Let's say you borrow $500,000 to purchase land and build a house with the intent of renting it for income. If you put 10-20% down, then you are betting at the end of the building process you will have a house and land that will appraise for $550,000 - $600,000. If you get to the end of the building process and the rental market has shifted out from under you to the tune of 30%, and the house now will command $2,400 per month instead of $3,600 per month, you have a clear choice ahead of you.
Let's say your monthly interest payment is $3,000. If you think the market will recover sooner than you run out of cash to make up the difference between your interest payment each month and the amount of cash it is producing for you ($3,000 - $2,400 = $600), you will hang on to it. If you cannot afford that, you will either try to restructure the loan. If you can't restructure, you sell at the market rate of the house - say $420,000 and pay off as much of the principal you can afford.
The house, as long as it doesn't burn, has some value. People will continue to live there, because even if the bank forecloses on you it turns around and sells it for market value to the next guy with capital.
But the analogy of debt and interest is probably half right. Usually on such speculative ventures, and oil well drilling is highly speculative, you don't finance your operations with debt. The creditors know it is speculative and will charge too high interest rates (much, much higher than interest rates for a house). I would imagine that unless an Exxon or BP is financing it with their own cash, that the smaller guys are financing by selling shares of stock. In that case, the shareholders take a valuation hit, but the company remains solvent and able to continue operations at whatever the price is. The shareholders in a position to take a long view will keep their shares, the ones that cannot will sell at the discount. But the good news is that a functional oil well, just like a functioning house, is always worth something, no?
Not quite...in the old established major fracking areas such as in ND and TX the geology is so well known that drillers are not only decreasing the horizontal spacing , but are also tapping into similar layers further down.
They know the oil is there and how to get it out....so it's not like a "wildcat" single hole that may or not produce.