TPT July 2016

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JULY 2016 57
G LOBA L MARKE T P L AC E
newsletter noted that, after early May filings for creditor
protection by Midstates Petroleum and Ultra Petroleum, 59
American oil and gas companies are now bankrupt. Input from
Reuters, the law firm Haynes & Boone, and the credit industry
resource indicates that the number of
US energy bankruptcies is closing in on the staggering 68
filings seen during the depths of the telecom bust of 2002
and 2003. And Charles Gibbs, a restructuring partner at the
international law firm Akin Gump in Texas, told MarEx that the
domestic oil industry is not even halfway through its wave of
bankruptcies.
“I think we’ll see more filings in the second quarter than in the
first quarter,” Mr Gibbs said. Fifteen oil and gas companies
filed for bankruptcy in the first quarter. (“US Oil and Gas
Bankruptcies at Historic Levels,” 4 May)
Perceiving “notable parallels” between the telecom and
energy boom-and-bust cycles, MarEx noted that pioneering
technology brought an influx of investment to each industry. A
plethora of new, small companies issued high levels of debt,
and a supply glut sapped pricing just as demand fell sharply.
For the energy sector, the consequences are already being
felt, and MarEx sees no early reversal of fortune. Among its
observations:
› Until recently, banks were willing to offer leeway to
borrowers in the shale sector, but lately some lenders
have tightened the purse strings.
› A widely predicted wave of mergers in the shale space is
yet to materialise as oil price volatility makes valuations
difficult and buyers baulk at taking on debt loads until target
companies exit bankruptcy.
› Losses for energy investors in the stock and bond markets
over the last two years are significant. It remains unclear
how long it will take to get through the worst of the declines,
and who will be left standing when it is over.
The use of fracking in older but not quite
played-out fields is seen as dealing the
knockout punch to high prices
The Price of Oil, published by Cambridge University Press
late last year, was written by Marian Radetzki, a professor
of economics at Luleå University of Technology, Sweden;
and Roberto F Aguilera, an adjunct research fellow at Curtin
University, Australia. Guest-blogging this spring on Scientific
American, the co-authors expanded on the main proposition
of their book: that the period of high oil prices has come to
an end. (“The Age of Cheap Oil and Natural Gas Is Just
Beginning,” 3 May)
Noting that, in constant money, the price of oil rose by almost
900 per cent between 1970 and 2013, Messrs Radetzki and
Aguilera compared this “truly spectacular” increase with the
68 per cent price rise over the same period for metals and
minerals, a commodity group that, like oil, is exhaustible. They
hold that political rather than economic forces have shaped
the inadequate growth of upstream oil production capacity, in
their view the dominant factor behind the sustained upward
price push in the sector.
The Price of Oil asserts that the international spread of two
revolutions will assure much ampler oil supplies, delivering
prices far below the highs that prevailed between the end of
2010 and mid-2014. Here, abridged and lightly edited, is the
authors’ analysis of these twin developments:
› The shale revolution – a result of technological
breakthroughs in horizontal drilling and hydraulic
fracturing, or fracking – has in less than a decade turned
long-run declining oil production trends in the US into a rise
of 88 per cent from 2008 to 2015. Despite current low prices
and the damage done to profits, an exceedingly high rate
of productivity improvements in this relatively new industry
promises to boost shale output still further.
The US does not stand out in terms of shale resources. Even
an incomplete global mapping suggests a US shale oil share
of no more than 17 per cent of a huge, widespread geological
wealth. Given mainly non-proprietary shale technology and
the many advantages to be expected by producing nations, it
is inevitable that this revolution will spread beyond the United
States.
The world beyond the US will exploit its shale resources as
successfully as the US has done in the past ten years. This
would yield rest-of-world output of 20 million barrels per
day in 2035, roughly comparable to the global rise of all oil
production in the preceding 20 years – a stunning increase
with far-reaching implications.
› The second, related, revolution grows out of a dawning
realisation that advancements in horizontal drilling and
fracking – technologies associated with shale – can also be
exploited for fuller extraction from conventional, but old and
tired, oilfields. If the rest of the world applies these techniques
more broadly, as the US has done in recent years, this would
yield a further 20 million barrels per day of oil by 2035.
The increases in oil output would be bound to put downward
pressure on prices, either by preventing rises from recent
levels, averaging some $53 per barrel in 2015; or by pushing
prices back to these levels if an early upward reaction takes
place. The authors of The Price of Oil foresee a price of
$40 by 2035 – well below the levels posited in “authoritative
forecasts” by public bodies and leading oil corporations.
Of related interest . . .
› The US Energy Information Administration (EIA)
estimates that natural gas production from hydraulically
fractured wells now makes up about two-thirds of total US
marketed gas production. This is greater than the share of
crude oil produced by fracking, which accounts for about half
of current US crude oil production.
Well completion and production data supplied to the EIA
by IHS Global Insight and DrillingInfo Inc demonstrate the
dramatic increase in US natural gas production associated
with fracking. In 2000, approximately 26,000 hydraulically