Like birds of prey, the state oil giants of Saudi Arabia and Russia can smell the decay setting into the U.S. shale industry and the market share that will come free when its weakest die from the super glut they created and demand lost to the coronavirus. But there are other vultures circling over U.S. shale too now, and some of them are American.
Riyadh’s Saudi Aramco (SE:2222) and Moscow’s Rosneft (OTC:OJSCY) appear to be the most visible bad actors in wanting to extinguish the so-called frackers who helped make the United States the world’s largest oil producer. But there is a whole C-suite of American oil executives who also wish to rid the industry of the thousands of small-to-medium sized independent drillers who have crowded the space and their market.
For years, while the Obama to Trump administrations toasted the shale industry’s unglamorous but phenomenal growth and production efficiency that enabled most Americans to enjoy gasoline at under $3 per gallon, other top U.S. executives in the game — some belonging to the world’s super major or Big Oil companies — applauded too, but with contempt.
On the inside, many of these high-flying oil executives wished the shale business — which had expanded U.S. crude production from 8 million barrels per day to 13 million bpd in just six years and now accounted for over half of the country’s oil and gas volumes — would just disappear, or at least be cut down to size, so that a barrel could go back to trading at $80 to $100, instead of $50 to $60.
Big Oil almost saw this happen in the first round of shale bankruptcies during the market crash of 2015. Now, thanks to the Saudis and Russians, they're seeing a second chance.
Bigger U.S. Oil Companies Want Shale To Die As Well
“Aramco and Rosneft want shale to die — that’s always in the headlines and everyone knows it,” said a senior trader at an European energy brokerage in New York, who transacts oil cargoes for clients of the two companies. “What’s less known is there are American firms out to kill shale too, as everyone wants the same market share.”
Adds the trader:
“It’s these bigger U.S. rivals who don’t want Donald Trump to rescue the shale companies, although they can’t tell him that, of course. They also want shale drillers to go out of business so that they can buy up their assets for cents on the dollar. They are essentially circling the shale patch like vultures.”
To underscore their point, CEOs of major American oil companies — including Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Occidental Petroleum (NYSE:OXY), Devon Energy (NYSE:DVN), Phillips 66 (NYSE:PSX), Energy Transfer Partners (NYSE:ET) and Continental Resources (NYSE:CLR) — met with Trump on Friday but never discussed any production cuts with him.
Exxon Mobil, Chevron and Occidental have all pushed into shale in recent years, spending billions of dollars in assets and takeovers, after initially conceding the fracking game to the thousands of independent drillers. While deepwater drilling and other types of traditional oil exploration form their core activity, a wave of bankruptcies in shale would present more acquisition opportunities and market share for them. Analysts expect some 30% of the shale industry to be wiped out if the current market malaise continues.
“Shale plays will continue to supply more than half of U.S. oil (but) many companies will disappear,” Arthur E. Berman, a veteran petroleum geologist and expert on U.S. shale plays, wrote in a column on Monday.
Indirect Advice To Trump: Don’t Help Shale
The American Petroleum Institute, which represents some of the biggest U.S. energy firms, and the American Fuel & Petrochemical Manufacturer, have counseled Trump against any market intervention that would help shale.
“We are not seeking any government subsidies or industry-specific intervention to address the recent market downturn at this time,” the two groups argued in a letter to Trump.
“Imposing supply constraints, such as quotas, tariffs, or bans on foreign crude oil would exacerbate this already difficult situation, jeopardize the short and long-term competitiveness of our refining sector world-wide, and could jeopardize the benefits Americans experience as a result of our increasing energy dominance.”
The use of “quotas” and “tariffs” by the trade groups was in reference to Trump’s threat to tax Saudi and Russian oil imports into the United States — if they insisted on actions that would destroy U.S. industry. The president raised the threat a couple of times at news conferences this week, although he doesn’t seem eager to carry it through.
The advice to Trump from the bigger oil companies came despite well-publicized reports that Saudi Arabia and Russia were expecting U.S. output cuts as a condition for a ceasefire in their production-and-price warfare. The glut in oil has already driven U.S. crude to a 2002 bottom and at least 55% below 2019 levels at under $30 a barrel. Most shale operators produce a barrel at $35 and above.
Without a retreat in global production to match an estimated loss of 20-30 million barrels in demand now, the highest cost oil producers will disappear — and shale drillers will be among the first to go.
To be fair to the CEOs who met Trump, any discussion of production cuts or cooperation with a cartel like the Saudi-led OPEC would be illegal under U.S. antitrust law.
But it would be perfectly legal to negotiate such cuts in the context of a government-to-government alliance like the Group of 20 Countries.
Saudi/Russian Position Clear: No U.S. Cuts, No Deal
The G20 is to hold a video conference Friday to discuss the oil market and expectations are high for U.S. oil drillers to join with offers of production cuts. Saudi and Russian officials, who will meet a day earlier under the OPEC+ alliance, also via streaming, have already said that without U.S. participation, they will not cut any production either.
Trump tried to play coy on Monday when asked by reporters what he would offer the G20 meeting in terms of U.S. cuts, saying OPEC had not pressed him at all. Said Trump:
“I think it’s happening automatically but nobody’s asked me that question yet so we’ll see what happens."
The “automatic” in the president’s words was a reference to the potential outcome resulting from the scarcity of oil storage facilities throughout the world now, itself due to the collapse in demand triggered by the COVID-19 pandemic and the Saudi-Russian battle for market share with shale.
The Paris-based International Energy Agency, a watchdog for Western oil consuming countries, said the current supply glut might overwhelm effective global storage capacity within the next two weeks. If oil can’t be sold or stored, it can’t be produced at much higher rates, and there will have to be rampant shut-ins by high-cost producers like U.S. shale drillers. While the Saudis and Russians have to “automatically” cut their output, as Trump implied, they are likely to hold off as long as possible to pressure shale businesses first.
The odd thing is it’s not like Trump doesn’t have any U.S. oil to offer for cuts. Texas, the largest U.S. oil producing state, accounting for about 40% of the country’s output, is willing to reduce up to 500,000 barrels per day, said Ryan Sitton, a member of the Texas Railroad Commission, which regulates the state’s oil industry. Yet, with the market expecting the global alliance of OPEC and non-OPEC producers to cut as much as 15 million barrels, the Texas offer seems like a drop in the bucket.
While there were a couple of bigger shale company CEOs at Friday’s meeting with Trump, the president hasn’t met with the broader shale industry. And he might not get to.
The length and breadth of the shale industry is humongous although its participants are mostly small operators: many do not have more than $5 million in retail sales of oil and gas in a year and do not refine more than an average of 75,000 barrels per day of crude.
There are about 9,000 such independent oil and natural gas producers in the United States. These companies operate in 33 states and employ an average of just 12 people. Some 91% of U.S. oil wells are owned by independent producers and they produce 83% of the country’s crude and 90% of its natural gas.
The bigger shale drillers at Friday’s meeting with the president were Continental Resources Chief Executive Harold Hamm and Devon Energy CEO David A. Hager. By aligning themselves with the Big Oil community, they are unlikely to help the broader shale agenda.