Europe massively refuses American gas

In the United States, the Chesapeake Energy oil and gas company, a pioneer in shale oil production and one of the largest in its field, went bankrupt. This is not the first high-profile bankruptcy and certainly not the last. Analysts predict that at current energy prices, about a third of all shale production in the US is unprofitable. The gas sector is suffering especially severe losses: amid falling fuel prices and market oversaturation, Europe is massively refusing to supply American liquefied gas under already concluded contracts.

Chesapeake Energy filed for bankruptcy on Sunday, June 28th. In the first quarter of 2020, she reported a net loss of $ 8.3 billion, and also announced that she had long-term liabilities in the amount of almost $ 9.5 billion. As part of the bankruptcy procedure, she agreed with creditors to restructure the debts of $ 7 billion.

At the time, Chesapeake was the second largest gas producer in the United States. Faced with falling world prices for this energy source, the company was one of the first to bet on shale oil production using hydraulic fracturing technology and ushered in a “shale revolution” in the United States. Due to the fact that many smaller firms followed Chesapeake, and Wall Street was actively issuing loans (often unsecured) to develop a new industry, the United States announced energy independence for the first time in many years.

The country not only reached self-sufficiency in oil and gas, but also began to actively push its energy resources abroad, including through the imposition of sanctions on competitors. In recent years, there has been a campaign to promote American liquefied natural gas (LNG) in Europe, in which Washington tried to stop the construction of the Russian Nord Stream 2 gas pipeline. The pressure partly worked: the Europeans signed a significant number of contracts for the purchase of American LNG.

But the coronavirus pandemic brought down world prices for natural gas and made supplies from the United States to Europe unprofitable. The price of liquefied natural gas fell to $ 1.5 per 1 million British thermal units (MBTU). Moreover, according to the contracts, Europeans themselves pay the cost of liquefying and transporting American gas. Under the current conditions, it was more profitable for European buyers to pay a penalty to suppliers in the USA and not to bear the cost of transporting LNG. Moreover, their storage facilities during the European quarantine were almost full.

According to Reuters, Europe is expected to abandon 40–45 scheduled for August liquefied natural gas cargo. A similar decision has already been made regarding July shipments. According to Wood Mackenzie, global trade in liquefied gas in 2020 will fall by 3%.

Even without COVID-19, too much LNG would have accumulated on world markets this year, says Ben Chu, an analyst at Wood Mackenzie. – COVID-19 just made things worse.

The Oil Price portal predicts a wave of ruin for American oil and gas companies this year, especially those who relied on oil shale. With an oil price of $ 35 per barrel, 30% of them would be unprofitable. In April, Whiting Petroleum reported on its inability to pay its debts. It was followed by Diamond Offshore, an oil producer for Hess and BP. In total, 18 oil and gas companies have already become victims of the pandemic this year, despite the fact that usually no more than 20 such companies go bankrupt in the United States.

The stoppage of gas production in the USA, which we previously considered a risk, this summer became part of our base case, Oilman estimates the situation from Goldman Sachs.

However, Wood Mackenzie believes that after the end of the pandemic, American gas will regain its position in world markets. A distinctive feature of American suppliers is the flexible terms of contracts, which allow canceling supplies in case of reduced demand. Even with the prospect of payment of forfeits, such contracts look safer in conditions of global instability. In addition, the United States has the opportunity to redirect part of the gas unclaimed by Europeans to domestic needs.

But if the American gas industry is predicted a gradual recovery, then the prospects for oil shale look less promising. Especially if Democratic candidate Joe Biden wins the presidential election in November, who promised to ban the drilling of new wells for shale oil in the United States.