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Oil price plunge threatens shale revolution

Producers of oil and gas from once hard-to-tap shale deposits are now facing the payback of the energy revolution they wrought: ultra-low prices forcing them out of business.

[NEW YORK] Producers of oil and gas from once hard-to-tap shale deposits are now facing the payback of the energy revolution they wrought: ultra-low prices forcing them out of business.

This year is expected to be a make-or-break year for US shale producers, after the 70 per cent plunge in crude prices, with many at risk of failure.

Dozens of shale drillers sought bankruptcy protection in the last year as low oil prices made their operations uncompetitive and they could not pay debts.

But many are holding on toughly, hoping desperately for a turnaround in the market.

It has been a rapid reversal for an industry barely a decade old. While shale and other deep-rock strata have long been known to hold substantial oil and gas deposits, it was only recently that techniques were developed to economically tap this "tight" oil by hydraulic fracturing, or "fracking" the strata to release it.

Encouraged by US policy to cut the country's dependence on imported energy, the fracking revolution led to a stunning increase in US domestic crude oil production.

Total US output rose from about 5.6 million barrels a day in 2010 to 9.4 million barrels a day last year.

But most of that surge, which made the United States rival Saudi Arabia as a crude producer, came while crude prices held above US$80 a barrel. That made the relatively costly process of tapping shale reserves lucrative.

It is different now that crude is close to US$30 a barrel, with estimates that US oil and gas producers as a group are losing about US$2 billion a week.

With the estimated price for survival at US$50 a barrel, "we expect a sharp jump in bankruptcies at some stage in 2016," said analysts at the VTB Capital in a note.

Law firm Haynes and Boone, specialists in the oil industry, counts more than 40 shale-oil companies having filed for bankruptcy in 2015, with the failures accelerating at the end of the year.

Another indicator of the crunch: The number of active drilling rigs in the United States has fallen 60 per cent, with the biggest losses in the main fracking zones of Texas, Oklahoma and North Dakota.

"Unless the prices come up in spades, the drilling activity is going to continue to get lower probably to mid-year," said James Williams of WTRG Economics.

For the moment, however, overall US oil output has not fallen significantly, in part because operators will produce at a loss to keep servicing their debts while hoping for a price upturn.

VTB Capital says lender banks are pushing them to keep the wells running.

Analysts at business consultancy AlixPartners say the fracking industry has also been able to lower its costs and adapt to market changes, allowing some in the industry to survive better.

"US shale has the advantage of lower and shorter investment cycles compared with conventional oil, which makes US shale more responsive to oil prices," they said.

And that has, in a way, guaranteed that prices will not bottom out soon.

"The market has lost confidence that US shale will decline quickly enough to perform its job this year of beginning the global rebalancing process," said an analysis from French bank Societe Generale.

Still, said VTB Capital, "something has got to give soon." Mr Williams says the crude oil price needs to come up to US$50 dollars a barrel to allow most shale producers to keep going. It was below US$32 on Tuesday.

"For some, it still would be too expensive to drill at US$50." "Until then, we're going to see a decline in oil production here in the US."