In Washington’s strongest response yet to the unfolding oil crisis sparked by Saudi Arabia and Russia, a group of Republican senators have demanded action over what they term “economic warfare” by the two oil giants against the US as shale producers fall victim to troubled markets.

US shale operators in the prolific Permian and Bakken oil-producing regions are being put under significant pressure to cut costs by freefalling oil prices, which have been in steep decline since Riyadh and Moscow failed to agree Opec+ supply cuts earlier this month.

The subsequent Saudi decision to ramp up its crude production and flood the market with heavily-discounted fuel has lent further disruption to this already-volatile situation, sending commodity prices plunging to their lowest in decades.

Many analysts have observed the move was intended, at least in part, to undercut the US shale industry, which has been competing with Opec for market share over the past decade with cheap and abundant supplies of oil and has been critical to the Trump administration’s economic strategy. And it seems to be working.


Oil crisis has forced US shale firms to slash capital spending plans

Several companies have already announced deep cuts to their capital spending plans for 2020, while there have been warnings that almost a third of the global shale workforce could be lost before the end of the year as producers scramble to cut costs.

Analysis from BloombergNEF warns that if shale oil prices remain near or below $30 per barrel, and drilling activity drops accordingly, US output could fall by more than one million barrels per day (bpd) by the end of the year.

“Some operators may struggle to survive, and the spillover could impact the broader economy,” warns the report.

“Wall Street may now be reluctant to fund shale producers after years of overspending and low returns. In 2016, upstream operators issued $35bn of equity. By 2019, this equity issued had fallen to $1bn.”

In the Permian Basin alone – a key shale-producing region comprising oilfields across Texas and New Mexico – GlobalData analysts have forecast an 834,000 bpd drop, while in the Bakken Formation, which spans north-western parts of the US and into Canada, a 170,000 bpd decline is expected.


Saudi Arabia has challenged US shale before – but this time it is different

With the global oil industry already facing a huge challenge for survival amid the drop-off in demand caused by the escalating Covid-19 and lockdown measures to limit the spread of the pandemic, Riyadh, and its leader Crown Prince Mohammed bin Salman, has come under fire for destabilising the market by choosing to “settle scores” at a time when it is already facing an unprecedented set of challenges.

It is not the first time Saudi-led Opec has sought to take on US shale by flooding the market – a production binge in 2015 sent prices plummeting and shale output falling, although the attempt was ultimately unsuccessful as efficiency improvements enabled US producers to rebound quickly.

But “conditions are different this time”, according to BloombergNEF.

“Shale oil output has almost doubled since 2016, and due to the steep production decline of wells, constant activity is required just to keep production flat. Today’s producers are leaner, with less room to improve operations and reduce costs.”


US energy dominance is ‘under direct threat’ from Saudi price war

Faced with the prospect of US shale operators being squeezed to the point of going out of business, six Republican members of the Senate, including Alaska Senator Lisa Murkowski wrote to secretary of state Mike Pompeo, urging him to set Saudi Arabia on a different course, either through negotiations or by leveraging the “enormously powerful tools” at the country’s disposal, including sanctions and trade restrictions.

They wrote: “The Kingdom of Saudi Arabia and the Russian Federation have embarked upon economic warfare against the US. We choose that term carefully and understand the full weight of its meaning.

“During this time of pandemic and global economic crisis, the Kingdom of Saudi Arabia has chosen to settle scores in the oil market. Riyadh’s motivation may be multi-faceted – to punish the Russians, to capture near-term market share, to destabilise long-term investment in American energy – but the end result is the same.

“Our nation’s energy dominance, which President Trump has carefully nurtured over the past three years, is now under direct threat from a country that professes to be our ally.

“By taking advantage of a confusing situation and desperate time, the kingdom risks its bilateral relationship with the US.”

They add that the diplomatic alliance between Riyadh and Washington will be “difficult to preserve” if the kingdom continues to intentionally inflict “turmoil and hardship” on the US companies “at the heart” of its energy industry.


Capex reductions in the Permian and Bakken will drive down shale production

Critical shale-producing regions in the US are being severely tested by the tumbling oil prices, while analysts estimating the break-even prices of $42 per barrel in the Permian and $46 per barrel in the Bakken region being necessary – well above current levels of $25 to $26 per barrel.

GlobalData oil and gas analyst Adrian Lara said: “The capital expenditure (capex) reduction of 36 key operators, accounting for 75% of total Permian production, indicates a drop of 834,000 thousand bpd in output for this group by 2020 when compared to the forecast for 2020 before the current price fall.

“This is a significant reduction in shale supply, which confirms the level of reaction that this type of production has to steep price movements.

“Key Permian operators will remain forced to reduce their capex given the uncertainty generated by low oil demand and the coronavirus-related economic downturn, as well as the escalating narrative between Russia and Saudi Arabia for flooding the oil market.

“It is very possible that US shale supply operators further adjust their capex plans later this year, causing a larger production reduction during 2020 and 2021.

“GlobalData estimates that for key operators in Bakken, a reduction of 50% in the number of rigs brings down their capex an average of 40%, and this translates into a drop of 36% in their remaining net present value (NPV).

“Our modelling indicates a drop of around 170,000 bpd in total Bakken production by the end of 2020.”


Riyadh urged to cut ties with Opec ‘relic’ and partner with the US

The US senators demanding political action to protect their domestic oil producers from this escalating scenario called on Saudi Arabia to end its association with Opec, the organisation it nominally leads, and instead “join the US on the global stage as a free-market energy powerhouse”.

They added: “An alternative path to a brighter future remains open, if only the Saudis will take it. [Opec] is a relic of a cartelised past, one that burdens the kingdom with free-riders and forces it to shoulder the lion’s share of every production decision.

“Instead of investing in Russian energy projects – which may only deepen Russia’s ties to China and provide it with leverage over American allies in Europe – the kingdom should partner with the US on strategic energy infrastructure projects across the Indo-Pacific region and in the Americas.”