Lack of upstream investment jeopardizes U.S. energy independence

Monday, 02 March 2020
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Energy independence of the United States will be tested in the 2020s, unless there is a sharp reversal in the collapse of fresh capital expenditure in the shale sector, CME Group finds. Currently, CAPEX in shale oil and gas fracking is dwindling, and rig counts are falling.

Appalachia, Permian and Haynesville are the most prominent shale oil and gas producing regions in the U.S. However, Appalachian production growth slowed significantly in 2019 due to dwindling capital investment in new rigs.

The number of operating rigs in Appalachia between April and December 2019 dropped from 81 to just 50, and from 63 to 52 in Haynesville. Meanwhile, the rig count in the Permian fell from 485 to 402 between February and December.

CAPEX cuts amid falling revenues

“The recent natural gas sell-off will put even further downward pressure on rig counts,” analysts commented. Bearish markets exert additional pressure on the exploration and production sector, which has been suffering from falling revenues and tight cash flows.

Pursuing different restructuring strategies, some producers have been imposed strict saving measures while others have been raising capital through debt.

“Unfortunately, the low-price environment has eroded equity valuations, amplifying the problem of holding uneconomic assets,” analyst noted. This has been “pushing some companies to write-offs, fire sales, financial distress and even bankruptcies.”

The decline in CAPEX, for the moment, has had little impact upon production amid soaring productivity per rig – but this can be short-lived. The average shale play lasts for only 18-24 months. Eventually per-rig productivity could begin to decline. “If that happens, the combination of low rig counts and falling productivity could cause U.S. oil and natural gas production to begin to fall,” analyst suggested. “Falling US production could, in turn, reduce storage levels and allow prices to drift higher.”

Exports rise despite narrowing price spreads

The U.S. shale revolution, unfolding since 2009, has been key to reduce risk premium in oil market and has been closing price gaps with Asia and Europe while putting the focus on Henry Hub as a pricing benchmark. Even if prices at Henry Hub were to “go somewhat higher,” the gap between U.S. and gas global prices will “remain significant, so US LNG exports will likely to continue to rise,” concluded CRM Group analysts.

Natural gas exports from the United States increased to over 4.5 billion cubic feet (Bcf) per day by mid-2019, up 37 percent from the pre-year period. Total US LNG export capacity rose from 5.4 billion Bcf per day in June 2019 to 6.1 Bcf by year’s end.

By the end of 2020, US LNG export capacity is expected to rise to 8.9 Bcf per day. Soaring gas production and falling prices have also accelerated the coal-to-gas switch in the U.S. power generation sector, and spurred demand from the petrochemical industry.

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