U.S. shale growth may be slamming on the breaks, although analysts differ over how significant the slowdown will be.
The EIA says that U.S. shale growth will slow down this year, but the agency still has growth at a rather optimistic 1.1 million barrels per day (mb/d), putting the annual 2020 average at 13.3 mb/d. The agency does see a more dramatic slowdown in 2021, with growth of just 0.4 mb/d.
The upbeat assessment is echoed by Rystad Energy, which predicts growth of 1.9 mb/d from U.S. shale, although that figure includes natural gas liquids. The firm sees Brazil and Norway adding another 1.3 mb/d, which combined risks leaving the oil market oversupplied this year. The recently announced OPEC+ cuts “might not be enough to sustain oil prices at $60 per barrel,” Rystad said in a report.
Right on cue, rumors of OPEC+ delaying its March meeting until June hit the news wire on Tuesday. In this hypothetical scenario, the cuts, which are set to expire at the end of the first quarter, would be pushed off until June. The OPEC rumor mill is nothing new, but anonymous leaks to the press coming only two weeks after the latest deal went into effect is…notable.
But other market watchers are warning that the shale boom might be closer to a peak than is commonly thought. Adam Waterous, an investor at Waterous Energy Fund, says that the Permian basin is either at or near a peak in production. “The North American oil market has been grossly overcapitalized, which is not sustainable,” he told Bloomberg. “It’s impossible to continue to have uneconomic production and capex.”
Even if the EIA is closer to the mark, the figures of over 1 mb/d of growth refers to an annual average. U.S. production ended the year at around 12.9 mb/d, according to the weekly data, so achieving 13.3 mb/d may be a bit less impressive than the annual changes suggest. “The momentum is declining significantly,” Commerzbank said in a note. “The decline in drilling activity and the rising costs of exploration are likely to slow the rate at which production is expanded.” Related: Oversupply Fears Are Front And Center In Oil Markets
Beneath the headline figures about production growth are ongoing operational challenges in the shale patch.
“The average cumulative production per well over the first twelve months of output has been on the rise since mid-2015 until April 2018, when it peaked, and has slightly fallen since,” JBC Energy said in a report.
The energy consultancy said that initial production rates increased in the North Dakota in recent years, but the tradeoff was steeper decline rates. The widely-cited productivity improvements in well design, along with an intensification of sand, water, lateral length, etc., all aimed at producing more oil and gas from a given well – those improvements are being offset by steeper decline rates, JBC said.
“So even under the optimistic assumption that cumulative production plateaued over the past year and has not fallen further, an increasing number of new wells is needed to offset the decline from the constantly growing fleet of legacy wells, in order to retain growth.” The JBC report was entitled “Another Nail in The Coffin of US Shale Growth.” Related: The World's Most Expensive Oil Nears $100 Per Barrel
This is not a new story, but it is one that is still unfolding. Either way, the steeper decline rates further complicate a business model that already has serious red flags.
Meanwhile, the latest EIA inventory data showed another build in refined products, and oil prices slid on the news. Short-term movements may not matter much, but the shale industry is very sensitive to price. With WTI slipping back into the $50s per barrel, and analysts warning about ongoing oversupply issues, that could lead to the shale growth projections coming in at the lower end of those forecast ranges.
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The flip side of that is if production undershoots the consensus estimates, it could result in a tightening up of the market, which ultimately is a bullish trend. But for now, the main market narrative still assumes U.S. shale continues to add new production. The weekly EIA data also showed output topping 13 mb/d for the first time last week.
By Nick Cunningham of Oilprice.com
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The EIA’s claim that US oil output could average 13.3 million barrels a day (mbd) this year is plain hype and self-delusional. US oil production is overstated by at least 2 mbd. US production averaged 10.3 mbd in 2019 and not 12.3 mbd as the EIA claimed and is projected to decline to under 10 mbd or in 2020. This means that the US may need to import up to 11 mbd in 2020.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Based on the facts, Cunningham could have written the same article but instead focusing on Shale's resilience and uninterrupted growth over a long period of time.