Plummeting Brent oil prices are putting pressure on North American shale, which has sunk hundreds of billions of dollars into investment, and could soon come crashing down.
Tempted by big returns, shale companies have borrowed more than $200 billion in bonds and loans, from Wall Street and London, to cover development and projects that may not even come to fruition.
Oil producers' debt since 2010 has increased more than 55 percent, and revenues have slowed, rising only 36 percent from September 2014, compared to 2010, RT reported.
Fracking, the process of hydraulic fracturing and horizontal drilling on land is much more expensive than the average water-based oilrig. However, over the past years, it has become relatively cheap and fast. Energy companies, eager to get in on the riches of the American oil boom, have been borrowing money faster than they have been earning it.
On Sunday, the first shale company filed for bankruptcy. WBH Energy LP, a private Texas-based drilling group, filed for bankruptcy after saying that their lender was no longer willing to advance money. The company estimates their debt between $10-50 million. There are hundreds more in the US alone. Analysts believe North American shale needs to sell at $60-100 per barrel to break even on the billions of debt accrued by the energy companies. Indebted companies, fearing bankruptcy, may therefore be forced to keep selling oil, even at a loss.
One way to avoid going bust is to merge, which is what many companies already have on the negotiation bloc.
“We’ve already seen Baker Hughes and Halliburton agree to merger, and these were two titans that used to compete head to head,” Ed Hirs, managing director independent oil and gas company Hillhouse Resources, told RT. “They’ve decided they can’t survive separately, they need to combine,” Hirs said.
Energy companies that can afford it will cut production, but this will prove more difficult for smaller companies with larger debt hanging over their balance sheets.
Oil prices lost more than 50 percent in 2014, and have already dropped 10 percent in 2015. Futures dramatically dipped when the Organization of Petroleum Exporting Countries (OPEC) decided not to curb production at their November meeting.
