The United States is under attack where it hurts the most, at the heart of its economy. Its oil industry, which has allowed it to consolidate its position as world oil production leader in the last decade and overcome the previous crisis of 2008, is cornered.
This enemy has two faces: that of Saudi Arabia and that of Russia. Both countries have apparently launched a fratricidal war to conquer and defend each other its market share, extracting more and more oil in a situation in which demand is in decline due to the pandemic. The consequence is that the prices of the barrel have sunk to 18-year lows.
For the International Energy Agency, the industry is experiencing a shock “unprecedented in history, with a ferocity never seen before.” Producers’ net income may fall 75% next year, from 287 billion to 70,000.
And the American oil industry is on its knees. This week, Whiting Petroleum filed for bankruptcy, as the collapse in prices leaves shale extractors ( shale ) loaded with debts.
The consultancy Rystad has calculated that the companies of fracking ( rock drilling ) They have to pay $ 133 billion of interest-bearing debt over the next six years. This technique needs prices of between 45 and 55 dollars a barrel, but until a few days ago, we were less than half and the recent upward swings do not guarantee sufficient stability either.
Under these conditions, only four drill rigs shale , ExxonMobil, Chevron, Occidental and Crownquest have the ability to drill new wells and make a profit at prices of $ 31 a barrel. The others have it … raw. Rystad predicts that in the second and third quarters of this year the number of such wells is active in the US. It can fall between 60% and 65%. Even if the price of a barrel remained at $ 30, there could be as many as 200 bankruptcies between now and 2021. If it fell again to $ 20, this figure would double. A million jobs are at risk of disappearing.
President Donald Trump has been forced these days to contact his Saudi and Russian counterparts to reach a desperate deal. The possibility of a 10 million-barrel-a-day macro-cut pact is rising sharply and is what is holding up the prices. Several observers believe that a consensus is inevitable, because both Moscow and Riyadh need income. But the weather is hostile. All wars have their reasons.
In early March, Harold Hamm, a manager at Continental, one of America’s largest drilling rigs, accused Saudi Arabia of “dumping” its crude oil on the market with the aim of harming shale producers. In his opinion, the Saudi action would not only be deliberate, but “illegal” and the object of denunciation. “Riyadh seeks to push certain producers, whether or not they are members of OPEC, into bankruptcy and possibly take advantage of less competition in the coming months,” acknowledged Andre Lebow of Commodities Research Group. Saudi Arabia has a very low extraction cost and, despite its wear and tear on the balance sheet, has some resistance capacity.
Fracking wells may drop 60% due to lack of profitability and the weight of debts
As for Russia, it has sufficient motivations to lower prices and thus get revenge of Americans. The sanctions the United States imposed on Russian energy companies, including those targeting the commercial division of state oil giant Rosneft last month, and attempts to stop the Nord Stream 2 pipeline to Germany, have angered the Kremlin. “Russia’s strategy appears to be directed not only at US oil shale companies, but at the policy of coercive sanctions that have been implemented in the era of American energy abundance,” admitted Helima Croft, director of raw materials at RBC.
“There is no doubt that it was a great humiliation for the Russians that the construction of the Nord Stream 2 gas pipeline stopped just before its completion,” said Daniel Yergin, vice president of IHS Markit. “The United States has opposed the pipeline, as it would increase Russia’s dominance in the European energy market. Trump Administration officials have repeatedly bragged about the ability of the United States to punish its opponents in foreign policy by dramatically reducing its oil exports, “he added. But times have changed.
Russia has adjusted its budget to cope with a barrel of $ 20 this year, a sign that it is in no rush to reach a deal and is already planning loans of $ 15 billion, in addition to accumulated foreign exchange reserves. Businesses in the United States, on the other hand, cannot hold out.
Russia and Saudi Arabia are formally rivals in the oil market, but at the same time complicit, as they take advantage of the weakness of the United States, a consequence that both had in mind when changing the rules of the game. “The question is whether Russia and Saudi Arabia join forces to damage the US shale or if they are fighting each other,” said Francisco Blanch of Bank of America.
In fact, the two alleged rivals also have far more interests in common than previously thought. “The real political fact is that the United States is much less involved in the Middle East than it used to be, and that Russia has deepened its presence in the region quite dramatically in recent years, both politically and economically. Russia has more weight today than it used to. Its influence is felt more than in the past, “said Blanch. For example, the Russian Direct Investment Fund has an agreement to supply pumping equipment to the Saudi state-owned Aramco.
Likewise, in this Washington-Riyadh-Moscow triangle, there is a fourth actor who observes the scene, pleased: China. Beijing has become the world’s largest consumer of oil this year and, prior to the Covid-19 crisis, its imports grew at a rate of 20% per year. And it is obvious that the largest producers seek to be their clients.
Thanks to the hydraulic fracturing boom , The United States began exporting to China, when until 2016 it did not sell it a single drop of oil. By tightening the market, both Moscow and Riyadh have a chance to cut an awkward rival like the United States out of the game because they are both doing business with Beijing.
Rosneft, Russia’s state-owned oil giant, has already closed deals with China’s CNPC to increase daily oil deliveries to a total of 600 billion barrels a day over the next 25 years and received more than 60 billion in advance payments from CNPC. At the same time, Aramco, which negotiates with the state-owned Petrochina refinery, is now reaching agreements in the private sector with the Norinco conglomerate.
US Entrepreneurs accuse Saudis of wanting to bankrupt them
So it is in Russia and Saudi Arabia’s interest to keep the United States out of the game. Even if it’s for a while. Is there something that unites two rivals more than a common enemy?