Nine out of the top ten bankruptcies in the USA in 2016 were energy companies, with fracking companies accounting for five out of the ten, according to Jones Day:
“With one exception, the Top 10 List of ‘public company’ (defined as a company with publicly traded stock or debt) bankruptcies of 2016 consisted entirely of energy companies—solar, coal, and oil and gas producers—reflecting, as in 2015, the dire straits of those sectors caused by weakened worldwide demand and, until their December turnaround, plummeting oil prices.”
Coal companies, Peabody Energy and Arch Coal, struggled in the face of tougher environmental regulation. However, the main threat to coal came from a switch from coal to gas in US electricity generation. Top of the list was renewables company SunElison, which over-borrowed on the basis of exaggerated estimates of the likely returns on solar and wind energy.
Although fracking companies account for half of the top ten bankruptcies, higher oil prices since December have resulted in a small increase in fracking activity. But the location of the revival says a great deal about the general lack of profitability in the US shale patch. According to Nick Cunningham at OilPrice.com, 39 percent of the new investment is in the mature Permian Basin in West Texas, with just 10 percent going into the giant Marcellus formation, and just three percent into the once booming Bakken:
“Money has flooded into West Texas because the Permian has both below-ground and above ground advantages over other shale basins. To start with, the Permian has a vast volume of oil waiting to be tapped. But more importantly, it is geologically favorable for drillers – multiple shale formations are stacked on top of each other, which means that a driller can sink a vertical well through several shale plays at once, and then drill horizontally through even more liquid-rich shale. More oil per given well means lower breakeven costs and larger profits. All else equal, that alone is enough for shale companies to concentrate their efforts on the Permian at the expense of other shale basins in the U.S.”
Cunningham also points to ‘above ground’ advantages in the Permian Basin, such as access to Texas’ pool of skilled engineers and technicians, locally sourced equipment, and year-round warm weather.
The retreat to the Permian Basin should provide food for thought for anyone thinking of investing in UK shale drilling. Although Britain sits on top of a lot of potentially gas-bearing rocks (the resource) it has none of the advantages found in West Texas. Britain’s geology is fractured, folded and often mixed with clay deposits which make fracking impossible. Even if there prove to be a handful of ‘sweet spots’ these will not be multiple layers of oil and gas bearing shale; meaning a lot more – expensive – drilling for a lot less recoverable gas (the reserve). Nor does the UK have access to a large pool of specialist equipment and labour. And bad weather in the winter months may prevent year-round drilling. In short, oil prices will have to rise significantly and for a prolonged period to make UK shale gas a viable proposition for sensible investors. But, as Cunningham notes:
“On the other hand, there is no guarantee that oil prices do rebound. There are plenty of reasons to think that they won’t, and could in fact decline. For now, the EIA is forecasting flat oil prices for the next two years…”