serious difficulties managing debt loads. This simply speeds up that problem and brings up all the other problems. “

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