On Sunday, June 28, Oklahoma-based Chesapeake Energy filed for Chapter 11 bankruptcy protection as it appears to be buckling under the weight of its enormous debts. The company was one the pioneers that led to the boom in US shale gas extraction, or “fracking,” that helped make the US the third largest producer of oil.
Chesapeake Energy has pioneered a concept where expensive gas extraction is fueled by taking on high debts to finance the purchases and maintenance of gas fields. It purchased gas fields in New Mexico, Texas, North and South Dakota, and Pennsylvania.
Founded in 1989, Chesapeake transitioned from traditional oil extraction to the more environmentally controversial and expensive shale gas extraction, which started a national trend.
At its height Chesapeake had a valuation of $37 billion and became one of the giants in the burgeoning US shale gas industry.
But the global financial crisis and its fallout provided a first shock to Chesapeake’s model that has now led to a valuation of only $115 million. Because so many small-scale producers followed Chesapeake’s example, the market had become flooded with expensive but plentiful US petroleum products.
In February, US government statements on the US shale gas industry focused on a major milestone on its horizon: The United States was about to become a net exporter of crude oil after a century of dependence on foreign oil, primarily from the Middle East and Venezuela. But those reports proved to be incorrect. Oil prices collapsed as the COVID-19 pandemic spread across the globe.
Instead of boosting US exports to unparalleled heights, the US started to overflow with its own surplus as international oil demand plummeted. With the key hub for its benchmark WTI crude located far inland, its oil had few places to go when futures expired in May, sending the price of WTI crude below zero for the first time in history.
While painful voluntary and involuntary production cuts in the US have relieved some of the pressure on its storage facilities, many experts predict that the shale gas industry is unlikely to recover from the devastating shock to the system anytime soon. It is likely demand will not return to pre-pandemic levels until 2022, when US shale gas extraction could recover.
With shale gas extraction now at its lowest point in a decade, the industry appears to be back where it started, only now it is saddled with billions in debt.
For low-cost oil producers in the Middle East and North Africa, the US decline has led to a significant increase in market share. This is likely to change the global oil market for years to come.