Shale and Solar Short-Term Prospects Like Night and Day – 1/6/16

Shale-drilling investors may have fled in droves as the oil rout deepened but increased efficiency and surprisingly robust funding has allowed top performers to maintain drilling operations. US shale oil has been able to resist low prices more than OPEC expected, and Pioneer Natural Resources Co. managed higher than expected returns on West Texas wells and a share sale will keep the company funded through the worst of the rout.

That said many companies are planning for oil prices to remain at levels closer to $60 a barrel in the long-term. With the days of $100 a barrel apparently gone, planned investments have dropped off sharply. While it might still make economic sense to keep already active rigs running to cover interest payments and sunk costs, most companies took on levels of debt that could never be sustained on current price expectations; those companies’ best assets are likely to be sold off in the coming year to meet loan obligations if prices remain depressed through the year. Financing options are running out quickly as oil prices hover around $30 a barrel. Who exactly will have the cash on hand to take advantage of the buyers market in oil and gas M&A remains to be seen as debt markets tighten up.

Solar energy is seeing changes just as significant as those in oil and gas this year. Since the gluts in the fossil fuels only increase the difficulty of reaching cost competitiveness, solar is fortunate to see projected costs falling rapidly enough that a slight rebound in the commodity prices to $50 a barrel would put solar well below cost parity with even newer natural-gas power plants. If balance-of-system costs (customer acquistion, installation, etc.) and energy storage prices fall as projected fall as projected, solar energy is likely to be the most economical choice for energy production by 2025. Wind and natural gas will complement solar and may be essential to widespread adoption as they balance out supply and begin biting into coal’s share of electricity production. The advance of renewables will speed along in the next five years so long as the industry maintains the support in government needed to update infrastructure to match a more variable supply.

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