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When the global pandemic brought entire industries to a grinding halt, the oil and gas sector and shale, in particular, suffered the brunt of COVID-19 in more ways than one.
Many shale companies were already struggling to turn a profit. But as pandemic-based restrictions rolled on over weeks and months, shale industry majors found themselves looking first at zero production and, subsequently, ways to somehow survive the market crash.
Add to that the massive debts that shale enterprises accrued when the market was booming, and you have yourself a situation. Rystad Energy has predicted the overall industry debt to reach $133 billion between 2020 and 2026.
Shale Businesses Have Been Hit by More Than Just COVID-19
The overabundance of oil had already shifted the advantage away from shale businesses because of the following reasons:
- Given the excess supply and lack of buyers, businesses are running out of space to store the oil. In fact, 76% of the global oil storage capacity has already been utilized. Shale companies are looking at frac tanks for storage to deal with this space crisis.
- The dip in demand has led to massive production cuts since March 2020, which in turn has affected the people who worked for shale oil companies.
- The number of active oil and gas rigs in the United States is dropping rapidly.
- The disturbance of the equilibrium between demand and supply is likely to drive the prices down even further in the near future.
And that is not all. According to Dallas Fed, the spending, too, has plummeted in the oil and gas sector, where $1.2 trillion was spent on drilling wells between 2010 and 2019. The weakening share prices of shale oil companies last year had already started showing this downward trend in the oil and gas sector.
Shale oil extraction through rock fracking is expensive. The COVID-19 pandemic led to restrictions on trade, travel, and transport, and the way oil businesses generally function. This, in turn, led to the oil prices dropping like never before (sub-zero levels), bringing about a nowhere-to-go situation for the fracking world.
Hundreds of oil companies today face uncertainty, with shale giants like Chesapeake Energy filing for Chapter 11 bankruptcy protection.
Redemption and Resumption – Considerations for Shale Businesses
Recovering from the shale shock and facing challenges that the new market dynamics and economics dictate is going to be tough. While shale companies gradually resume production and distribution, it is essential that they consider the following factors to adapt to the new normal.
- Acknowledge change and set realistic expectations
It is important that shale companies acknowledge the possibility that things will never be the same again, at least in the foreseeable future. Therefore, pre-COVID-19 expectations need to be put away and a more realistic view of what can be achieved should be considered.
The prospects seem better for natural gas, for instance. The price convergence of oil-to-gas and relative strength in natural gas prices present the upside in natural gas investments. Supply chains, meanwhile, will have an increasingly regional focus. Shorter supply chains could impact global shipping and the demand for marine fuels.
Acknowledging and understanding such changes is the first step in preparing a resilient business response.
- Redefine spending priorities
Operators would need to look at the decapitalization of undeveloped capital that is not generating revenue. Businesses should also identify ways to cut down on their selling, general, and administrative (SG&A) spend.
With cost and capital being key determinants, it is also important that shale companies focus on improving back-office efficiency and service delivery.
- Bolster business with strategic telecommuting
Working remotely, connecting virtually, and basically relying on advanced communication technology has become the norm over the last few months. Instead of looking at it as a disadvantage, it will bode well for firms in the oil and gas sector to embrace lean operations and use remote work strategically to bring business back on track.
- Plan recovery through operational transformation
Finding the right way ahead might necessitate leveraging the power of data analytics and new engineering thinking. Strategic consolidations and mergers, digital innovation, remote-sensing technology, IoT-based solutions, and automated operations can help pave a new path towards a sustainable business future with an eye on energy transition initiatives.
Why Shale and Fracking Will Stay Monumentally Significant
Experts reckon that when shale comes out on the other side, there are high odds that the industry will consolidate and recover significantly. With several likely M&As on the horizon, ownership structures and business models may change, but the shale industry will survive.
Fracking is crucial not just for the future of the US energy sector, but also for clean energy initiatives. According to the Independent Petroleum Association of America, fracking-based natural gas production and use have helped public health by improving air quality.
The shale revolution helped create millions of jobs, amplified oil and natural gas production industry, and made America the top producer of oil in the world. While the chips may have been down in the recent past, the importance of shale gas in the revival of the economy cannot be debated.
It is time for shale businesses to use a long-term roadmap for this difficult phase and make every effort to turn short-term pains into long-term gains.
Carrie Weisman is the editor at Adler Tank Rentals since 2018 and specializes in creating well-researched, in-depth articles for Fortune 5000 companies.
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July 29, 2020 at 11:42PM
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How America's Shale Industry Can Navigate Tough Times and Emerge Resilient - RealClearEnergy
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