Monday, April 27, 2020

The Oil Crash of 2020 Could Bankrupt Thousands of Fossil Fuel Companies

The oil crash of 2020 is driving down prices and contributing to the demise of the fossil fuel industry. This will drive hundreds and perhaps even thousands of companies into bankruptcy as part of a cascade of industry failures. In the face of oversupply and falling demand due to the cornavirus the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut oil output by 10 percent but this did not stop the free-fall.

The fossil fuel industry was in trouble long before the start of the price war between Russia and OPEC. Market realities have been signalling the end of fossil fuels for many years. In 2016 it was becoming apparent that diminishing oil returns were threatening the future of the industry. In 2019 we saw a wave of fossil fuel bankruptcies.

The coronavirus is another nail in the coffin of an already enfeebled oil industry. These dramatic price declines pushed crude oil futures into negative territory for the first time in history. On April 20, 2020 the price of crude oil was -$38 per barrel forcing companies to pay to get rid of their oil oversupply. This is due in part to a shutdown in business activity which has significantly diminished energy demand and travel.An analysis by Rystad Energy indicates that global oil demand contracted by 22 million barrels per day in April and 2.2 billion barrels for the year amounting to 5.7 percent dip.

Many had predicted a crash in oil prices years ago. In 2016 Thierry Lepercq, head of research at French energy company Engie, predicted that oil could get as low as $10. In 2017 Stanford University economist Tony Seba published a report which also predicted the collapse of the price of oil.

Declining oil demand is heading towards what CNN described as a "doomsday scenario" in which many oil and gas companies will not survive. The shale oil and tar sands sectors of the fossil fuel industry may disappear altogether. The Rystad analysis reveals that at at $30, FCF from public exploration and production (E&P) company will drop 70 percent year over year. At $20 a barrel 533 US oil exploration and production companies will file for bankruptcy by the end of 2021. At $10, there would be thousands of bankruptcies including almost every US E&P company carrying debt.

According to Reid Morrison, US energy leader at PwC, the situation is far worse than it was during the contraction of 2014-2016. It will also be far worse than what we saw in the wake of the financial crisis on 2007-2008. Erik Holm Reiso, a senior partner at Rystad Energy, said in 2008 and 2009, "demand fell by 1.3m barrels of oil a day. But Covid-19 could cause oil demand to fall by more than five times as much."

Fossil fuel titans like Noble Energy, Halliburton, Marathon Oil and Occidental have all lost more than two-thirds of their value and giants like Chesapeake Energy and Oasis Petroleum are on the verge of dissolution. While they may be the next dominoes to fall, they wont be the last. Rather than filing for Chapter 11 which allows firms to restructure their debt, we are likely to see many Chapter 7 liquidations.

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