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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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New Data Suggests Shocking Shale Slowdown

Shale rig

U.S. shale executives often boast of low breakeven prices, reassuring investors of their ability to operate at a high level even when oil prices fall. But new data suggests that the industry slowed dramatically in the fourth quarter of 2018 in response to the plunge in oil prices.

A survey from the Federal Reserve Bank of Dallas finds that shale activity slammed on the brakes in the fourth quarter. “The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained positive, but barely so, plunging from 43.3 in the third quarter to 2.3 in the fourth,” the Dallas Fed reported on January 3.

The 2.3 reading is only slightly positive – zero would mean that business activity from Texas energy firms was flat compared to the prior quarter. A negative reading would mean a contraction in activity.

The deceleration was true for multiple segments within oil and gas. For instance, the oil production index fell from 34.8 in the third quarter to 29.1 in the fourth. The natural gas production index to 24.8 in the fourth quarter, down from 35.5 in the prior quarter.

But even as production held up, drilling activity indicated a sharper slowdown was underway. The index for utilization of equipment by oilfield services firms dropped sharply in the fourth quarter, down from 43 points in the third quarter to just 1.6 in the fourth – falling to the point where there was almost no growth at all quarter-on-quarter. Related: 2019 Could Make Or Break OPEC

Meanwhile, employment has also taken a hit. The employment index fell from 31.7 to 17.5, suggesting a “moderating in both employment and work hours growth in the fourth quarter,” the Dallas Fed wrote. Labor conditions in oilfield services were particularly hit hard.

The data lends weight to comments made by top oilfield service firms from several months ago. Schlumberger and Halliburton warned in the third quarter of last year that shale companies were slowing drilling activity. Pipeline constraints, well productivity problems and “budget exhaustion” was leading to weaker drilling conditions. The comments were notable at the time, and received press coverage, but oil prices were still high and still rising, and so was shale output. The crash in oil prices and the worsening slowdown in the shale patch puts those comments in new light.

What does all of this mean? If oil producers are not hiring service firms and deploying equipment, that suggests they are rather price sensitive. The fall in oil prices forced cutbacks in drilling activity. Oilfield service firms in particular are bearing the brunt of the slowdown. Executives from oilfield service firms told the Dallas Fed that their operating margins declined in the quarter. Related: OPEC Oil Exports To The U.S. Fall To Five-Year Low

In fact, roughly 53 percent of the oil and gas executives that responded to the Dallas Fed’s survey said that the recent drop in oil prices caused them to “lower expectations for capital spending” in 2019. A further 15 percent said that it was still too early to make a decision on capex changes. Only 31 percent of oil executives who responded to the Fed survey said that the oil price downturn would not affect their spending plans.

The oil rig count climbed for much of 2018, but began to level off in the third quarter. The rig count, which stood at 885 in the last week of December, has barely budged since late October when prices began to fall.

The downturn is still in its early days. It takes several months before the rig count really begins to respond to major price movements. The same is true for a string of other data – production levels, inventories, as well as capex decisions.


In other words, some early data points already suggest that the U.S. shale industry could struggle if WTI remains below $50 per barrel. But the longer WTI stays low, the more likely we will see a broader slowdown.

By Nick Cunningham of Oilprice.com

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  • Lee James on January 06 2019 said:
    I'm just an ordinary retired citizen, but am interested in what the Energy sector in the U.S. is all about.

    I see the Sector as a source of national pride when it comes to petroleum production. Of less concern is what, precisely, fuels the sector. It's the hype and lack of fiscal rigor behind production that concerns me. In addition, production cost currently does not include the cost of byproducts from burning fossil fuel, so cost accounting for the industry is very subject to change, going forward.

    The Energy Sector largely means petroleum, and has in recent years been fueled by low interest rates on borrowed money, and a belief that the sector always comes back with a roar if it has been down for a time.

    Today, debt is being refinanced at higher rates. And structural change is occurring in the industry where today's barrel of oil is profoundly different than our father's barrel of oil. Today's barrel of domestic oil is tough to get at. It's expensive because the petroleum is both very deep underground and diffusely distributed -- not a lot of new domestic resource is in reservoirs.

    We are driven to go after expensive domestic oil because foreign oil has become much more political, capital-intensive, long-lead time, and high-risk. We are not in a good place for producing petroleum -- not now, nor in the future, despite the techno developments that we hope are here to keep our way of life keeping on.

    Really, even with growing technological prowess, petroleum production is treading water on volume, and trading dollars around without financial gain.

    All things considered, we should make it a family and national priority to develop clean energy and electrify transportation. Locally developed power means a more robust grid, with greater efficiencies, and less pollution. pollution does carry a cost, even if we defer it.

    As has been pointed out in Oil Price pages recently, clean energy is showing signs of providing greater return today than traditional energy. The way forward seems pretty clear to me after looking at today's political realities and ALL of the costs of producing and using energy.
  • citymoments on January 06 2019 said:
    With all due respects to the author, I would like to say the following points:

    1. Shale oil, from the very beginning, is never a long term sustainable crude oil production, not sustainable in two aspects - very high cost of extraction ( it is not conventional oil in liquid formation) as well as very high decline rate.

    2. Shale oil, was not new discovery; where the shale oil is in Texas now , is where the conventional oil was extracted in Texas,they have been discovered 40 years ago. It was left there untouched because everyone knew it could not be extracted with a profit.

    3. After the BP GOM oil spill incident 2005, oil price suddenly went sky high to $150 a barrel; suddenly everyone was panic and it is no longer to be able discover any new on shore conventional oil as well as the safety risks involved to go off shore became too high. So, then oil price at over $120 a Barrel, shale oil became the only proposition to fulfill the short term supply gap, followed by crazy wall street promotion as the new shale oil revolution.

    4. This wall street promotion was further marketed by all shale oil producers to claim their break even cost is $40-50 a barrel to attract investors money, here is the real fraud: no one in financial reporting and investment community ever scrutinized the break even cost - whether it included the land leasing and royalty cost or the take away transportation cost? why less than 10% of shale producers had positive cash flow when the WTI was over $60 a barrel most time of 2018 if their break even cost was $45 a barrel?

    5. In summery, most of those technology advancements in shale oil production were highly exaggerated, because so far, most shale oil producers have generated no positive cash flow let alone any net profit. WTI under $80 a barrel, shale oil should never be allowed to be extracted. It is retarded to believe: keeping extracting shale oil will make USA a net crude oil exporter, it is selling precious energy resources of USA below its production cost, it is burning investors money, makes USA poor.
  • Brian Bresee on January 07 2019 said:
    At $45/barrel WTI (the average break even price for US producers) market forces are deciding US oil production, what did the Bears at that price think was going to happen? A return of OPEC to trying to crush US oil producers, a tactic that failed miserably in the past, to bring an even lower price?

    The oil price is now set to climb over $60/barrel, which will in time bring back the US oil producers, along with reducing consumption again because fewer can afford the higher price. I see it as very possible that over exuberance will peak the price just over $70/barrel before it drops to a range between $50 to $65 a barrel, barring a major event that could spike prices.
  • Mamdouh G Salameh on January 07 2019 said:
    Yet the US Energy Information Administration (EIA) supported by concomitant utterances by the International Energy Agency (IEA) will soon come out with over-hyped announcements indicating that US oil production is growing by leaps and bounds.

    Shale slowdown news follows in the footsteps of disclosures by the Wall Street Journal (WSJ) that US shale companies have over-hyped the production potential from thousands of shale wells despite accusations by many authoritative organizations including MIT that the EIA has been overstating US oil production. According to the WSJ, two-thirds of projections made between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota.

    The data also lends weight to comments made by top oilfield service firms ‘Schlumberger and Haliburton’ in the third quarter of last year that shale companies were slowing drilling activity. Pipeline constraints, well productivity problems and “budget exhaustion” were leading to weaker drilling conditions.

    Claims about explosive growth of US shale production including the projection that US oil production will exceed 12.3 million barrels a day (mbd) in 12019 are pure hype by the EIA. Moreover, the claim that US oil production reached 11.7 mbd in 2018 is overstated by at least 3 mbd made up of 2 mbd of liquid gases and 1 mbd of ethanol all of which don’t qualify as crude oil. In fact International Exchanges around the world don’t consider them as substitutes for crude oil. And if the International Exchanges don’t accept them as substitutes, then they are not crude. Therefore, US oil production could have been no more than 8.7 mbd in 2018.

    This reported slowdown contradicts claims that US shale oil producers have managed to reduce their breakeven prices to the extent that they can still raise their production even if WTI remains below $50 a barrel.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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