Is U.S. Shale Production Finally Nearing Its Peak?

• Shale well decline rates are accelerating, and production is expected to plateau or even decline soon.
• Upstream oil and gas companies are merging and acquiring assets to improve their long-term shale well productivity.
• Lower capital expenditures for drilling and completions are expected due to consolidation and a focus on shareholder returns.

Last October, I published a piece on OilPrice where I discussed the drivers for the rapid expansion of upstream E&P merger activity that was being seen. Upstream M&A has continued since that article came out, and I thought an update was in order as not only has it continued, but seems to have reached a fever pace in recent weeks. In just the last three months we have had news from Chord Energy, (NYSE:CHRD) merging with Bakken focused, Canadian operator Enerplus, (NYSE:ERF). In a long overdue consolidation in the natural gas space, Chesapeake Energy and Southwestern Energy have agreed to a merger of equals. Just last week, leading gas producer EQT Corp, (NYSE:EQT) announced its intention to acquire Equitrans, (NYSE:ETRN). As I said, a fever pace. In this article we will review our thinking from last October and provide new information from various sources that highlight underlying resource drivers for continued upstream M&A as 2024 ages.

Production peaking later this decade

Last week at the CERAWeek conference in Houston, ConocoPhillps CEO, Ryan Lance forecast that U.S. production would advance to about 14 mm BOPD a few years hence, and then plateau. He was quoted in an SP Global article-

"Probably later this decade we'll see US production plateau and will probably stay there a long time," he said. "I don't know that we'll get to 15 [million b/d], but I think we'll pass through 14 million [b/d] on the way to 15 million [b/d].” For this year, Lance thought, “US crude oil production growth in 2024 will likely drop to about 300,000-400,000 b/d in 2024, down from around 1 million b/d in 2023.” 

This viewpoint matches fairly well with my own, although I must admit I have been surprised with the impact that drilling and completions technology has had on enabling production growth in the face of rig count declines. One way to measure the impact of longer laterals, increased frac intensity, and well spacing is through the change in output per rig. As measured by the EIA-DPR (Drilling Productivity Report), from March of 2019 the average daily output per Permian rig has increased from 624 BOPD per rig, to 1,359 BOPD per rig. Normalized for the decline in rig count from 465 to 316 in this basin, that’s still a 60% increase in output.

The “Red Queen” effect

Now we are nearing the peak of the arc where growth comes in 5-10 BOPM increments instead of the 50-60 BOPM gains we saw from Jul-22-Dec-23. Eventually, unless drilling increases, or new technologies come along-not out of the question, the legacy decline factor-this month -422K BOPM, will exceed new oil production-currently 430K BOPM. When that happens, the curve will bend down, as noted in the graph below. 

This is referred to in shale professional circles as The Red Queen effect, referring to a scene in Lewis Carroll’s Through the Looking Glass where Alice learns from the Red Queen that she must run increasingly fast just to stay in the same place. This has turned out to be a fairly apt metaphor for shale production. A report from energy analyst firm, Enervus, to this effect was summarized in a Journal of Petroleum Technology article August, 16th of last year. Dane Gregoris, report author and managing director at Enervus Intelligence Research, was quoted as saying.

“The US shale industry has been massively successful, roughly doubling the production out of the average oil well over the last decade, but that trend has slowed in recent years. The production decline rate has grown steeper at a rate of more than 0.5% annually since 2010. We’ve observed that decline curves, meaning the rate at which production falls over time, are getting steeper as well density increases. Summed up, the industry’s treadmill is speeding up and this will make production growth more difficult than it was in the past.” 

Or it could be sooner

As Mr. Lance opined, shale output may bend the curve in the next decade. Some believe that could happen later this year. The graph above from this month’s EIA-DPR illustrates that YoY legacy declines are accelerating in all shale plays, most notably in the Permian.

In contrast to the point of view expressed by Mr. Lance, natural resources analyst firm Goerhring & Rosencwajg, put out a bulletin in the third quarter of last year with a much closer time-horizon, based on declines acreage quality and the fact that you can only let air out of a balloon for so long.

“We now calculate the Permian has also produced half of its reserves and expect sequential growth to turn negative within the next few months. With a growing degree of confidence, we expect 2024 will be the peak in Permian production. Over the last fifteen years, the US shales have represented all non-OPEC growth. In the previous five years, the Permian has dominated US shales. If correct, we are entering an unprecedented period of tightness in global oil markets.”

With this imminent plateauing of U.S. shale, should G&R be correct, the focus of the conversation in regard to shale output shifts toward the length of the “tail.” A metaphor for the slope of the decline that will be seen as more and more wells are completed in the future. Here McKinsey notes in their 2024 Outlook on Oil that “shale production could plateau in the mid-2020s at about ten million barrels per day and remain stable through 2040.”

That is a fairly long tail in my view, and buttresses investments in U.S. shale drillers. As we will discuss in the closing commentary in this article, the M&A activity we have seen over the last couple of years is clearly hinged on the idea espoused by McKinsey that decades of useful life remain in shale plays, even if they do decline.

Your takeaway

One thing that is certain is that the larger companies with deep pockets have decided to pad their long term productivity in shale plays by buying out the best of the relatively smaller players, public and private. 2023 was a banner year for M&A activity with about $234 bn in deal-making, as noted in a recent Offshore Technology article.

As RBN Energy noted in their February, 5th blog post, Keep On Dancing, this wave of upstream E&P consolidation was likely to continue.

”The huge wave of 2023 consolidation has taken out several of the major potential targets, especially in the Permian. However, the drivers of crude oil consolidation remain and there are strong prospects for future major deals this year, especially in other plays such as the Bakken, Mid-Continent, and Gulf of Mexico.” 

If that scenario continues to play out this year, we are likely to see further capex declines that impact drilling and completions as these companies combine forces and then root out wasteful duplication. The twin forces of stubbornly low prices in natural gas, and oscillating prices for WTI, combined with increasing demand by investors for capital returns, have had the effect of many upstream companies curtailing capex for 2024. Maximizing free cash flow to fund shareholder capital returns-dividends and stock repurchases, have clearly taken priority over increased capex for production growth.  This message has been consistent across a broad swath of shale producers that include Occidental Petroleum, (NYSE:OXY)-down 9% YoY, Devon Energy, (NYSE:DVN)-down 7% YoY, and Diamondback Energy, (NYSE:FANG), down 11% YoY.

In summary. The natural forces of legacy declines in older shale wells, combined with reservoirs that are approaching, or have passed their halfway point of ultimate recovery, will meet capital restraint and result in a plateauing of shale output as early as this year. This will exert a tightening force on the oil market, which should be supportive for prices and the stock prices of E&P operators. If we do indeed see a sign that these declines are accelerating to the point where production actually declines, I would expect a robust impact on the stock prices of these companies almost immediately.

By David Messler for Oilprice.com 

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