Gas Producers Were In Serious Trouble Well Before the Coronavirus & Global Oil Price War
U.S. gas prices cratered in 2020 to their lowest levels in 25 years after an unusually warm winter further exacerbated a global gas glut.
And gas markets face an equally challenging future. Industry analysts are awaking to the risks of an era of increasing price volatility now that expanded gas exports have interconnected domestic and international markets. At the same time, gas demand in the U.S. power sector is already nearing its peak.
Shale Firms Lost Tens of Billions of Dollars Over the Last Decade
Over the last 10 years, a cross-section of 34 North American shale-focused oil and gas producers spent $189 billion more on drilling and other capital expenses than they generated from selling oil and gas. Forty-six producers, representing $53 billion in aggregate debt, filed for bankruptcy in 2020 alone.
In Appalachia, the eighth largest shale gas producers were $73.4 billion in the red over the decade.
Wall Street Lost Faith In the Oil & Gas Sector’s Unprofitable, Debt-Fueled Expansion
Wall Street bailed out the fracking industry from the plunge in oil prices that began in 2014 but has since withdrawn that lifeline as the industry consistently fails to turn profits.
Gas Pricing Can’t Drop Far Enough To Outcompete Renewable Energy
Wind and solar are already undercutting existing coal and gas in many countries across the globe, according to BloombergNEF and other industry forecasters. Given this long-term trend, there is enormous financial risk in continuing to invest in gas.
One analysis found that 90% of all planned U.S. gas-fired power plants (representing $70 billion in investments) are at risk of becoming financially obsolete by the mid-2020s, well before they reach the end of their assumed economic lives. The financial carnage arrived first for the gas turbine suppliers, like GE and Siemens, whose businesses endured deep slumps as the energy industry shifts to renewables and the market for gas turbines crumbles.
Pipelines Face an Equally Perilous Future
Pipeline owners face similar financial risks. On the demand side, as clean energy increasingly dominates power generation, utilization of new gas pipelines could be cut by between 20% and 60% by 2035, potentially producing a “death spiral” for their owners.
Meanwhile, on the supply side, many recent pipelines were justified by contracts with fracking companies looking for increased takeaway capacity for their gas. Deteriorating conditions for gas producers exposes pipeline owners to significant mirrored risks.
Exports Won’t Save the Gas Industry
Domestic gas producers have been counting on exports of liquefied natural gas (LNG) to prop up demand. It is an increasingly dubious assumption. Going forward, the growth in LNG trade exposes the domestic market to greater price volatility risks, many planned export facilities are struggling to win commercial support, and the U.S. appears poised to end public financing support for the expansion of gas infrastructure overseas.
Plastics Won’t Save the Industry Either
The surge in gas production from U.S. fracking has expanded the market for ethane, a component of gas sold as a petrochemical feedstock and used for producing plastics.
The gas industry was counting on continued growth in this market, but instead, demand for plastics is being threatened by both the coronavirus pandemic and recent actions by governments around the world, including local governments in the United States, to reduce plastic consumption. Further restrictions on plastics are expected too, as the world mobilizes to address climate change and ocean health.
Plastics production and incineration produce significant levels of greenhouse gas emissions (which, if left unchecked, could consume more than 10% of the remaining carbon budget scientists have set to stay under 1.5°C of warming). And the ocean is polluted with about 8 million metric tons of plastic every year, the weight of nearly 90 aircraft carriers, according to the National Oceanic and Atmospheric Administration.
Investors have started looking to the future
A major transition appears to be underway, as investors have started fleeing the oil and gas sector amid its poor economic performance and the growing importance of sustainability pledges and climate concerns.
CNBC Mad Money host Jim Cramer declared fossil fuel investments are “in the death knell phase.” BlackRock, the world’s largest asset manager, announced it would start moving away from investments with a “high sustainability-related risk,” including some fossil fuels.
Jobs in the Oil and Gas Sector are Disappearing from the Economy
While the combined pressures of the coronavirus and a global oil price war made declines more evident, U.S. oil and gas employment has actually been falling since October 2018 after peaking in September 2014.
We are likely already in the midst of the sector’s terminal decline. Government policy, planning, and investment are needed to protect oil and gas workers: A just transition would combine comprehensive social support for impacted workers, a major initiative to remediate the nation’s 3 million abandoned oil and gas wells that would employ impacted workers (as urged by a coalition of oil-producing states in the aftermath of the coronavirus pandemic), bold investments in clean energy careers of tomorrow, and unionization of clean energy workforces.