USA: Financial markets and development of unconventional oil sector

Abstract

Developed financial markets played a crucial role in launching and managing the US "shale revolution". Comparatively low investment barriers for entry and shorter time span between initial investment and first cash flows have attracted to the sector numerous small and medium sized independent exploration and production companies with limited own financial resources. Besides, because of the very rapid decline of production in the first year after running the well to sustain level of production permanent drilling of new wells is necessary, what in its turn requires new and new investments. In 2009-2014 about 1.4 trillion dollars of investment were poured into US oil and gas sector, 286 billion dollars out of that in the form of joint-ventures creation, 253 billion dollars through selling stocks, 786 billion dollars via bonds issuing and banking credit. During downward oil price cycle the matured derivatives markets and risk hedging operations strengthened the sustainability of unconventional hydrocarbons sector and slowed down the decline in tight oil production. Despite significant decrease in production costs and fexible financial markets, the protracted stabilization of oil prices at lower levels caused the deterioration of economic and financial indicators of oil and gas companies. In 2015, US energy sector became a leader by number of corporate bankruptcies. However, it should be anticipated after the ongoing phase of bankruptcies, merges and acquisitions the more efficient upstream sector will rapidly respond to the inevitable oil price recovery by increasing output. Thanks to the availability of a sophisticated and risk-taking financial sector in the USA, the bankruptcies of particular tight oil producers is unlikely to cause a crash of the entire sector of hydrocarbons' production industry at whole.