US oil producers cut oil rig count over high cost

Manama: The US oil industry is struggling to cope with the aggressive strategy adopted by the Middle Eastern oil producers and is fast cutting their oil rig count. The industry is experiencing a rising tide of bankruptcies, according to the recent data releases.

Unlike Middle East oil exploration and production companies, who enjoy a very low cost of production, the US oil production relies primarily on extracting oil from shale rocks. The cost of shale oil production is often quoted to be on the higher side than the current crude oil prices.

The latest rig count released by Baker Hughes notes that the average US rig count for April 2016 was 437, down 41 from 478 counted in March 2016, and down 539 from 976 in April 2015.

The fall in rig count is further pronounced when multi-year data is taken into consideration; in October, 2011 US had 2017 oil rigs. Middle East oil rig count at the same time was 297 and is now at 384.

The worldwide rig count for April 2016 was 1,424, down 127 from 1,551 counted in March 2016, and down 844 from 2,268 counted in April 2015.

The capitulation of the shale-oil industry is more evident from the bankruptcy filings released by US-based law firm Haynes and Boone.

It says that the month of April witnessed a big jump in bankruptcies among US oil and gas producers; with 11 cases of chapter 11 filings accounting for US$14.9 billion debt. As of May 1, 2016, 27 producers have filed bankruptcy, so far this year.

“Haynes and Boone has tracked 69 North American oil and gas producers that have filed for bankruptcy since the beginning of 2015. These bankruptcies, including Chapter 7, Chapter 11, Chapter 15, and Canadian cases, involve approximately US$34.3 billion in cumulative secured and unsecured debt,” says the law firm.

It also warns that in spite of the recent uptrend in oil prices, more US oil producers might be hit further in the coming months.

A recent Reuters article says that the fast drop in US oil production might even balance the often quoted demand-supply mismatch. Two million barrels per day extra supply than demand has been widely believed to be the major reason for oil crash.

“Wildfires in Canada. Instability in Venezuela. Stalling US frackers. Drops in oil output are happening so fast that it looks as if the Americas alone could resolve global oversupply,” the article stated.