(Bloomberg) – A pressure from President Donald Trump and the world’s largest oil producers to raise crude prices has failed to stop an avalanche of bankruptcies in the sector, and more are yet to come.
The devastating effect of the Covid-19 pandemic on the oil market is rippling across the entire supply chain, from explorers to companies supplying their workers and equipment. London-based Valaris Plc, owner of the world’s largest offshore rig fleet, was the last victim on Wednesday. In North America alone, dozens of producers and oilfield workers went bust in 2020, and Mizuho Securities USA predicted earlier this year that as many as 70% of U.S. shale producers could go bankrupt.
Oil prices plummeted from a free fall following an agreement reached by OPEC and its allies, appointed by Trump, to resume production. But after embarking on aggressive growth plans when crude traded above $ 100 a barrel a few years ago, the sector is still facing crushing debt burdens, and demand for oil and petroleum products remains well below normal as nations struggle for the spread of the virus. In the longer term, oil companies are calling on investors to tackle climate change and transition away from fossil fuels.
“Oil is likely to face the biggest challenge it has ever seen in the second quarter with the biggest demand shock oil has ever experienced,” James West, an analyst at Evercore ISI, said in a telephone interview on Wednesday. But “we still have a lot of runways for fossil fuels and hydrocarbons. Although there is still a movement to introduce alternatives, they lack some critical mass, and we will be using oil and gas, especially natural gas, in the near future. ”
American shale farmers, many of whom borrowed heavily to pay for civil rights in prominent areas and continued to boost production, even as raw prices fell from the highs of recent decades, were one of the first which went bankrupt. High-profile victims so far this year include Whiting Petroleum Corp., once the largest oil producer in the Bakken Shale region of North Dakota, and Chesapeake Energy Corp., the archetype of America’s extraordinary shale gas fortune. Although international oil marketers such as BP Plc and Chevron Corp. have stronger balance sheets, they have eliminated thousands of jobs.
Oilfield servicemen and offshore rig providers are soon following shale farmers into bankruptcy. Offshore oil contractors are mastering at the fastest pace in three years, as explorers are urging high-cost drilling to cope with the global decline in commodity prices. While newer deepwater projects are less expensive, they take even longer to develop than national shale resource bases and are typically more expensive.
Valaris, which was created in 2019 from the combination of Ensco Plc and Rowan Companies Plc., Joins competitors Noble Corp. and Diamond Offshore Drilling Inc. in bankruptcy. Pacific Drilling SA said earlier this month that it may return to bankruptcy court for the second time in less than three years, and Transocean Ltd., the world’s largest owner of deep water oils, said it was exploring strategic alternatives.
“Offshore drilling is structurally damaged, and recovery is not difficult,” Bernstein analyst Nicholas Green wrote Wednesday in a note to investors. “Offers for new contracts are few, very competitive and low price; most players are badly exaggerated and need money. “
Mixed Record
The bankruptcy of Valaris comes days after the Trump administration authorized a sweeping plan to sell drilling rights and stimulate oil development in Alaska’s rough Arctic refuge. While Trump has touted the dominance of U.S. energy, his record in tackling priorities for oil industry is mixed. Even when he personally intervened to help a global pact broker to cut oil production this spring, the president trumped low crude and gasoline prices as a “tax cut” for consumers.
Leaders of the energy industry have stated that Trump, despite his supportive rhetoric, has routinely prioritized other segments of the U.S. economy, including defending coal at the expense of natural gas and adopting steel tariffs that concern it. higher pipeline costs. They were also disappointed in his decision to lose an opportunity for offshore oil expansion and gas leasing in the eastern Gulf of Mexico, thanks to it would hurt his chances of re-election in Florida. Other movements to help energy interests have been blocked in court.
Under Trump, the Department of Home Affairs has rescinded the pleas for offshore oil producers for an exemption from a low reduction in the royalties they pay the federal government for raw and gas extracted from federal waters.
However, for the most part, the oil industry considers Trump to be the preferred alternative to Joe Biden, whose $ 2 trillion climate plan aims to end US confidence in fossil fuels.
The cascade of oil-patch failures is unlikely to stop until supply and demand return to balance, which may take some time. Global oil demand will resume next year as the world emerges from the coronavirus pandemic, but will not recover until 2022, the International Energy Agency said in June.
Manufacturers are responding to investor demand for lower spending, however, which will ultimately result in a tighter oil market and higher prices, Sankey Research founder Paul Sankey said in a note to investors.
“We are on our way to consumers who are crying out for oil companies to increase investment,” Sankey said.
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