US Shale Industry at The Brink of Bankruptcies, Consolidation

Even though 10 percent of global oil comes from the U.S. shale market, U.S. shale makes up 40 percent of global oil extraction activity and 100 percent of the growth in U.S. midstream and petrochemical sectors over the past 10 years, the report said.

The U.S. shale industry, hammered by low demand, international competition and high debt, is poised for “great compression,” a report from multinational accounting service Deloitte said Monday.

Shale companies face “an economic storm on the horizon” as oil prices have dropped by more than 50 percent to below $30 a barrel, down from around $60 before the pandemic. Lockdowns across the world caused drastic changes in the crude oil market, especially with transportation demand, the report said.

Collaboration by Russia and Saudi Arabia to flood the market with OPEC oil has helped to drive demand for U.S. oil lower, and China has turned to cheaper international sources for oil, the report said.

Even though 10 percent of global oil comes from the U.S. shale market, U.S. shale makes up 40 percent of global oil extraction activity and 100 percent of the growth in U.S. midstream and petrochemical sectors over the past 10 years, the report said.

High debt levels, and investor wariness around U.S. shale companies makes the industry ripe for consolidation and contraction, Deloitte said. The industry could write down more than $300 billion in assets and many companies will likely go bankrupt, the report predicted.

According to Deloitte, 30 percent of shale companies are technically insolvent when oil prices hit $35 per barrel or below, and 20 percent of companies suffer from “stressed financials.” This makes a volatile industry even more disrupted, the report said. More than 190 shale companies have declared bankruptcy in the past 10 years.

“Any major developments in U.S. shales will likely have a domino effect on the global oil and gas industry,” the report said.Last week, The Institute for Economics and Peace said in a report that the COVID-19 fallout on oil prices could result in the “collapse” of the U.S. shale industry.

The U.S. shale disruption will spill over into other industries, such as construction, other analysts predict.Financing for large liquid natural gas construction infrastructure projects in the U.S. Gulf regions has dried up, according to a June 19 report from the Institute for Energy Economics and Financial Analysis.

“What becomes more challenging is that the whole case for U.S. LNG exports was that the U.S. gas price was low, the international gas price was high, and there was a trade to be had,” Nikos Tsafos, a senior fellow with the energy security and climate change program at the Center for Strategic and International Studies said. “To me, it’s not obvious that you are going back to that world.”