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Oil Industry Bankruptcies Will Transition to a Low-Carbon Future

Collapsing Oil and Gas Markets

As the oil and gas industry has been battered by price volatility, excess supplies, and falling demand, the renewable energy market has continued to grow rapidly. Throughout the first three quarters of 2018, gasoline and diesel prices remained somewhat consistent,he most dramatic collapse in oil prices in more than a generation, coupled with the coronavirus pandemic has sent the oil and gas industry into crisis mode, while crude oil prices had a jarring climb from $60 a barrel to almost $75 a barrel (Randolph and Schulte, 2019). During the fourth quarter of 2018, extreme price volatility started to impact both fuel prices and crude oil markets. A short-lived spike in fuel prices was felt during the beginning of the winter months. However, by the end of 2018, crude oil prices were hit with the largest decline since 2014, collapsing from $75 a barrel to just to $45 a barrel (Randolph and Schulte, 2019). By 2019, the decline in crude oil prices forced a number of oil and gas companies to file for bankruptcy.

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Renewable Energy Progress

While oil and gas companies were struggling, the renewable energy industry continued to make progress in the global energy market. During the first half of 2019, total wind power generation overtook coal as the main source of electricity in Texas (Mills et al, 2019). Coal has long been on the decline in the world’s developed countries. By the end of 2020, the demand for coal in the United States is forecasted to drop to the lowest level since 1978 (Goldman & Egan, 2019). While coal once provided roughly half of the electricity generated in the U.S, it now only powers about one quarter of the country’s electricity needs (Telford & Grandoni, 2019). During Donald Trump’s presidency, eleven American coal companies filed for bankruptcy, including Murray Energy, the largest privately-owned coal company in the country (Moritz-Rabson, 2019). Will traditional oil and gas companies follow the same decline that has been experienced by the coal industry?

Energy Analysts Predictions

As global energy consumption continues to rise in the future, energy analysts from the U. S. Energy Information Administration predict that fossil fuels will continue to remain as the main source of global energy in the coming decades. On the other hand, some energy experts believe that fossil fuels have already started their slow decline and will gradually disappear from the global energy profile over the course of the next 50 to 100 years. While vast reserves of shale gas still remain within America’s Permian Basin, along with massive pockets of offshore oil reserves straddling the coast of Brazil, and 896 trillion cubic feet of natural gas reserves in Qatar, market forces are starting to adversely impact fossil fuel production and consumption.  

Since the Industrial Revolution that began in the early 18th century, non-renewable fossil fuels like oil, natural gas, and coal have been the main resources for the world’s energy supply. However, renewable sources of energy have rapidly started to replace coal-fired power plants, while the rise of electric vehicles has begun to put an increasing amount of pressure on the future of the petroleum-based internal combustion engine. These are just a few of the signals that some energy analysts and economists have labeled as the global energy transition. Between 2010 and 2019, approximately 540 coal-fired power plants closed in the United States (TIB, 2019).

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Sustained Growth in Wind, Solar, and Hydro

According to the U. S. Energy Information Administration, sustained growth in wind, solar, and hydro power is projected to make renewable sources of energy the fastest-growing sources of power over the next two decades, growing by about 2.6 percent annually through 2040 (Cusick, 2016).  While many up-and-coming renewable energy producers anticipate a prosperous future, fossil fuel companies have continued to spiral downward towards less profitable models of production. The consequences of collapsing oil prices have taken a significant toll on all aspects of the oil industry. When oil prices remain extremely low, fossil fuel producers that are employing increasingly expensive extraction technologies and those that are working to access hard-to-reach reserves will continue to experience a disproportionate level of economic hardships.  

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Falling Oil Field Productivity

The overall productivity of oil fields has been dropping. According to the International Energy Agency, oil field production decline from first-year operations increased from a six percent decline before 1970, to a more than 14 percent drop between 2000 and 2007 (IEA, 2013). Since these numbers were released, experts believe that production decline has continued to worsen because of the need to increase levels of energy consumption in order to extract new sources of oil and gas. Declining levels of oil field productivity and long periods of depressed oil prices have led to a wave of oil industry bankruptcies that seem to keep on becoming more prevalent with each passing year.

Between 2015 and 2019, the Haynes and Boone energy law firm reported that 208 oil and gas producers filed for bankruptcy in the United States (Rapier, 2020). These 208 fossil fuel companies reported aggregate debt in excess of a staggering $121.7 billion. After oil prices initially crashed in 2015 and 2016, a little over 100 companies filed for bankruptcy. As oil prices rebounded between 2017 and 2018, Haynes and Boone only reported that 24 companies filed for bankruptcy. However, when another steep drop in oil prices was experienced during the fourth quarter of 2018, the number of bankruptcy filings skyrocketed once again. In addition to traditional oil and gas production companies, 196 oil field service companies (conducting work similar to Halliburton) also went bankrupt during the five-year period.

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Difficult Years to Come

Despite two significant attacks in the Middle East, with the September 2019 attack on Saudi Aramco’s oil facilities and the January 2020 killing off Iranian Major General Soleimani, the oil market has been resistant to price increases. Instead, following these incidents that heightened geopolitical tensions in the Middle East, the growing coronavirus pandemic swept in to drive down oil prices even further. The decline in energy consumption also sent natural gas prices down to extremely low levels that haven’t been seen in years. These events set the scene for yet another difficult year for the world’s already financially strained oil and gas companies.

The oil industry nightmare keeps getting worse. As the coronavirus pandemic caused the global travel industry to collapse, oil prices fell to their lowest prices since President George W. Bush’s first term in office. America’s once-booming oil industry was hit by an unprecedented collapse in the global economy. As global commercial air traffic dropped, the demand for jet fuel collapsed. Goldman Sachs says that oil demand in March 2020 may have dropped by as much as eight million barrels of oil per day, which represents an unparalleled collapse that has never before been experienced (Egan, 2020).

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Lasting Economic Damage

When America became the world’s largest producer of oil in 2019, it radically changed the country’s economy. While low oil prices were once thought of as a net benefit for Americans, they are now viewed as a wash at best. As a net consumer of fossil fuels, a decline in gasoline and diesel prices was once a slam dunk for the vast majority of Americans. However, since a significant sector of the country’s economy has become involved in the production of oil and gas, the damage from collapsing oil prices will have a much larger impact now than was felt during the massive collapse in oil prices that was felt in 1991 or 2008.

Economic analysts from Morgan Stanley have projected that low oil prices could shave 0.15 to 0.35 percentage points off the total U.S. gross domestic product (Isidore, 2020). Economists with Moody’s Analytics, which is a company that specializes in providing economic research regarding risk, performance, and financial modeling, says that more bankruptcies, loan defaults, and job losses should be expected from the American oil and gas industry in the future. In 2019, the U.S. oil and gas industry employed a total of 1.5 million people. Many economists are concerned about the impacts of jobs losses in this sector of the economy. However, Frank Macchiarola, the senior vice president of policy, economics, and regulatory affairs at the American Petroleum Institute has a more optimistic outlook. He says, “No industry is immune from market downturns, but the American oil and gas industry has been resilient through periods like this before (Isidore, 2020).”

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Renewable Energy Transition

As major oil companies like Chevron, Exxon Mobil, and Occidental Petroleum have been hit from the pain of low oil prices, companies involved in the renewable energy industry have been poised to take advantage of the struggles experienced by the fossil fuel industry. Texas has been a prime example of the energy transition that has been taking place. While the state experienced the largest number of oil and gas bankruptcies between 2015 and 2019, the Electric Reliability Council of Texas reported that, in the first two quarters of 2019, the share of wind and solar continued to grow throughout the state. This growth has been attributed to the development of new tax incentives such as the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). In addition to support from the ITC and the PTC, the production costs associated with installing wind and solar projects continue to fall.

The U.S. Energy Information Administration reported that U.S. wind capacity additions in 2019 alone totaled 12.7 gigawatts (GW), which exceeded the annual capacity of additions in each of the preceding six years (Mills et al, 2019). While tax credits related to wind and solar development have been essential for the renewable energy industry, corporate renewable procurement initiatives have also provided a significant boost to the industry. According to research firm Wood Mackenzie, corporate buyers accounted for roughly 22 percent of all solar and wind projects in 2018, contributing to a total of 5.8 gigawatts of renewable power (Mills et al, 2019).  

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Seizing the Opportunity

As financial capital has disappeared and crude oil prices have cratered, many fossil fuel companies have struggled to find a path forward that doesn’t include filing for bankruptcy. The most dramatic collapse in oil prices in more than a generation coupled with the coronavirus pandemic has sent the oil and gas industry into crisis mode. Conversely, companies within the renewable energy sector hope to capitalize on the mountain of debt being accumulated by the fossil fuel industry. Even the once-unassailable Texas shale-drilling companies have started to pull drilling rigs, lay off hydraulic fracturing crews, and slash capital budgets. Amid this fossil fuel industry turmoil, renewable energy companies have been faring far better and remain optimistic about the long-term energy transition.

Sources

Cusick, D. (2016). “Fossil Fuels May Not Dwindle Anytime Soon.” Scientific American.

Egan, M. (2020). “Oil collapses by another 24% to $20. It hasn’t been this low since 2002.” CNN Business.

Goldman, D., & Egan, M. (2019). “America’s largest private coal miner files for bankruptcy.” CNN.

Hayes & Boone. (2019). “Hayes and Boone Energy Roundup: Fall 2019.” Hayes and Boone, LLP.

International Energy Agency. (2013). “Resources to Reserves 2013: Oil, Gas and Coal Technologies for the Energy Markets of the Future.” Organization for Economic Cooperation Development/International Energy Agency.

Isidore, C. (2020). “Low oil prices could damage the US economy.”

Krauss, C., and Phillips, M. (2020). “American Oil Drillers Were Hanging on by a Thread. Then Came the Virus.” The New York Times.

Mills, C., et al. (2019). “Renewables Trends and Regulatory Updates.” Hayes and Boone, LLP.

Moritz-Rabson, D. (2019). “Eleven Coal Companies Have Filed for Bankruptcy Since Trump Took Office.” Newsweek.

Rapier, R. (2020). “Oil Bankruptcies Are Piling Up.” Forbes.

Randolph, S., and Schulte, J. (2019). “Are Oil and Gas Companies Still Hedging? A Survey of How Oil and Gas Producers Hedge.” Opportune, LLP.

Telford, T., & Grandoni, D. (2019). “Murray Energy files for bankruptcy as coal’s role in U.S. power dwindles.” Washington Post.

TIB. (2019). “Choked by Coal: The Carbon Catastrophe in Bangladesh.” Transparency International Bangladesh.

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