Last Tuesday the share price of Chesapeake Energy, one of the leading US shale oil producers, fell 29% in a single day. With internationally traded Brent Crude now trading at below $88 a barrel, a 4-year low and down from $100 only a few weeks ago, and the US benchmark West Texas Intermediate at below $85, down from over $107 in June, the fabled miracle of US shale is facing a near-death experience. The oil consultancies estimate that US shale production will break even at $75 a barrel, so there is still some leeway for survival. But the impact of tensions over Ukraine and the gathering conflagration in the Middle East, plus above all the global market fears of secular stagnation kiboshing the world recovery from lengthy recession, are putting the market for unconventional energy production under strain as never before.
The steep decline in production from shale wells, which can drop 60% or more in the first year, means that companies have to keep drilling merely to maintain output, let alone increase it. If the funds for drilling dry up, production will fall quickly and the US oil boom will go bust. Only 2 months ago it was still confidently forecast that next year the leading US shale oil and gas producers would cover their capital spending from operating cash flows. Now that prospect is receding. With a price below $90, between a third and two-thirds of producers will be outspending their cash flows.
The immediate international effect will be to put pressure on some members of the OPEC cartel such as Venezuela as well as the oil sands of western Canada. Significantly Statoil, the Norwegian state-controlled energy company, has now said it is putting an oil sands project in Canada on hold for at least 3 years because of rising costs. The effect on putative shale production in the UK will be severe if the price of Brent Crude continues its precipitate fall because of the loss of investor confidence in the face of the looming crude price war. After 3 years of an eerie calm in the oil market, volatility is back with a vengeance. This is certainly now the tightest investor assessment since the shale revolution started to revive US oil production in 2009. The odds are closing that it will put a damper on UK shale production before it has even seriously begun.