The end of June, 2020 brought very strange news. It was strange not due to the contents, but due to the general context in which it appeared.

First, it is difficult to call news that was expected for the last six-seven years. Secondly, we are speaking about a phenomenon typical for the last months. Thirdly, the described event looked absolutely insignificant itself against the background of tormenting the world economy. Honestly, nobody would care about one of more than 200 ruined oil and gas companies of the United States if this ruin was not indicative. Under excessive oppression of debts Chesapeake Energy, the pioneer, the visionary, an icon of the slate industry failed.

Time of anti-records

At the beginning of July one of the world’s largest oilfield services companies Baker Hughes updated statistical data about the drilling rigs operating in the territory of the United States. Their quantity was reduced to 263. It is two less than a week before. Yes, rates of reduction decreased. Besides some companies, having inspired with an increase in prices for oil to 40 dollars per barrel started again building new wells. But it does not cancel a fact that falling lasts nine weeks in a row and now we see updating minimum indicators for all the time of supervision that is since 1944.
The last half of a year is time of anti-records for the world oil and gas branch. It is enough to remember the falling of quotations of futures for WTI which alarmed the whole world to negative values. It not only became an outstanding historical event, but also forced the Moscow exchange, which also traded in this financial instrument, to reconsider procedure of the auction.
The drilling rigs working today are about 10-12% of that quantity which worked during Golden slate Age which, however, lasted no more than three years at the beginning of 2010.
Certainly, not 100% of these installations work at production of slate oil and slate gas. According to the data published in the Forbes magazine in the middle of March 539 installations were used for these purposes, and at the beginning of June their quantity was reduced to 165.
The indicator of quantity of the operating drilling rigs in itself is one of the most important for an assessment of current state of oil and gas branch of the USA and prospects of production. The matter is that about two thirds of the oil extracted in this country by data on the first quarter of the current year belonged to oil from nonconventional sources or, as it is called usually, slate. And specific of slate production consists in need to drill constantly, a lot of and persistently to maintain current production level.

Nothing exclusive

Experience of the last decade proved that a huge number of drilling rigs, available in the United States, was a decisive factor of development of slate revolution and slate fever with it. Perhaps, this factor played even a big role than geology. And the role of the legislation which a number of experts consider as one more important factor of success of the American slates is actually insignificant. For example, no legislative initiatives helped to make slate Mecca of Poland or Great Britain. Geology and quantity of the drilling rigs play a crucial role. China is one more proof which could not realize slate plans of the first half of 2010 at all its power of the industry, economy and the state support.
Over the last 10 years the necessary level of intensity of drilling in the USA decreased. There is a big merit of the American oil industry workers in it who developed and adapted technologies available to them for changing market conditions, but nothing essentially changed. Productivity of «slate» wells falls for incomparably smaller terms than productivity of wells on traditional fields. Expenses on drilling inevitably beat at cost of production. Therefore the most effective way to reduce prime cost is to drop service prices of the oilfield services companies and not so technological breaks.
There is nothing essentially exclusive in the technologies applied on nonconventional fields. Neither horizontal wells, nor hydraulic fracturing of layer were thought up for production of slate gas or slate oil. New development is to some extent transferred to area of production of traditional hydrocarbons (multilateral wells, «a fish bone», multistage hydraulic fracturing of layer).
Actually slate branch did not grow from children’s panties. Adult life is a readiness for self-restrictions. And slates remained extremely infantile phenomenon, though they had an occasion to mature — crisis of 2014-2016. In this sense anything unexpected in slate branch for the last some months did not occur. After all, the crisis began for it not in March 2020, but in October 2018.

Gloss and poverty

The world market of hydrocarbon raw materials has been living in a pre-crisis situation since October, 2018. Then prices of oil came nearer to 86 dollars per barrel then there was collapse to the mark lower than 50 dollars.
The reason was covered in overproduction of black gold. And specifically that the American companies, having inspired with stabilization of the market and return of comfortable price level, started increasing production with doubled force. During 2018 it grew in the USA on phenomenal 2 million barrels per day. It occurred against weakening of quotas of production from OPEK+.
Timely reaction of the countries of OPEK+ which quickly reduced production for maintenance of stability of the market allowed stopping the crisis. Prices of oil were stabilized in a corridor of 60-65 dollars. But the threat remained as the United States continued thoughtless increasing production, though with smaller rates. So, during 2019 an average daily level of production of black gold grew on 1.2 million barrels — from 11.7 million to 12.9 million barrels per day. That is the USA used the fruits of efforts while Russia, Saudi Arabia and the countries which adjoined them were in the mode of self-restriction. But it occurred not without serious consequences for them.
A wave of bankruptcies in the American petro gas, which the general public around the world noticed only in the spring of this year, covered the slate industry in 2015.
By the time of a collapse of the market in 2018 the American companies had to pay about a quarter of proceeds from sales of oil to banks. Barrel fell in price. And the amount of payments remained the same. At some companies it even grew up as enormous mass of credits were required for keeping afloat. By some estimates, by the beginning of the current year they had to give the banks about 20 dollars from every barrel.
Also it is impossible to tell that the problems of the American petro-gas were a big surprise. Not only our edition but also a number of the western analysts at the beginning of 2017 noted fragility of the situation which developed by that moment: there was no full financial improvement of the American companies, and sharp growth of production could lead to new falling of the prices. That actually happened in October, 2018. Only transaction of OPEK+ gave a chance to avoid new crisis and a collapse of a slate bubble.
Oil consumption (and liquid hydrocarbons in general) continuously grew: from 93 million barrels per day in 2014 to 101 million barrels per day in 2019. At favorable combination of circumstances in 2020-2021, even taking into account increase in production of oil in the States, demand could outstrip the offer that would open an opportunity to the countries of OPEK+ to increase quotas. Besides, nobody intended to increase infinitely production of black gold in the USA. Even at the high prices of hydrocarbons, stimulating activity of the oil and gas companies, production would hit the ceiling.
At the beginning of current year the Management of power information (Energy Information Administration, EIA) which is division of the American Ministry of Energy predicted that in 2020 oil production in the USA will grow on 0.4 million barrels (to 13.3 million barrels per day) and in 2021 on 0.4 million barrels (to 13.7 million barrels per day). So, low dynamics could create additional problems for the separate oil and gas companies in the North America, but in general, it would save oil and gas branch from possible collapse and a wave of ruins.
Besides, at the beginning of current year, according to Rystad Energy, the American companies planned to reduce capital expenditure on 11% and thus to increase production on 0.7 million barrels per day, but then coronavirus came.

On a threshold of a price war

The first swipe of a new disease took China. Having estimated threat, the country leaders made frankly difficult decision. In February quarantine measures were entered: many enterprises stopped their work, people sat at home. In fact, a considerable part of national economy was on pause.
Initially quarantine was entered for two weeks, but after obtaining new data on the incubatory period of development of this disease it prolonged for three weeks — to the beginning of March. It was a big blow for the oil market. China is one of the largest importers of oil in the world which independently makes, by data for 2019, 3.8 million barrels per day and consumes 14.1 million barrels. As a result very representative volume of import against the world demand turned out. And suddenly consumption of oil in China was sharply reduced. By a number of estimates, the maximum level of falling made 7 million barrels per day. Though in this case it is not about an average value for February and about separate days’ data, but 7 million barrels are nearly 7% of the world demand. Let’s add to it sharp decrease in production to the People’s Republic of China because of the compelled suspension of work of the enterprises and we will receive an explosive situation which struck practically on all sectors of the world economy.
It was necessary to realize scales of this blow only, but, first, stirred an adequate assessment suddenly arisen pessimism concerning ability of China to cope with epidemic. For example, the OPEC in February revised the forecast of demand for oil in 2020 on 220 thousand barrels per day (to 990 thousand barrels). International Power Agency predicted reduction on 365 thousand barrels per day (to 825 thousand barrels). By the way, after such forecasts price of oil obediently failed. As it became clear subsequently, pessimists were mistaken concerning China and concerning the world demand — optimists, because, secondly, nobody could assume the scale of the future disaster (decline in demand for 25-30%) and how it will strike on the largest economies of the world.
The meeting of the countries of OPEK+ in March took place under the sign of uncertainty. On the one hand, the People’s Republic of China started canceling quarantine measures and restoring demand, on the other hand, coronavirus came to Europe, Russia and the USA. And as it could be reflected in the world economy, it was unclear at that time. In the circumstances Saudi Arabia demanded further reduction of production on 1.5 million barrels. The Russia position was more reserved: to wait a little, collect objective data on dynamics of demand for black gold and then to make a crucial decision.
If to be guided by forecasts only and to go for reduction, there can be a deficiency. Especially as involuntary help to the world market was given by Libya where production of oil since the beginning of year fell off on 1 million barrels per day, owing to an unstable internal political situation. If there were a deficiency, there could be an excessive increase in prices, and it, in turn, would lead to overproduction in the countries which did not adjoin the agreement. Then the efforts on stabilization of the market after its collapse in October, 2018 would ruin, and the prospect of normalization of the prices could be rejected far for the horizon.
But if not to reduce production, there will be a surplus which besides will lead to new falling of the prices and need to correct the agreement of OPEK+.
As showed the near future, the offer of Saudis was insufficiently radical to avoid the coming nearer problems. But the assessment of objective data at preservation of close contacts in OPEK+ could serve as stabilizing factor for the market against a collapse of demand and would give a chance to react quickly to promptly changing situation. Unfortunately, events went on the other way.
Saudi Arabia declared Russia price war, promised to increase oil production and to win the markets at the expense of dumping. Russia was not on war. But it was necessary to Saudi Arabia on April, 2, the next day after the termination of period of validity of the agreement of OPEK+, to ask about negotiations and to offer the new agreement.

The gaping heights

EIA had to detain release of the new forecast in March to consider sharply changed situation. As a result it reported that there will not be practically production growth in this year (an average level will make 13 million barrels per day at 12.9 million barrels at the beginning of a year and 13.1 million barrels in the middle of March). And in 2021 production of oil has to decrease to 12.7 million barrels at all.
By Rystad Energy assessment published approximately at the same time, the slate companies reacted to the first essential falling of the prices of 2020 very quickly: they began reducing investment programs. Capital expenditure only for the first month was cut down more than on 16.5 billion dollars. Analysts also corrected forecasts for 2020, having declared the future almost double reduction of capital expenditure. But thus it was expected that falling of production will make only 1 million barrels per day and it will begin only in the middle of the year.
Nobody expected that falling of prices which as a result happened. It was supposed that at 40 dollars for barrel slates will be able to live some time, generating a negative cash flow but keeping production at the expense of earlier incurred expenses. The opinion is the strangest, considering negative experience of 2014-2016 when oil production from dense collectors fell from smaller volumes and at higher quotations.
By the beginning of April, after the publication of mass of the texts proving improbable stability of the model of oil and gas branch chosen by the States when prices of oil fluctuated within 25-30 dollars for barrel, production in the United States failed to 12.4 million barrels per day. That was inevitable under the present circumstances: the slate companies started dying out taking the extracted volumes in an economic non-existence.

«Is it the end of the American slate oil revolution?»

Disputes on the level of profitability of slate fields do not cease from the moment of the beginning of so-called slate revolution. Some representatives of the industry broadcast rather popular but strange formulated thought: at the price in 24 dollars for barrel the slate companies are profitable on 50% and at 30 dollars — on 60%. It is possible to tell, of course, that it is told by optimists who consider that the glass is half full. But actually the glass is in general broken.
As practice showed, at 31 dollars for WTI the majority of slate wells are unprofitable. According to Rystad Energy, no more than five companies among which naturally are the giants ExxonMobil and Chevron, could in such conditions continue drilling. The economic situation for the wells drilled but put into operation was naturally better. But this factor does not play a noticeable role yet.
About one and a half years ago the extremely optimistic thought sounded in mass media that American companies extract slate oil with prime cost of 15 dollars per barrel. On closer examination it appeared that many mass media referred to the initial message without important specifications that is not about all companies and about separate sites of some fields of a quantity of the enterprises. But all the same this size commanded respect as 15 dollars for barrel is quite adequate level of expenses which will allow standing at any possible storm in present conditions.
However, it was not given estimates, which part of oil is got with such level of expenses. Even the most devoted apologists of the American slate industry nevertheless gave very wide range of operational costs of production of one barrel: from 15 to 45 dollars.
In the middle of March when crisis just inflamed, but the prices already flied to the bottom, BloombergNEF (BNEF) published the text under the bright name «Is it the end of the American slate oil revolution?» By BNEF estimates, producers of slate oil in the Perm basin (the largest slate field) needed a price in 47 dollars for WTI for profitability. And the vast majority of projects became unprofitable at the price in 35 dollars for WTI.
It is worth making a reservation that, by the same estimates, production had to fall more than to 1 million barrels a day by the end of the year if the prices fall to 30 dollars for barrel. But also this forecast was too optimistic in comparison with severe reality. If during crisis of 2014-2016 oil production in the States fell on 1.2 million barrels per day within 13 months, in 2020 eight weeks were enough to it to break this record.

The second great extinction

Burden of forecasts is a heavy burden. At the beginning of 2017 when the American oil and gas industry was restored after the slate bubble burst with a loud crash, EIA published a forecast. In its framework some scenarios of development of the American oil and gas branch were considered.
As specialists of the Ministry of Energy of the USA assumed, in case prices of oil remain steadily low, production of black gold in the United States will fall lower than 8 million barrels per day by 2022 and then will continue to fade slowly to 7 million barrels per day by 2040. Extremely optimistic scenario, which realization was expected in case of rapid growth of the prices, assumed that oil production increases to 13 million barrels per day by 2021. Some more scenarios in style «if suddenly a meteorite arrives» were considered. But any of them could not foresee the real dynamics of development of branch for the next three years.
Actually, the reality proved that even basic assumptions were deeply wrong. For example, after falling of prices of oil in 2018 production grew to 13 million barrels a year earlier than it was expected at steadily high quotations.
Many researchers (including in Russia) are inclined to see in such dynamics pluses only. They are admired with an ability of the slate companies to pass from sharp reduction in production to not less sharp growth within several months. From our point of view, it is possible to admire with not smaller success an ability of a hooligan to waste money and having remained without a kopek in a pocket, to take away purses from passersby. And it is not exaggeration.
At a boundary of the 2000s and the 2010s we noted that there are much more public relations in the slate industry than actually the industries that the next bubble which will inevitably burst is inflated that slate fever is the main enemy of slate revolution. And yes, it was necessary to recognize progress of the American oil industry workers. They really could place at service to the country those reserves of hydrocarbons which could not be got earlier and having got to sell. But we could not fail to see the approaching overproduction crisis in 2013 and 2018, as well as we could not fail to see the future slate collapse in March, 2020. So, we wrote in February of this year: «The situation with American oil and gas companies in 2014-2016 repeats again». But many people succeeded not to notice the obvious.
Falling of production in the USA was inevitable because of lameness of the strategy chosen from the very beginning, or, perhaps, market models on which there live some «whales» absorbing numerous plankton, which destiny interests nobody.
Five companies are keeping now profitability tower over 10 thousand operators of slate business. The least representatives of this business own one well. Therefore no wonder that the total of bankruptcies for the last five years came nearer closely to a mark in 250 companies, but until recently it excited very few people. So far at last the large enterprises on scales of the American oil and gas branch did not go under a knife.
Bankruptcy of Chesapeake Energy became the loudest and at the same time the most expected.

Mirror of slate revolution

Chesapeake Energy is a pioneer of the slate industry. The name of this company sounded loudly and proudly at a boundary of the 2000s and the 2010s: revolution icon, rapid growth of actions, fine capitalization. In May, 2010 Aubree Makklendon holding at that time a post of the Head of the company declared that introduction of technology of production of hydrocarbons from dense collectors «will change the course of the world history as will allow exempting economy not only from emissions of hydrocarbons but also from influence of OPEC».
At Aubree Makklendona the company extended and saved up more than 20 billion dollars of a debt. It outbid offers on land lease, forcing out competitors, carried out the wide program of geological exploration. Many wells were drilled, but their average productivity looked disappointingly. In attempt to play in a capitalist predator together with other not less sensible companies Chesapeake Energy in 2011 created conditions for crisis of overproduction and brought down gas prices to 70 dollars for 1 thousand CBM. The predator gobbled up itself.
Chesapeake Energy could not be reoriented quickly on oil as its many competitors did. The head of the company was dismissed, but it did not help. The enterprise by that moment took the second place in the country on production of natural gas. Chesapeake Energy had to sell assets, to borrow, to reassign somehow to make ends meet.
The last six-seven years the company lives under continuous threat of bankruptcy. In 2019 it closely approached a ruin side, but it was rescued by a loan in 1.5 billion dollars. We believe that the financial organization which granted this credit, now incredibly rejoices to the successful investment, as well as insurance companies.
In the first quarter Chesapeake Energy lost 8.3 billion dollars. At the end of March it still had only 82 million dollars and a debt of 9.5 billion dollars.
This company will not disappear of course. Let on the Russian scales it also does not look like a giant, but 1.9 thousand employees and production of hydrocarbons at the level of 26.6 tons of an oil equivalent (thereof 23.56 billion cubic meters of gas) as of 2018 do it quite big player for the USA. Anyway, but business of Chesapeake Energy will remain. Let in smaller scales, but they will much more correspond to not fine ideas of the future in which the USA by means of slate oil is subverted by OPEC as that was wanted by the former head to Chesapeake Energy and fundamental factors that is objective reality.
Meanwhile Chesapeake reached the agreement with creditors on restructuring about the debt in 7 billion dollars. If from January to May 18 American oil and gas companies submitted an application for bankruptcy, in June their quantity reached seven. Ruins in the energy sector started competing to anti-champions of the American market — retail trade and the sphere of entertainments.
In principle many branches, which became the victims of the bubbles inflated on their soil, blossomed after painful crisis. The slate industry in this plan is the extremely ordinary phenomenon to which certain unique lines are artificially attributed.

Destiny of a bubble

There is an opinion that there is nothing terrible in falling of production of slate oil, after all, as it fell and will grow and will become stronger than the former. Formally practice of the last ten years confirms it. But for some reason this thesis was thought up and is actively used for a ridiculous justification as if there were no slate bubble.
Bubble essence is in the unjustified growth of the price of an asset or the whole segment of the market. When the bubble bursts, the segment does not disappear. Let’s tell a terrible thing: it even can gradually grow to the values which are strongly surpassing that were observed at the moment when the bubble burst. Simply there should be corresponding base for this purpose. The most striking example is crisis of dotcoms which arose because of the superheated expectations put in false ideas of so-called new economy. A lot of investors, apparently, think that the fact of business on the Internet is already a key to success.
Actually Internet business has the wide scope and a number of technological restrictions which could not be overcome at the turn of millennia. But after the market of dotcoms failed, Internet and business did not disappear. Moreover, today it many times surpasses volumes of twenty-year prescription in scales. It is remarkable that the NASDAQ Composite index which falling in 2000 marked the beginning of a crisis, surpassed a record of 2000 in 2015 only, and now it surpasses a pre-crisis indicator twice. This fact, by the way, confuses some investors.

Mistake as a part of a system

The blind belief that to learn to extract oil and gas from nonconventional sources is valuable and justifies any senseless overproduction is similar on trust in «the new economy». Though even the USA does not need so much oil extracted in its territory.
In 2015 before a collapse it was extracted 9.61 million barrels of oil in the USA. Thereof 4.9 million were slate oil. And at the beginning of this year slate occupied 8-8.6 million barrels from 13 million barrels. For a variety of reasons not all this volume could be utilized within the country. Considerable part of the extracted oil had to be taken out, creating a surplus of light and extra light crude in the market. Even now export of oil from the USA is a little below last year’s indicators. So, in June, 2019 it was exported from 3 million to 3.77 million barrels a day and in June 2020 — from 2.44 million to 3.16 million barrels a day.
In principle it is surprising that it is necessary to pronounce obvious things over and over again. If a system gives out the same mistake again and again, it is not a mistake but a part of the system. In this sense preservation after crisis of a former format of slate branch can lead to overproduction crisis again. Besides overproduction is absolutely senseless as we will emphasize this thought once again: the USA remained a net importer of oil and thus could not process all volume of the extracted oil in the territory.
Production reached a record – 13.1 million barrels per day at peak in the middle of March. To the middle of June this indicator failed to 10.5 million barrels and then grew up, having recorded on the mark of 11 million barrels per day. A number of dismissals in oil-and-gas and related industries by the present moment is estimated in hundreds of thousands.
One of the most radical forecasts was sounded by the Deloitte Company. In its opinion, the slate companies will write off assets (or will correct their cost) for 300 billion dollars. And the 15-year slate boom enters the period of «great compression».
Disturbing news of the second wave of a coronavirus come from the USA followed by the new restrictive measures that, in turn, can affect negatively only just begun demand restoration. Actually, increase in demand and persistent efforts of OPEK+ on stabilization of the world market give a chance to the American companies as well. The main objective of OPEK+ is to achieve today control of production at the growing consumption. That is production has a little to lag behind consumption to create a market window for sale of the saved-up surplus. And them a huge number — about 1.5 billion barrels for the first half of the year was saved up, according to OPEC. This volume presses on the market with the fact of its existence and also limits logistic opportunities of certain players. So, Saudi Arabia was actually compelled to reduce production on 1 million barrels per day respective the quotas which are put in the agreement of OPEK+. Some more Middle Eastern countries joined it.
Surplus of the offer in 1.5 billion barrels is nearly 8 million barrels on every day of the first six months 2020. Increase in demand is necessary to get rid of them. Consumption returned on pre-crisis indicators in some Asian countries (for example, in China) and in June started growing in Russia, Europe and the USA. If growth proceeds, sale of surplus will be accelerated. Having got rid of their most part, the market can expect stable increase in the prices to the comfortable level of 70-85 dollars. But the risks of repetition (let and in smaller scales) events of the first half of the year still exist.
If recovery from the crisis goes without special surprises, one of its obvious consequences for the USA will become integration of oil and gas business which already began as the property of less successful companies is safely redeemed by more successful.


Terms of implementation of the LNG projects also move and the operating plants on liquefaction of gas can face attempts of clients to revise contracts to exclude from them the situation about «liquefy or pay». Six LNG plants in the United States reduced in May loading on 35%. The European consumers already refused approximately 60 consignments of the liquefied natural gas from the USA, though the American producers are supported a little by China which nevertheless lifted earlier introduced restrictions which developed the American LNG stream from Asia to Europe.
In general gas production falls after oil production, it creates risks for domestic market of the USA as in recent years natural gas here actively developed, winning a place in the sun from coal. But for the coal industry the present situation opens an opportunity to win a little the lost position. However, natural gas will be helped a little by the crisis. EIA predicts decline in demand for gas in 2020 on 3.6%. The industry became the main responsible for decrease in consumption. Production falling at the moment is expected till March, 2021. But in this plan the value of forecasts is not higher than when they speak about growth.
Return of the world demand to pre-crisis indicators will become the most important point. Today slate production was rolled away to the indicators of the middle of September, 2018. There is an irony in it as the majority of the countries of OPEK+ reduced production from the level of October, 2018. Production of oil in the USA can grow at a favorable price environment. The moment of the beginning of growth and that position with which it will begin is important. In other words, whether production at the present levels will remain or will fail further. Further falling will favorably affect the world market and premature growth on the contrary will strike on it. That is will strike on the slate companies as well.
The United States, as well as around the world, likes to talk about plots against themselves. During the last months there was created a steady opinion here that falling of prices of oil is a joint blow of Russia and Saudi Arabia against American slate hydrocarbons and strategy of power domination. In this regard there is a wish to notice that it is time for American slate industry to change system and to grow from children’s panties. Meanwhile, it has no bigger enemy than itself. And if the system does not change to some extent and will not be accustomed to reasonable self-restrictions, repetitions will be inevitable. There will be a new bubble. And it will burst again.