While acknowledging that U.S. shale growth is slowing down, analysts and experts continue to predict that total American crude oil production will rise by around 1 million barrels per day in 2020.
But U.S. exploration and production companies, the ones with the boots on the ground in the Permian and other major American shale plays, acknowledge that the slowdown is and will be much worse than what the EIA, the International Energy Agency (IEA), or OPEC predict.
Many U.S. oil and gas firms are cutting capital expenditure plans and production targets for 2020, squeezed between the scarce availability of capital from debt and equity markets and investors demanding returns. Capital discipline, combined with firms having to move to Tier 2 and 3 locations to drill and parent-child well issues, has the U.S. shale patch saying that current forecasts about U.S. production growth are too optimistic and not taking into account many of those issues.
“I can’t remember another time when oil was $55 and the industry was in such shambles,” Frank Lodzinski, CEO at shale explorer Earthstone Energy who has five decades of experience, told Bloomberg, noting that the forecasts by EIA are “usually wrong.”
In its latest Short-Term Energy Outlook (STEO) from mid-November, the EIA sees U.S. crude oil production averaging 13.29 million bpd in 2020, up by 1 million bpd from an expected average of 12.29 million bpd in 2019. Surprisingly, the EIA lifted its 2020 production forecast by 0.9 percent compared to the forecast in the October STEO. The growth rate is expected at 11.8 percent in 2018-2019 and at 8.1 percent in 2019-2020.
The IEA said in its World Energy Outlook 2019 that U.S. shale production “is set to stay higher for longer than previously projected, reshaping global markets, trade flows and security.” Related: This U.S. Shale Giant Is On The Brink Of Collapse
U.S. production growth is set to slow from the breakneck pace in recent years, but American production will still account for 85 percent of global oil production growth until 2030 and for 30 percent of the increase in gas. Oil and gas shale production in the U.S. will outpace Russia’s total oil and gas output by 2025, according to the Paris-based agency.
Commenting on those forecasts, Scott Sheffield, CEO at Pioneer Natural Resources, told Bloomberg TV that those predictions are “way too optimistic,” and rather than 85 percent of global oil growth, the U.S. will likely represent 30-35 percent of this increase until 2030.
Due to capital discipline and a focus to please investors, the U.S. patch will be spending 80 percent of every dollar on drilling, compared to 105 percent of every dollar spent on drilling over the past decade, Sheffield told Bloomberg. Free cash flow yield of 5 percent and a double-digit return on capital employed (ROCE) will be the key drivers of investors returning to the energy sector, the manager said, noting that only a few companies will be able to get to those numbers, while the rest will have to consolidate.
Signs of the U.S. production growth slowdown are already evident in the Permian economic indicators this year. Related: The Complete Guide To Drilling
Job growth in the Permian Basin has been sluggish this year, the Dallas Fed said last week. Employment was little changed at an annualized -0.2 percent year to date to October—and this was the first time since 2016 that Permian Basin employment has lagged job growth in Texas. Mining, logging and construction, the largest employment sector in the Permian, contracted at a 13.9 percent annualized rate in October, dragging total employment down. Year to date, the sector has fallen by 4.7 percent, according to the Dallas Fed.
Shale industry veteran Mark Papa, currently chairman and CEO at Centennial Resource Development, said on the company’s earnings call in November that he sees total U.S. year-over-year oil growth in 2020 at around 400,000 bpd, below the current consensus and below his own estimate of 700,000-bpd growth in September.
“Most people will ascribe the low U.S. growth to capital discipline. But I think the larger reason is what I've been talking about for several years the shift to Tier 2 and 3 drilling locations in all shale plays and increasing parent-child issues in the Permian,” Papa said, and warned that the growth slowdown will likely continue after 2020.
“I'll also note that this is likely not just a 2020 event. I believe U.S. shale production on a year-over-year growth basis will be considerably less powerful in 2021 in later years than most people currently expect,” the shale industry’s pioneer said.
By Tsvetana Paraskova for Oilprice.com
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And yet, the US Energy Information Administration (EIA), the International Energy Agency (IEA) and Rystad Energy continue hyping about the rising production of US shale oil with Rystad Energy taking its hyping to new levels by claiming that US oil production will hit 18 million barrels a day (mbd) by 2030.
The claim by the EIA that US oil production will average 12.29 mbd this year rising to 13.29 mbd in 2020 is not only self-delusional but a plain lie. US production could probably average less than 11 mbd this year and around 10 mbd in 2020.
Oil rigs don’t lie. They tell the story on the ground and the story they are telling is that the US shale oil industry is in terminal condition.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London