U.S. shale production is still growing but at a much slower pace than before. A combination of cost inflation and mixed messages from the Biden Administration have left some observers worried about the prospect of peak production.
Shale executives say that peak Permian production will occur this decade.
This could lead to structurally higher prices at the pump as consumers will feel the pinch from U.S. shale losing global market share at the expense of OPEC, which is only set to increase its control over global oil supply.
The new priorities of the shale patch – capital discipline and a focus on returns to shareholders and debt repayments – have coupled with supply chain constraints and cost inflation to drag down U.S. oil production growth in recent months.
The Biden Administration's mixed signals to the American oil and gas industry, with frequent blaming of the sector for high gasoline prices and even a threat of more taxes, are not motivating U.S. producers, either. Many are reluctant to commit to spending more on drilling when there isn't any medium-to-long-term vision of how the U.S. oil and gas resources could be used to boost America's energy security and help Western allies who depend on imports.
American oil executives already said in early March that OPEC is once again the most influential force in global oil supply – and will be so for the foreseeable future – now that U.S. shale production growth is slowing.
Scott Sheffield, CEO at the largest pure-play shale producer, Pioneer Natural Resources, told the Financial Times earlier this year, "I think the people that are in charge now are three countries — and they'll be in charge the next 25 years."
"Saudi first, UAE second, Kuwait third."
Meanwhile, peak Permian oil production is just five or six years away, according to Pioneer's Sheffield, who attributed this forecast from March to expectations that drillers will have exhausted by then the prime drilling acreage in the top shale-producing basin.
The Permian is also set for a new wave of consolidation, with private equity looking for the exit and public companies looking for additional top-tier acreage. The likes of Exxon, Chevron, and ConocoPhillips could be out on the hunt for major acquisitions to trim costs and return more cash to shareholders, prioritizing efficiency over production growth.
"There are synergies that can happen, there are costs that can come out of the system, there are better efficiencies that can come with some M&A. So I do believe that M&A is going to continue in this space, it needs to continue in the space to be a healthy business," ConocoPhillips CEO Ryan Lance told Bloomberg Television in an interview last month.
Occidental's chief executive Vicki Hollub said in April that the Permian hadn't peaked yet.
Most forecasters say the Permian still has room to grow, but executives and analysts flag concerns that the peak in oil production could come well in advance of peak demand.
The most recent Dallas Fed Energy Survey for Q1 showed at the end of March that oil and gas expansion in Texas, New Mexico, and Louisiana – home to the biggest shale plays, including the Permian – stalled amid surging costs and worsening outlooks.
In comments to the survey, one executive at an exploration and production firm said, "The continued mixed messages put out by the administration are also contributing to the uncertainty and unwillingness to put additional funds toward development and growth."
Another executive noted, "The Energy Information Administration put out its Annual Energy Outlook this week, and it forecasts that oil production from the U.S. will be flat for the next 30 years. We should probably inform them of the collapse in shale production we are going to see in under five years."
A third one put it bluntly,
"The administration's policies will continue to affect domestic natural gas and oil production negatively. Oil and gas prices will soar in the next few years, and we'll be at the mercy of nations that hate us."
By Tsvetana Paraskova for Oilprice.com
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