Battered Shale May End up in Good Condition, Goldman Says

The crashing oil price has shaken up the US energy industry, but nowhere as much as in the shale business. Maybe, though, after a batch of casualties, shale will emerge yet again in good shape.

That’s what Goldman Sachs thinks, anyway. Reason: Shale’s vaunted flexibility allows it to ramp up quickly once prices finally return to a more sustainable level, analyst Damien Courvalin wrote in a research paper. “Shale’s flexibility is likely to be finally monetized by producers once demand starts to recover to fill any global supply gap,” he argued.

For sure, the pain of the price plunge—the result of a breakdown among the Organization of the Petroleum Exporting Countries (OPEC) and Russia on how much to pump—is spreading worldwide. Since year-end 2019, oil prices have tumbled by two-thirds to $21 a barrel.

President Donald Trump is in talks with Russia on the subject, but OPEC—in particular Saudi Arabia—is busily flooding the global market with cheap oil. Part of that is a strategy to drive the US shale producers, an unruly bunch of competitors, out of business.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The first sign of the impact in the shale belt is Wednesday’s Chapter 11 bankruptcy protection filing by Whiting Petroleum, the initial causality of the latest oil price war. But somehow, Whiting just might pull through to fight another day. The shale producer reported $585 million cash on its balance sheet and declared it could operate without shedding employees.

For the moment, the oil drop has rendered thousands of prospective shale sites money losers. Trouble is, for OPEC, it tried the price war trick before, in the middle of the past decade. It caused short-term pain among shale drillers, but they came roaring back.

Shale’s flexibility resembles the extra capacity that Saudi Arabia maintains so it can swiftly expand production on short notice, Courvalin said. “This implies that the coronavirus-led demand collapse may ultimately benefit shale and low-cost producers alike,” he said.

While many shale wells have closed (the rig count in Texas’ Permian Basin is off by a quarter from 2018, when pricing was much stronger) shale’s high-pressured apparatus and short drilling time mean the business can easily pivot once the price comes back, he stated.

Shale wells can later resume production with limited lost capacity, Courvalin said. Older wells, often owned by the oil majors, tend to lack that capability, so their productive value may be lost, he noted.