Since shale oil boomed in 2016, the warnings about the industry have not stopped, and many have been dismissive of the shale oil industry’s prospects since the beginning.
After all these years of singing the praises of the industry, it was not expected that in the magical year of 2020, the shale oil industry suffered a serious wave of shocks.
Raging wave of bankruptcies in the shale oil industry
As a result of the epidemic, a number of North American oil producers have filed for bankruptcy protection. This can be a small blow to U.S. crude oil production.
The oil companies that have filed for bankruptcy protection in the last two years have contributed about 800,000 barrels per day to the U.S. shale oil industry, which is unevenly distributed – with a large share of oil production in the Eagle Ford and Bakken regions, nearly 400,000 barrels per day, and only 80,000 barrels per day in the Permian Basin.
Rystad Energy, a Norwegian energy consulting firm, says outright that U.S. shale oil production will be reduced by a quarter in 2021, with an estimated 200,000 barrels per day cut. This loss could offset the expected increase in national oil production in 2021.
The head of Rystad Energy stated.
“The bankruptcy of North American oil exploration and production companies affects the entire oil industry. Much of the growth in U.S. oil through the end of 2021 is expected to be offset by lower production from companies that have restructured in bankruptcy over the past two years, as most companies are now in a reduced phase of extraction activity with limited new well activity.”
While U.S. shale oil has been hit hard, U.S. natural gas production, on the other hand, has not been much affected by the epidemic, with total U.S. onshore natural gas production increasing by about 8.5 billion cubic feet per day, according to statistics, some of which is associated gas associated with oil production. Bankrupt and restructured oil producers remain active in the Appalachian and Haynesville regions and no significant decline in natural gas production is expected in these two areas.
Based on the overview of the third quarter earnings reports of U.S. companies, it can be concluded that the current oil players that are still active will maintain their current level of activity in 2021. From the last three months of this year to the fourth quarter of next year, U.S. oil production may grow by 80 – 120 thousand barrels per day. In addition, the marginal production of large oil companies and private companies will also grow.
Wall Street shifts targets from U.S. shale oil to Canadian oil sands
While the U.S. shale oil gloom is overhead, on the other hand, the Canadian oil sands are recovering from a historic market crash in 2020. Wall Street equity analysts have a series of optimistic outlooks for it.
Analysts at Big Morgan and Goldman Sachs have bought shares of Suncor Energy, Canadian Natural Resources and MEG Energy, saying that the Canadian oil sector’s profitability will remain respectable next year. Earlier, Bank of America Securities and Bank of Montreal Capital Markets issued similar analyses.
In a report on Friday, Morgan Stanley analysts Benny Wong and Adam J Gray said.
“Canadian producers are coming out of the downturn with greater strength and greater ability to generate free cash flow due to improved cost structures and disciplined capital utilization.”
Canada’s crude oil industry has been able to thrive thanks to weakening competition from Mexico on the one hand, and transportation pipelines coming on stream on the other. All of these factors have improved the outlook for heavy crude producers in northern Alberta, Canada.
Investment banks are also so bullish on the after-market for the region’s crude oil industry because the steady production from oil sands producers’ mines means they can maintain revenues for decades without much investment, while the short life of shale wells forces U.S. exploration companies to keep burning through money in order to maintain production.
The eight largest Canadian oil sands producers by market capitalization had a combined free cash flow of $1.4 billion in the third quarter, compared with $163.7 million for the eight largest U.S. exploration and production companies, according to foreign media data.
BMO Capital Markets said in October that exports of Mexico’s major Mayan heavy crude are expected to fall 70 percent over the next three years, which will help narrow the Western Canadian Select (WCS) futures discount to $5-7 a barrel, compared with the current spread of about $12 a barrel.
Demand for WCS has also risen after OPEC members cut production of heavy, high-sulfur grades of crude like oil sands. Goldman Sachs said Canadian oil will continue to be “well supported” in 2021.
Adam Waterous, CEO of Calgary, Canada-based private equity firm WEF GP, also expects the oil sands to be more profitable than shale. He estimates that U.S. crude oil production will fall by about 2.5 million barrels per day next year, as oil prices remain too low to generate attractive returns.
He concluded by mentioning.
“The best days for the U.S. oil industry are definitely behind us. While other countries don’t think so, we are very bullish on the Canadian oil sands.”
Of course, oil sands companies face potential downsides as well. Increasingly, banks and investors are shunning the industry out of concern for high carbon emissions. The pipeline being built still faces political opposition.
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