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More Job Losses Coming to US Shale
By Gaurav Agnihotri
Oil Price, Al-Jazeerah, CCUN, July
With the recently concluded nuclear deal between Iran and
the P5+1 countries, oil prices have already started heading downward on
sentiments that Iran's crude oil supply would further contribute to the
already rising global supply glut. The economic crisis in Greece, OPEC's
high production levels and China's market turmoil have created more pressure
on oil prices, making a
price rebound look highly unlikely in the near future.
the prices of both Brent and WTI moving towards $50 per barrel, the short to
medium-term outlook for oil remains mostly bearish. This is bad news for the
U.S. shale sector which is already dealing with rising debt and the
ever-increasing risk of default.
A recent Bloomberg report stated
that U.S. driller's debts stood at
$235 billion at the end of first quarter of 2015, which is quite
worrying. Does this mean that the U.S. oil sector is likely to witness a lot
more layoffs than we have seen so far? Surprisingly, a recent
IHS study had revealed that the U.S. shale sector has been boosting job
creation in addition to supporting around 1.7 million jobs in U.S.
All this as the overall unemployment rate in U.S. has been declining since
previous years. But with rising negative sentiment pertaining to oil prices,
is U.S. the shale sector prepared to face one of its biggest tests yet? Will
the industry be able to sustain another long period of low oil prices or
will it once again resort to trimming its workforce?
Low oil prices
will most likely result in more job losses
Since the oil price
collapse of last year, we have seen how oil field services and drilling
companies have slashed thousands of jobs in order to reduce costs and cut
their operational spending. Some of the major oilfield companies like
Schlumberger, Halliburton and Weatherford have already announced
close to 20,000 layoffs as of February 2015.
markets turned bullish when oil prices were hovering in the range of $60 per
barrel during the last two months, raising hopes that oil companies would be
sending close to 150 drilling rigs back into operation.
Now that oil
prices are again moving towards the $50 per barrel mark, high drilling costs
make almost a third shale oil in the U.S. too expensive to produce.
Even Goldman Sachs has admitted that the $50 per barrel oil price level
would deter any kind of a drilling recovery in U.S. this year, as there
would only be around 20 to 50 rigs returning to work by end of this
December. In fact, analysts from Goldman predict WTI will fall to $45 a
barrel by October this year.
"Oil rebalancing remains in its early
stages with the current cash flow and funding mix stalling it, we believe
that as fundamentals reassert themselves and we move past the seasonal peak
in demand, oil prices will continue to sequentially decline," said analysts
from Goldman Sachs.
U.S. shale sector faces another challenge as
The U.S. shale industry had been somewhat insulated
from the effects of low oil prices in the past as companies had
hedged their production. This meant that companies had fixed their
future selling price in order to temporarily circumvent the ongoing
volatility in the oil markets. Since most of the companies had hedged their
production before the last oil price crash, they were well protected from
the erratic oil price movements. However, the situation is quite different
now as most of these hedges are about to expire. For small and medium shale
companies that had hedged their production at $85 or $90 per barrel
previously, having more of their production exposed to $50 per barrel prices
will be painful.
What to expect over the coming months
coming few months will prove challenging for the sector, and some small and
medium U.S. producers may start missing their debt repayments or even file
for bankruptcy. Quicksilver Resources and American Eagle Energy are two of
the six U.S. based companies that have filed for bankruptcy in 2015 so far.
Sabine Oil and Gas Corp. is the latest, and
the biggest, U.S. producer to file for bankruptcy so far.
mergers and acquisitions have slowed down considerably for the U.S. oil and
gas industry in 2015. If the present trend persists, companies will have no
choice but to cut their workforces even further to remain competitive and
reduce their rising overheads. If oil prices remain in the range of $50 per
barrel for longer than expected, even big operators such as Exxon Mobil,
Chevron and ConocoPhillips (who have so far not made any major layoffs)
could start downsizing their workforce.
By Gaurav Agnihotri for Oilprice.com
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