Is the US shale oil industry bankrupt?

Igor Sechin, CEO of giant Russian oil company "Rosneft" recently stated that once the US shale (shale oil and gas) leaves the market, prices will rise again, and could reach sixty dollars a barrel.

In a report published by the American website "Oil Price", writer Irina Slav said that the parity prices for American oil shale basins range between 39 and 48 dollars per barrel, according to data collected by Reuters, at a time when WTI is trading below the level of 25 dollars per barrel for more than From a week ago.

The price of Scoop Stack Company in Oklahoma reached 48 dollars per barrel, and the Permi basin reached forty dollars.

Ostensibly, these rates are not optimistic when it comes to an industry that has experienced massive losses in a short time due to a significant decrease in the demand base and a sharp increase in supply.

The writer stated that getting out of this crisis depends on luck, the size of the wells and the size of the company, and the problem is that it is possible that the luck will eventually end just as oil runs out from many wells.

How about size?
The larger the company, the more space it has to reduce operating costs, which is the daily expenses related to managing any business.

Companies can reduce these costs by requiring suppliers to reduce their prices, and this has been done by some companies working in the oil shale sector, where they demanded a huge reduction of 25%.

The author stated that this strategy was adopted during the recent oil price crisis as well. Meanwhile, oil shale producers talked of efficiency gains and about stringent cost controls.

Regardless of the efficiency gains, break-even prices declined due to lower operating expenses. It is reported that companies are already working to reduce their commercial activity by slowing the speed of drilling rigs and drilling less wells.

This is one of the self-regulating mechanisms for this sector, as the fewer new wells are drilled, the smaller the production growth, according to the Oil Price report.

The writer indicated that the American shale won a lot of praise for changing the global oil game and enabling it to reduce its costs sufficiently to survive the 2014-2016 crisis. This sector deserves most of the praise it has received, because moving from the second highest level of production costs in the world to one of the lowest levels is undoubtedly a commendable achievement.

However, those interested in oil shale often forget that there is an end to the discounts that exploration and production companies can request from the oilfield services provider, and once these discounts are activated and operating costs reach the maximum, exploration and production companies will start to rely on themselves.

Decline in demand
The question that many ask is whether the shale industry is able to follow the steps that you followed in the last crisis, i.e. reduce costs and withstand and enjoy higher profits once the crisis ends. Unfortunately, the industry is now struggling with what appears to be the largest decline in demand in oil history.

In addition, the opportunities for further reductions in break-even prices are more limited than they were five years ago, you cannot innovate indefinitely, and you cannot reduce business break-even levels to zero. More importantly, oil shale may experience higher, not less, equal points in the shale areas.

The author explained that not all shale formations are equal, as oil can be extracted more easily in areas compared to others. But thanks to technological developments, there is definitely more room to improve efficiency in extracting oil from rock formations, and these efficiency improvements are likely to reduce parity levels across the shale patch.