Delivery of liquefied natural gas (LNG) to the European market in 2019 broke a historical record and, according to preliminary estimates, reached 105 billion cubic meters. The three of leaders among importers included Qatar, the USA and Russia.

Besides, EU countries prepared for possible transit crisis at the beginning of 2020 and therefore they filled the underground gas storages (UGS) more active than the usual. At present the surplus of gas which continues to press on the prices is observed on the direction of deliveries, traditional for Gazprom. Oil in February also fell in price. It is obvious that 2020 will be very hot for oil and gas branch. It is remarkable that today American slate production lies at the heart of many problems of oil and gas. The USA continue increasing production of hydrocarbons as if without noticing the increasing amount of bankruptcies and the coming nearer repetition of the crisis of 2014-2016.

In the summer of 2013 we assumed that 2014 will become the beginning of crisis of slate production which will result in mass bankruptcies of the American oil and gas companies. In 2014 the crisis which owing to the global nature of the market of oil affected all world economyand about 150 enterprises extracting slate oil and gas were ruined in the USA.

To the middle of 2016 production of oil in the States, according to Energy Information Administration (EIA), fell to 1.2 million barrels per day — to 8.4 million barrels. But, fortunately for local players and world economy, this year became rotary: there was a stabilization of the prices, restoration of branch began. Not the last role was played by the conclusion of the transaction of OPEK+, which main drivers were Russia and Saudi Arabia.

At the beginning of 2017 there was an article «Rehearsal of Price War» in which prospects of slate oil were estimated at the USA among other things. In this text we made an assumption that the United States will try not to allow sharp growth of oil production: «In a situation when the sharp growth of production of black gold at any of large players can bring down the prices, further increase in production of hydrocarbons for the American companies will be equivalent to suicide».

Certainly, we were mistaken, having counted upon discretion of investors who had to estimate risks of overproduction after burning in 2014-2016 on investments in the «slate» companies. But in what we were not mistaken, so it in negative consequences which are involved by the sharp growth of production. The prices fell off, bankruptcies began.

American «slate» lives in a personal Groundhog Day: increases production, it starts being ruined but before falling still fondly hopes for the best, reaches edge and then makes all this again as if without remembering negative experience of the recent past. The situation of 2014-2016 with the American oil and gas companies repeats again.


The surname of the current U.S. President is translated as «trump». He came to the power, promising support and growth of coal mining, oil and gas. Nothing good happened to coal – production made a start from the bottom in 2017 and did not wish to come back to former high rates. According to all available data from EIA since 2011 coal mining in the USA fell to 42% and the quantity occupied in this branch decreased from 92 thousand to 54 thousand people.

But the trump is really stacked out against oil and gas for the government of the USA. Growth of production of black gold was during the work of present administration. Besides it had not to make any efforts for this purpose. The main support to the American slate was given by the countries of OPEK+.

The countries of cartel and the players who adjoined them led by Russia at the end of 2016 agreed to reduce oil production. It led to stabilization of the prices, returned confidence on the market and allowed to get rid within the next year of the saved-up surplus of black gold.

For the American oil companies which endured crisis it was a gift from above. Having entered in 2017 with daily production at the level of 8.95 million barrels (on 250 thousand barrels less than last year’s indicator), in November they returned to former maxima and then exceeded them.

Considering restrictions of production in Saudi Arabia, Russia and many other countries and also continuous increase in demand for oil with dynamics in 1-1.5 million barrels per day in a year, progress of the American companies (which increased yearly production approximately on 800 thousand barrels per day) caused in 2017 no more than concern. There was even a small decrease in production in the States at the beginning of 2018. And then something terrible happened: prices of oil went up.

Within half a year they overcame a mark of 70 dollars per barrel and then also 80 dollars submitted to them. In other words, for lack of surplus of the offer the quotation directed to the levels, normal for branch, allowing to work at traditional fields and gradually to involve hardly removable and nonconventional stocks in production.

The American companies rolled up their sleeves and began drilling joyfully with doubled force, carry out hydraulic fracturing and drill again. In October 2018 when the gain stepped over a mark of 1.5 million barrels per day, the superheated market responded quite expected — reduction of prices. But following the results of a year Americans increased production almost on 2 million barrels per day.
By the existing estimates, at that time — at peak of the prices — 25% of the income from oil sale the American companies spent for service of debts to the banks. The prices fell and the debts remained the same. Respectively, a share of income which should be torn off from heart and given in cold hands of bankers grew. But they could not stop as interests of the oilfield service companies went into action. The crisis also well walked through their ranks and financial position of the majority of the service enterprises was very shaky.

The countries of OPEK+ reacted to a collapse in prices, having agreed to reduce production in 2019 on 1.2 million barrels per day from the level of October, 2018. American companies gratefully nodded and continued increasing production. During 2019 it increased on 1.2 million barrels, and except the prices which stood around $60-65 per barrel it had other less obvious consequences.

Intolerable ease

The United States remains the largest consumer of oil. In 2018, according to BP, average daily consumption in this country reached 20.46 million barrels. For comparison, taking the second position China consumed per day 13.5 million barrels and Russia – 3.23 million barrels of oil per day.

At the same time the USA remains a large importer of oil and also increases export of black gold. It would seem, why to export if all of you still depend on import, whether it is better to direct the oil extracted in the territory of the country on own oil refineries (oil refinery)?

The situation looks stranger if to consider that the USA, having increased production on 4.6 million barrels per day for 3.5 years, could not reduce import in proportion. Certainly, a contribution to the given situation was brought by increase in demand which increased approximately on 1 million barrels per day). But quality of the oil extracted in the States is more important.
The American oil refineries, as a rule, work with light and heavy grades. And slate oil belongs to light (and extra light) grades. Today, according to EIA, slate oil occupies 64% of total production. The volume of extracted «slate» for the end of 2019 was approximately equal to all American production of black gold in the middle of 2016.

So much of light crude is not necessary for the American plants. Certainly, a part finds application at oil refinery, but it should be mixed with heavier grades for receiving mix with characteristics necessary for a plant. It is possible to use also oil products for mixture. For example, fuel oil. But a part of slate oil should be exported.

Here it is worth stipulating that such development of the situation was more than expected. And experts tried to prepare for it. In 2014 the USA made public the plans to expand capacities of oil refinery which could recycle effectively light crude on 3-4 million barrels per day by the end of decade. But the burst price crisis made amendments to these plans.

Import satisfies needs of plants of the United States for heavy oil and oil products. The main supplier traditionally is Canada. For example, from 266 million barrels of oil and the oil products imported by the States in October of last year in this country it was bought more than a half – 136.5 million barrels. Most likely, it is first of all about dense bitumen, which Canadians receive from oil-bearing sand. By the way, October of last year for example is chosen not incidentally, but more information about it will be given a bit later.

The other noticeable but more modest supplier is Mexico which monthly sends to the States to 20 million barrels of oil and oil products. Long time Mexico had a strong contender fighting for a share of the market of the USA — Venezuela.
Venezuela, according to BP, is the owner of the largest reserves of oil in the world — 47 billion tons. About two thirds of the proved stocks belong to the hardly removable. On this indicator this country is also the world leader. Also it is a pioneer of oil production from nonconventional sources. At the beginning of this decade against the high prices exceeding 100 dollars for barrel 700 thousand barrels of heavy hardly removable oil per day here were extracted, and it was planned to increase its production to 3 million barrels by 2020. But in reality total production in ten years was reduced from 3.2 million to about 1 million barrels per day.
The reason of falling is covered in the crisis of 2014-2016 which made extraction of considerable part of the Venezuelan oil unprofitable. And then sanctions from the USA followed. As result — in the first quarter of 2019 the United States stopped importing oil from Venezuela.

But suddenly it cleared out that a number of large suppliers of oil are not as great as the States would like, especially as a part of them got under the American sanctions too. Thus, for example, Russia has production of the corresponding quality and in the necessary quantities.

Help to the Russian fuel oil

The deliveries from our country to the States which a little gave in in 2018 considerably grew in 2019, replacing the Venezuelan volumes. The data for December have not been published yet, but the Russian export to the USA for the first 11 months of last year made 166.37 million barrels. These are more than annual indicators for the last five years. Total result, most likely, will be the largest since 2012. In October of last year our country became the second large supplier of oil and oil products in the market of the United States.
Certainly, current situation is very ironic. But the fact that growth of deliveries to the USA is only one of consequences of sharp growth of production of slate oil is more interesting to the Russian economy. It is a small but interesting episode.

Much more important from the point of view of the Russian economy the fact that export of black gold from the States led to a surplus in the market of easy grades of oil. The events urged on demand for the main export grade of the Russian black gold — heavy sulfurous Urals.

As a rule, Urals bargains to the mix Brent with discount which sometimes reached 4 dollars per barrel. But in 2019 the difference in the price between these grades was considerably reduced. And in some days Urals even was more expensive than North Sea mix. According to Bloomberg, from November 2018 to July 2019 due to the increased demand the Russian suppliers could earn about 905 million dollars in addition.
During the same period when ceiling prices of Urals were observed (in comparison with Brent), the Russian mix was begun to be buried ahead of schedule. It was predicted sharp decline in demand because of the new requirements within the convention MARPOL limiting use of high-sulfurous fuel oil as ship fuel. But also in this area the American slate oil involuntarily gave us a helping hand. Some Russian oil industry workers still observe excess of high-sulfurous fuel oil. But a considerable share of this product found demand for oil refinery in the United States.

Where is my 2009?

Growth of oil production in the USA pulled for it increases in gas production. In 2018 its level made 2.42 billion cubic meters per day, and in 2019 – 2.66 billion cubic meters. In parallel with it export volume also grew. LNG supply became the main driver on this direction.

According to EIA, in 2017 the USA exported 20.4 billion cubic meters of LNG, in 2018 – 31.2 billion cubic meters and for the first 11 months of 2019 – 46.2 billion cubic meters. And though the liquefied natural gas still lags behind volumes of pipeline deliveries from the States to Mexico (49.5 billion cubic meters in 11 months 2019), but the USA put new capacities into operation and predict double growth of deliveries.
The liquefied natural gas from the USA was the main and the most terrible horror story of which it tried to frighten Gazprom in the 2010s. For some reason many analysts expected that suppliers of the American gas will begin price war with Russia for the European market. But those, as well as all reasonable people do, preferred the directions on which it was possible to earn more — Latin America and Asia. Mexico, South Korea, Japan and China were the main buyers of the American LNG for 2017-2018.

China is the most dynamically emerging market of LNG in the world. Demand potential in this country is huge. To rush on this market and to be fixed on it is a great luck for any producers of the liquefied natural gas. In 2016 487 million cubic meters of the American LNG, in 2017 – 2.3 billion cubic meters, and in 2018 – 2.6 billion cubic meters were delivered to the People’s Republic of China. On the scale of the Chinese demand it is 4% only. For comparison, Australia in 2018 occupied 44% in the structure of supply of the liquefied natural gas to the People’s Republic of China.
And in 11 months of 2019 only 198 million cubic meters of the LNG made in the United States were delivered to China. The reason of so sad dynamics was covered in the next foreign policy success of the USA — in the developed trade opposition with the People’s Republic of China.

During this conflict in September, 2018 China entered 10 percent duty on import of the American LNG. Ironically, but, according to the Ministry of Energy of the USA, such a situation generally became possible because gas from the States is on sale in the Celestial Empire on a spot basis, but not under long-term contracts.

Involuntarily released volumes require a buyer. Thus the USA put new LNG productions into operation. It did not occur so quickly, as it was supposed in the middle of the decade, but the offer from the United States grew. And as the market of China was closed, it was necessary to carry gas where it could be sold and where the infrastructure was prepared for this purpose, for example, to Europe.
Europeans in 2019, according to preliminary estimates, bought the record volume of LNG in the history — about 105 billion cubic meters. Thereof 18 billion cubic meters were provided by the USA and Russia (LNG plant of Novatek). Thus the EU was succeeded to fill 45% of the LNG terminals which is available in its territory.

Flow of the liquefied natural gas became one of the reasons of reduction of prices of natural gas. On spot platforms the price fell to 120 dollars per 1 thousand CBM. Long-term contracts were more favorable from the point of view of the supplier — the prices in them during some periods surpassed spot for 30-40 dollars per 1 thousand CBM.

Current situation painfully reminds the events of 2009. Then because of decrease in demand for import gas in the USA Qatar was compelled to develop gas deliveries to the market of the European Union. There it caused a collapse of the prices already low at that time. Europeans were delighted to emergence of Qatar LNG as its arrival, as it seemed to them, confirmed the theory about formation of the market of the buyer in the EU. That is the market for which suppliers will fight, beating down the prices. But in two years Qatar redirected three quarters of the volumes to Asia — on long-term contracts. By the way, under long-term contracts the most part of LNG in the world is sold, therefore it is not absolutely correct to write about the prices of this energy carrier bargains, based only on data of spot platforms.

Now production of the United States already acts as forsake LNG. Having lost the market of China, the American gas floated to Great Britain, the Netherlands, Spain, France, Italy and Turkey.

Echo of gas alarms

But for the sake of objectivity it should be noticed that in general the situation in the European market is more difficult now than ten years ago. For its assessment it is necessary to consider bigger quantity of factors. For example, the whole 2019 passed under the sign of possible transit crisis between Russia and Ukraine which potentially could lead to failure of deliveries and deficiency of gas in the period of the maximum demand — at the beginning of 2020. The countries which had such opportunities increased stocks in UGS. Gazprom together with the European partners also created stocks in the territory of Europe. As a result underground gas storages in the territory of the EU were filled more than for 90%.

Increase in demand for LNG is explained partially by this aspiration to create stocks. But here it is possible to object that in January, 2020 for the first time in the history supply of LNG to Europe were equal to pipeline deliveries from Russia — approximately on 10 billion cubic meters. How to estimate this fact?
First reaction of the general public to it: at last forecasts that Americans will drive Gazprom out of the European market come true. But after all liquefied gas which had to come to the EU in case of transit failure should be bought in advance. And uncertainty with the contract for transit lasted to the end of 2019.
LNG is much more inertial energy carrier than pipeline gas. You cannot receive it while you had requirement in it — freight will be delivered for rather long period of time. In January Gazprom started reducing quickly deliveries to the EU as now it is required to realize surplus of the saved-up stocks in the territory of Europe. And LNG which could satisfy potential deficiency only started arriving on the market. Respectively, indicators of January can quite appear not a part of a long-term trend but only an echo of gas alarms of 2019.

Of course, it would be silly and short-sighted to be engaged in facile optimism. It is obvious that under current conditions — surplus of stocks and warm winter Gazprom in 2020 will hardly turn out to repeat records of the last two years. But records are not the end in itself. The wide audience too quickly gets used to loud indicators in 200 billion cubic meters of deliveries a year, forgetting that four years ago 179 billion cubic meters were a record.
At the same time you should not forget about two important circumstances. The first is that in 2018 545.46 terawatt/hours of electric power were made in Germany, thereof 44.42 terawatt/hours (8.2%) — at gas power plants. And in 2019 – 511.58 terawatt/hours, thereof – 54.07 terawatt/hours (10.2%) at gas power plants. In January, 2020 gas provided development of 13.5% (about 8 terawatt/hours) of all electric power. Demand for gas grows and consumption of coal in electric generation decreases. And this process will proceed if the European Union wants to achieve ecological objectives of 2050 at least partially.
The second circumstance has global character: suppliers want to earn money but not to lose it. Ten years ago Qatar did not want to do charity work and at the first opportunity carried LNG where it can be paid more. And if because of a number of circumstances in one market the supplier does not get a clear advantage at the price and the prices are too low, natural selection comes into force. Someone from producers of gas will be compelled to leave from the market and some will be able to endure the adverse price period and to find to themselves a place due to the growing world demand.
And here it is worth looking once again at the situation with the American oil and gas sector.

The tired-out horses …

One of the leaders of a rating of the companies, whose actions appeared last year the most unprofitable for investors, is Chesapeake Energy. It is one of the most visible oil and gas companies of the USA, a leader of slate revolution. In 2014 its actions cost about 30 dollars, at the beginning of 2020 when the company was called one of the most underestimated, — 90 cents. At the time of writing of these lines the price fell to 50 cents.
Several months ago Chesapeake Energy declared determination to declare bankruptcy in 2020. Then it allegedly managed to raise proceeds of credit of 1.5 billion dollars for 4.5 years. By the available estimates, the current world prices for oil and the American gas prices are too low for the company not only to create a free cash flow but also for maintenance of the current production level.
Chesapeake Energy like no one else proves that it is possible to live for years in a pre-bankruptcy state. It would seem, long ago it is time to disconnect it from financial analog of the medical ventilator. But it still continues to imitate activity.

However many American colleagues of Chesapeake Energy were lucky much less. First, banks reduce giving credits. And secondly, there are mass bankruptcies that were quite expected at the beginning of 2017.
43 oil and gas companies in 2018 and 50 for the first nine months of 2019 declared themselves bankrupt. In October of last year the EP Energy Company could not satisfy a debt in 5 billion dollars. It appeared the largest default since 2016. By a number of estimates the total of bankruptcies in oil and gas sector of the USA since 2015 reached 208. On some inexplicable (for a number of analysts) reason surges in these bankruptcies coincide with reduction of prices of oil and drilling volumes.

Considerable part of the largest American «slate» companies showed losses in the third quarter of last year — about 1.3 billion dollars. And players of the international level, as well as before crisis of 2014, declare multi-billion write-offs.

According to actual forecasts of EIA, in 2020 oil production in the USA should grow to 13.3 million barrels per day, and in 2021 — to 13.7 million barrels per day. Thus the USA assumes increasing export of energy carriers. So, about 30 billion cubic meters of the LNG made in the United States can enter the market within this year. In the situation of financial instability of the American oil and gas sector it is possible to overstrain with such plans. And it is known what happens to the tired-out horses.

It is possible to object that our forcing is obviously engaged and, in fact, does not make sense, after all plans of the USA are quite realistic and bankruptcy of certain players only revitalizes the situation. Especially as bankruptcy is not the termination of production. It is so, but the American companies obviously do not maintain prolonged 60 dollars for barrel at all stories about incredibly increased efficiency of production. And as practice of 2014-2016 shows, bankruptcies after all lead to production reduction.
Uncertainty in the world demand for oil which was generated by coronavirus epidemic in China only adds reasonable doubts, especially against refusal of our country to reduce production once again to support the prices.
The main character of the movie «Groundhog Day» had to pass through numerous repetitions of the same events before he started learning vital lessons from them for himself. Probably, there was not enough one crisis to American «slates» too to learn all necessary lessons.

Current year will be unconditionally one of the most full of content in the history of oil and gas branch. The mass of interesting events waits for us both in Europe and in Asia and, the most important, in the USA. Perhaps, the leaders of this country will be able to freeze the current situation for the period of presidential elections. However, improvement of the situation in the USA is inevitable. It will also affect positively the market of oil, as well as the market of gas, unless demand for fuel oil can suffer a little. But it is a quite different story.