Insolvency-Related Implications For The Oil & Gas Industry In The U.S.

Despite the tremendous growth and development of oil and gas resources in recent years, the industry is expected to be a boon for bankruptcy lawyers. This article explores how the current low price environment hurts developers and their lenders, whose past investment premises included a sustained high price environment and provides some insight into what the issues will be in bankruptcy.

Over the past 100 years, politics and periodic limitations on production (often as a result of global affairs) have resulted in price fluctuation and shortages, sometimes significant. In the 1970s, declining domestic production coupled with increased demand left the U.S. vulnerable to fluctuations in the global oil market, and substantial shortages led to the need for rationing and gas lines. In the previous decade, soaring oil prices (up to $145 per barrel of West Texas Intermediate (WTI) in the summer of 20091) sent the airline industry into a tailspin. The U.S. has relatively abundant petroleum resources, but the availability of cheap oil is on the decline, and production is limited in part by state and federal regulation and in part by expectations of the market price for crude.

The U.S. has relatively abundant petroleum resources, but the availability of cheap oil is on the decline, and production is limited in part by state and federal regulation and in part by expectations of the market price for crude.

In the last decade, U.S. oil exploration and production has been on an upswing due to improved techniques of horizontal drilling and fracturing tight geological formations to release previously trapped hydrocarbons in new and old fields. The U.S. currently has booming oil and natural gas economies in numerous states based primarily on these technological advancements and increased investment resulting from previously high oil prices. The U.S. has already reemerged as an energy superpower, and with production levels on the rise, some predict that the U.S. could be completely relieved of reliance on foreign oil by 2035. But investment in new U.S. production capacity has been expensive. Hydraulic fracturing and offshore drilling requires an expensive initial investment. A single deepwater well can cost $100 million to test and develop for oil production.2

Over the past decade, investors and their lenders made these investments in a high price environment with the expectation that future oil prices would easily support a recovery on investment. However, production increases have outpaced expansion of global demand, and prices in the past 12 months have fallen in half to about $50 per barrel. It's unclear where the bottom will be and how much longer prices will remain at these levels. At $50 per barrel, many of the previous...