Is shale oil a sustainable business model?

Shale oil companies have gone bust, many repeatedly

Question: Is shale oil a sustainable business model?
Position1 of 3›: Shale oil is not economical except at extremely high prices
Argument: Shale oil companies have gone bust, many repeatedly

Hundreds of defaults and billions of dollars of defaulted bonds show that the shale oil business model was not sustainable.

The argument

Law firm Haynes and Boone recently released its updated Energy Bankruptcy Reports. These reports cover North American oil and gas producers, oilfield services and midstream bankruptcies from the beginning of 2015 through 2019. Over the entire five-year period, 208 oil and gas producers have filed for bankruptcy since Haynes and Boone’s Oil Patch Bankruptcy Monitor began tabulating E&P filings, involving approximately $121.7 billion in aggregate debt. There was an initial wave of more than 100 bankruptcy filings in 2015 and 2016 as the oil price crash pushed some companies to the breaking point. As oil prices recovered somewhat after 2016, the number of filings declined to 24 in 2017 and 28 in 2018. But the fourth quarter of 2018 saw a steep drop in oil prices, and that decline lingered into 2019. This resulted in a jump in the number of filings in 2019 back up to 42. Of the 208 bankruptcy filings, Texas led the list with 94. Colorado and Louisiana were far behind Texas with 11 filings each, while New York was in fourth place with 10. Canada overall had 18 oil and gas producer bankruptcy filings. Haynes and Boone also reported that the oilfield services sector was hit hard, with 196 bankruptcies over the five-year period. The total amount of aggregate debt administered in oilfield services bankruptcies during this period was approximately $66 billion. Texas again led the way with 102 bankruptcies.

Premises

[P1]Between 2015 and 2019, 208 North American oil and gas producers filed for bankruptcy, involving roughly $121.7 billion in debt. [P2] These filings tracked the oil price closely, surging past 100 during the 2015–16 price crash, falling as prices recovered, then jumping again to 42 in 2019 after prices dropped. [P3] This repeated wave of failures, with many companies going bust more than once, shows the sector cannot stay solvent when prices fall. [C] Therefore, because shale oil companies have gone bust repeatedly, shale oil is not economical except at extremely high prices.

Counter-arguments

Critics reply that a wave of bankruptcies during a historic price crash shows shale is sensitive to low prices — as most commodity producers are — not that the model is uneconomical in general. Many industries see failures in a downturn without being written off as unviable. They add that bankruptcy frequently restructures debt while the wells keep producing under new owners, so the collapse of over-leveraged firms does not show the underlying resource is unprofitable. With drilling technology steadily lowering breakeven costs, the sibling position that shale is viable given improved technology and prices remains open.

Rejecting the premises

[Rejecting P2] That filings tracked the oil price shows shale is sensitive to price crashes, as most commodity producers are, not that it is uneconomical at normal prices. [Rejecting P3] Bankruptcy often restructures debt while wells keep producing under new owners, so failures of over-leveraged firms do not show the resource is unprofitable, especially as technology lowers breakeven costs.

The argument

Premises

Counter-arguments

Rejecting the premises

Further reading