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Is shale oil a sustainable business model? Show more Show less

The drilling of shale oil has been hailed as revolution that has brought cheap gas and oil to American and made America a net exporter of oil and natural gas. However, there is serious debate as to whether shale is a sustainable business model given the high number of bankruptcies in the sector.

Shale oil is not economical except at extremely high prices Show more Show less

Shale oil and natural gas are extremely capital intensive, and buying land, drilling and extracting the oil is far more expensive than drillers will admit to. Proof of this is that we have seen hundreds of shale oil companies go bust and almost no shale oil companies produce any free cash flow.
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Shale oil companies have gone bust, many repeatedly

Hundreds of defaults and billions of dollars of defaulted bonds show that the shale oil business model was not sustainable.
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Context

The Argument

Law firm Haynes and Boone recently released its updated Energy Bankruptcy Reports. These reports cover North American oil and gas producers, oilfield services and midstream bankruptcies from the beginning of 2015 through 2019. Over the entire five-year period, 208 oil and gas producers have filed for bankruptcy since Haynes and Boone’s Oil Patch Bankruptcy Monitor began tabulating E&P filings, involving approximately $121.7 billion in aggregate debt. There was an initial wave of more than 100 bankruptcy filings in 2015 and 2016 as the oil price crash pushed some companies to the breaking point. As oil prices recovered somewhat after 2016, the number of filings declined to 24 in 2017 and 28 in 2018. But the fourth quarter of 2018 saw a steep drop in oil prices, and that decline lingered into 2019. This resulted in a jump in the number of filings in 2019 back up to 42. Of the 208 bankruptcy filings, Texas led the list with 94. Colorado and Louisiana were far behind Texas with 11 filings each, while New York was in fourth place with 10. Canada overall had 18 oil and gas producer bankruptcy filings. Haynes and Boone also reported that the oilfield services sector was hit hard, with 196 bankruptcies over the five-year period. The total amount of aggregate debt administered in oilfield services bankruptcies during this period was approximately $66 billion. Texas again led the way with 102 bankruptcies.

Counter arguments

Framing

Premises

Bankruptcy is the most certain sign that a business doesn't work. The shale oil industry has seen hundreds of bankruptcies. QED. (Mic drop)

Rejecting the premises

Proponents

Further Reading

Energy Bankruptcy Reports and Surveys 12/31/2019 LATEST UPDATE - December 31, 2019 Haynes and Boone's Energy and Restructuring Practice Group lawyers have been helping clients navigate the ups and downs in the oil and gas sector for more than four decades. With the slump in commodity prices persisting, our lawyers are closely following recent industry developments and have prepared several useful reports for industry participants, including borrowers, lenders, private equity firms and investment funds, and others. https://www.haynesboone.com/publications/energy-bankruptcy-monitors-and-surveys

References

    This page was last edited on Thursday, 27 Feb 2020 at 18:41 UTC