News: Disappearing US shale reserves could see drillers clipped further

  1. US shale firms are set to have their wings clipped further in the coming months as the sector faces potentially huge reductions to booked reserves.

    Reserves based loans to independent oil companies – which allow cash to be borrowed against oil in the ground – have provided the fuel for much of the so-called ‘shale boom’.

    The collapse in oil prices has, however, brought into question whether this untapped collateral can still be recognised.

    Explained most simply a great many of these yet-to-be produced ‘barrels’ are now longer commercial at these low current prices; and from a lenders point of view practically renders them worthless.

    This looming crisis is further exacerbated by a change to Securities and Exchange Commission rules in at the end of the last decade which expanded the parameters of what oil companies could report as reserves.

    Those changes allowed ‘undeveloped’ barrels of oil to be booked among a company’s proven reserves, and they have helped drive a significant increase to inventories across the sector.

    To include these additional reserves, which had yet to be drilled, there had to be a “reasonable expectation” that these ‘barrels’ would be drilled profitably in the future.

    In the new light of day, with US crude prices below US$60 rather than above US$90, large volumes of reported reserves could potentially disappear overnight.

    Westhouse Securities, in a note, highlighted Bloomberg stats which indicate that more than half of new US oil reserves could be affected; Bloomberg says 5.4bn of the 9.7bn barrels added since 2008 are in the undeveloped category.

    “The significance of this is that oil companies lending facilities are based on the level of reported reserves and so any significant reductions in reserves could substantially shrink US oil company balance sheets and could lead to dramatic reductions in medium-term activity levels,” said Westhouse analyst Mark Henderson.

    Henderson reckons these issues will factor into a continued reduction in US production volumes, which he expects in turn will support broader oil prices.

    “We have argued for some time that it is only a matter of time before the dramatic decline in activity levels, coupled with the sharp initial decline rates that shale oil wells suffer, will combine to reduce US oil production in coming months,” he added.

    “With little additional production coming from elsewhere in non-OPEC, we remain positive on long-term oil prices.”

     

 
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