Oil price drop threatens US fracking boom

Plummeting oil prices caused by a Saudi-Russian feud and the coronavirus outbreak may lead to a decline in fracking, the controversial practice that has fueled the domestic energy revolution in the U.S.

Fracking, which involves blasting water and other chemicals deep within the ground to lift oil out of rock crevices, is more expensive than using a traditional oil derrick, making U.S. producers more sensitive to dropping prices.

Oil sank to $23 from a high of $53 dollars in mid-February, far below the “break even” point that producers need to drill new wells to maintain supply, and with volumes rapidly diminishing at existing wells.

“These wells are more expensive, they produce a larger portion of all their oil and gas that first year,” said Lynn Helms, director of North Dakota’s Department of Mineral Resources, which regulates the oil industry. “We’re just starting to see the economic impacts and expect them to grow quite a bit over the next six to nine months.”

It’s not just that fracking is more expensive — it costs anywhere from $6 million to $10 million to drill a horizontal fracked well versus about $2 million for the traditional bobbing oil derricks dominant in the rest of the world — fracked wells can also deliver half of their contents to the surface within the first year, giving a well little time to wait out shocks to the market. 

Major oil players have already told stockholders they will slash their budgets in response. 

Schlumberger, one of the largest oilfield services companies in the world, said it would cut its budget by 30 percent this year. Halliburton, another oilfield services giant, has already furloughed 3,500 of its employees in Houston.

In North Dakota, where 5 percent of the state’s workers are tied to an oil industry dependent on fracking, unemployment has soared, with claims jumping from 600 in the middle of last week to more than 2,500 by the week’s end, according to The Bismarck Tribune. 

But while fracking is key to an industry that is the lifeblood of many communities, there’s a growing movement to restrict the practice given its impact on the environment. Beyond the effects to the climate from simply burning fossil fuels, fracking relies on a variety of chemicals and risks polluting water.

Most Democratic presidential candidates this cycle vowed to end the practice on federal lands, and Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) have introduced a bill that would ban fracking entirely.

“We need to cut our emissions by 2030, so we need to get off of fossil fuels,” said Randi Spivak at the Center for Biological Diversity, which advocated against any assistance for the oil industry in the coronavirus stimulus package. “From a climate perspective this downturn should be seen as a way to pivot away from fossil fuels and into clean renewable energy.”  

But as oil hits its lowest price in 18 years, economics rather than politics are likely to fuel a decrease in fracking, at least in the short term.

Experts say the price drop will hit the industry in waves.

First to go will be the crews operating rigs that drill new wells, as companies likely won’t have the multimillion-dollar cash flow needed to begin work. Oil is far below the approximately $50 break-even figure needed to keep pumping existing wells while drilling new ones.

“I’ve never been a fan of the term ‘break even’ because no one is in business to break even,” said Ron Ness, head of the North Dakota Petroleum Council. “But do you want to produce some of the highest quality, best crude oil in the world at $20 a barrel? Do you want to keep producing that oil or be patient?”

The number of rigs in the U.S. has already dropped by about 20, falling to 772 last week from around 790 the month before — a significant drop in a figure said to measure the health of the industry. 

Without drilling new wells, oil supply will decline.

“The best day of life for an oil and gas well is its birthday,” when oil rushes to the surface, said Raoul LeBlanc, an oil industry expert at IHS Markit. But after that, “They decline relentlessly.”

After cutting rigs, producers might eventually look at slowing production. 

Producers could “shut in” wells, essentially capping them to pause production, a move that risks damaging the lifetime production of the well but allows them to reopen once prices rise.

But experts disagree on just how likely that is to happen.

Rusty Braziel, CEO of energy analysis company RBN Energy, said shut-ins are rare and unlikely to happen right away.

“Now producers are only going to be focused on the very best sweet spots they’ve got,” he said. “If you turn wells off, you get nothing, and right now companies need the money.”

Braziel and LeBlanc agreed prices would have to fall to below $10 a barrel before producers won’t make enough money to continue fracking.

But LeBlanc said he thinks shut-ins could begin this year.

“We believe that prices will go low enough to shut in production because we have a monster surplus,” he said. 

That’s an issue the government was looking to fix. President Trump vowed to buy 77 million barrels of oil to fill the Strategic Petroleum Reserve, but funds for the purchase were stripped from government stimulus packages, and the initial 30 million barrel sale was canceled. 

Adding to the industry’s woes, gasoline demand is expected to fall by more than 50 percent throughout the pandemic, according to research from IHS Markit. 

The oil industry has said it is not seeking a bailout.

“Make no mistake this is a challenging time not just for our industry but businesses across the U.S. Considering that we are a resilient and innovative industry, we have time and again bounced back,” said Frank Macchiarola, senior vice president of policy, economics and regulatory affairs with the American Petroleum Institute. 

Environmentalists, meanwhile, hope the industry volatility will spur leaders to evaluate ways to move away from fossil fuels. But low prices could complicate that trend as well.

“I would never say the crisis we’re facing is a good thing, and I think it’s not clear what the impact of this will be on carbon emissions. If oil prices are low, that pushes in one direction and pulls in another,” said Tim Donaghy with GreenPeace.

“If gasoline prices are low, there’s a worry it will slow the adoption of electrical vehicles or other clean energy solutions.” 

LeBlanc agreed.

“For people who want to see an energy transition, it’s good for oil to be expensive because it makes all of your other technologies more competitive,” he said.