Alternatives For Managing Distress In The Oil Patch

Dorsey & Whitney LLP

According to the U.S. Energy Information Administration (EIA), the United States (U.S.) regular gasoline retail price as of the Monday before Labor Day fell to $2.22 per gallon this year, the lowest level for this time of year since 2004. The EIA concludes that U.S. gasoline prices are relatively low because of continued low demand for gasoline since mid-March, when travel demand fell because of efforts to limit the spread of coronavirus. Indeed, monthly motor gasoline consumption in the U.S., measured as product supplied, reached a low of 5.85 million barrels per day during April 2020, the lowest level since 1974.

There is little question that U.S. oil and gas production is expected to experience a decline in response to the first quarter’s supply-and-demand shocks. In addition to reduced production of newly drilled wells corresponding to a reduction in drilling activity, oil and gas production naturally experiences declines in connection with the monetization of existing wells. Specifically, shale wells typically decline 70 to 90 percent relative to their peak production within a three-year period, with the large majority of that production decrease taking place within the first 12 months. Consequently, the absence of current drilling activity can rapidly result in the decrease of U.S. oil production. According to estimates developed by energy news website, the absence of drilling in U.S. shale basins would theoretically cause a decline in production by more than one third to less than 5.0 million barrels per day by the end of 2020.

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