Shale Compression: Report Tells of “Great Compression” in US Shale Industry

A report by ‘big four’ accounting firm Deloitte, describes the current state of the US shale industry as a “great compression”, largely driven by volatility in the oil market. However, oil is only half of the picture in terms of the shale industry, and natural gas does not seem to be in the same state as its fellow commodity.

Since the shale boom’s beginning in 2008, the shale oil and gas industry has grown exponentially. The market was prime for shale operators, with the world’s petroleum demand leading to high prices of oil and gas and an abundance of resources to supply such demand. However, as with virtually every other industry, the COVID-19 pandemic had major adverse effects on the shale industry. Lockdowns and travel restrictions led to a massive decline in the use of petroleum products (i.e. gasoline and jet fuel) and actions by foreign countries caused the oil and gas market to become volatile. This volatility and low price of oil are not sustainable for a large percentage of shale operators, according to Deloitte.

These circumstances led to “great compression” on the industry, who must now find the way to navigate the squeeze. The report states that since March, oil prices via the West Texas Intermediate fell from an average of $50 to $60 per barrel, to $20, and even briefly into negative numbers. According to Deloitte, 30 percent of shale operators are “technically insolvent”, and cannot break even at those prices. This reality could lead to major restructuring, acquisitions, and bankruptcies within the industry, according to the report.

However, natural gas, the product of Marcellus and Utica shale, is not seeing the squeeze that oil is enduring, and could present an opportunity for oil drillers who are looking to expand their portfolio beyond crude. According to the report, “the recent narrowing of the oil-to-gas price ratio and a prolonged period of low oil prices have made the gas-heavy companies more attractive” to operators seeking to diversify their operations away from oil.

While the gas industry is faced with its own issues to address, especially in Appalachia, the change created by the pandemic could bring new opportunities for the region and for gas as a commodity. The study cites changes in commuting, telework, and the push for renewable energy that could have moved oil’s estimated peak demand from previous estimates of 2035 to 2040, to 2028 or even earlier. With these new realities and uncertainties, those in the shale industry will have to follow the national trend and adjust accordingly.