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The EIA Is Dead Wrong About The Future Of U.S. Shale

In early March, the Energy Information Administration forecast that U.S. crude oil production would rise by close to 600,000 barrels daily this year to a record high of 12.44 million barrels daily. On the surface of it, the industry looked like it had every motive to boost production: demand was strong, especially from overseas, oil prices were higher than breakeven levels across much of the shale patch, and the federal government wanted more oil getting extracted.

However, this was only half of the story. The other half was about industry executives declaring the U.S. shale boom over, cautioning against expectations of much higher production and warning that cost inflation was making a lot of wells uneconomical. On top of it all, many new wells were not as productive as expected in a sign that the top drilling inventory of the U.S. shale industry was nearing exhaustion.

It was in this context that Quantum Energy, the private equity company focused on oil and gas, this week issued a warning: drilling in the U.S. shale patch could decline by as much as 20 percent if prices remain at current levels.

Crude oil prices need to rise to at least $80 per barrel and natural gas prices need to rise to around $3 per million British thermal units for the U.S. shale industry to keep drilling at current rates.

At lower prices, drilling will begin to shrink, especially at private companies that have much weaker balance sheets than the big players, Quantum chief executive Wil VanLogh told Bloomberg.

These comments echo similar ones made by Pioneer Natural Resources' Scott Sheffield last year when he said that "You just can't keep growing 15% to 20% a year. You'll drill up your inventories. Even the good companies." 

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Then there is the inflation problem, too, with double-digit price increases hitting the industry and curbing the positive effect of higher oil prices on balance sheets.

"We've seen anywhere between 30 and 50 percent inflation - depending on which cost category you're talking about - that's what we're walking into in 2023," said the chief financial officer of Devon Energy, Jeff Ritenour, during the company's latest earnings call, in February.

Taken together, all these challenges would naturally combine for weak production growth, with that growth coming from the big shale oil and gas producers who can afford to make smaller profits after a record year.

These record profits, by the way, would provide the industry with a safety belt if the current trend in prices evolves into a downturn. Another private equity firm active in the energy industry said this earlier this month, noting shale drillers' financial discipline during last year's boom.

"I don't think the upstream business has ever been in better position for a downturn than it is today," Ben Dell, managing partner at Kimmeridge Energy Management, told Bloomberg in an interview last week. "We're heading to being essentially debt-free as an industry."

Dell then went on to commend the industry on its focus on profitability rather than production growth and praising drillers for "being rational and dropping rigs and focusing on profitability."

That was when oil prices were higher than they are now. WTI has slipped to $70 per barrel. Some have argued that the current rout is speculative, a spillover from the banking sector after the two bank collapses in the U.S. and Credit Suisse's near-death experience. But the fact remains oil prices are lower than they need to be to motivate more drilling in the U.S. shale patch.

Most forecasts are still for output growth this year, but these forecasts were made when oil was about $10 per barrel higher, and all was well in the banking world. In a context where prices can turn on a dime, no producer would make risky production growth plans.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More