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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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Time Is Almost Up For U.S. Shale

A top U.S. shale executive said that it may only be the Midland basin in the Permian that can grow production beyond 2025.

Aside from Midland, every other shale basin may be on borrowed time, with the best acreage already picked over and oil prices languishing below $60 per barrel.

It’s been a brutal two weeks for the U.S. shale industry, clobbered by a series of poor financial results from several drillers at a time when oil prices more broadly are in freefall. The latest was Oasis Petroleum, which plunged by more than 30 percent on Wednesday, after the company said it would probably spend a little bit more than previously expected, and might produce a little bit less.

Last week, Concho Resources admitted that one of its more promising experiments, a 23-well project, suffered from poor results because the wells were packed too closely together. The company’s share price plunged by more than 22 percent because investors realized that perhaps Concho Resources, and other shale drillers like it, may not be able to produce as much oil as expected from a given level of spending.

But the hits keep on coming. President Trump announced a new round of tariffs, scheduled to take effect in September. China responded by digging in, and letting its currency depreciate, which set off a global panic about currency wars and a slowing economy. Oil entered a bear market, down more than 20 percent from a recent peak in April. U.S. energy stocks across the board fell to new depths.

Prices recovered on Thursday on rumors about more OPEC+ cuts, but that has done little to dispel concerns about U.S. shale. Related: Oil Craters On Fears of Currency War

The industry faces both medium and long-term challenges as well. Pioneer Natural Resources, one of the larger producers in the Permian and widely considered one of the stronger companies, warned about the future of drilling.

“Rig count and Tier 1 acreage is being exhausted at a very quick rate,” Pioneer President and CEO Scott Sheffield told analysts on an earnings call on August 6, referring to the Delaware basin, which has seen a surge of activity most recently.

“I am lowering my expectations of the Permian, reaching 1 million barrels of oil per day growth annually as it did in 2018,” Sheffield said. “I'm still convinced the Permian will reach 8 million barrels a day at a much slower pace with the Midland Basin as the only growing basin in the U.S. past 2025.”

8 million barrels per day is not exactly peanuts. That would amount to another doubling of output compared to today’s levels. But Sheffield said that everywhere outside of the Midland sub-basin within the Permian faces an uncertain future. To be sure, he was arguing that this would enhance Pioneer’s value, since many of its competitors would be knocked out of the market. “Based on the scarcity, if Midland Basin is the only basin growing past 2025, it will make Pioneer's properties worth twice as much money or 3x as much money at some point in time over the next 5 to 6 years,” Sheffield said. Pioneer was one of the few companies that avoided a sharp selloff in its share price, although it reported a $169 million net loss for the second quarter.

But that would presumably mean that U.S. shale production would have to slow or even fall outside of the Midland. The prediction echoed that of Goldman Sachs, which said that the poor results from Concho Resources regarding well density could be a harbinger of broader problems with the future of shale. Concho’s “unfavorable spacing tests and lower than forecast capital efficiency raise justifiable questions whether we are further down the path to when shale no longer becomes as relevant a driver of global supply growth,” the investment bank said in a note to clients. Related: The Reason China Is Winning The Battery Race

Sheffield said that he doesn’t see global oil prices staying below $55 per barrel over the next few years. That would likely mean WTI would be under $50, which he says is just too low for shale companies to be making money. If oil was stuck at those low levels, you would “see a significant fallback in Permian growth,” Sheffield told investors.

Pioneer is no stranger to operational problems. It made headlines in 2017 when it reported a higher gas-to-oil ratio than it had originally anticipated, a worrying predicament since natural gas is much less lucrative. Pioneer also admitted that some of the wells it had drilled in 2017 were a “train wreck,” with underground pressure causing problems and delaying operations. The announcement raised some red flags and Pioneer saw its share price take a nosedive, falling to an 18-month low at the time.

Pioneer has avoided the utter meltdown that has hit other shale companies in recent days, but it’s noteworthy that two years on from its announcement about its train wreck wells, Pioneer’s share price is back down to about the same level. Even the stronger shale companies are facing increased investor scrutiny.

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on August 09 2019 said:
    US shale oil production has reached the point of no return. Hardly a day passes without news of slowdown of production even in the Permian basin, bankruptcy and loss of market value for drillers still operating in the shale play. This is compounded by declining oil prices.

    While the US shale oil revolution has left its mark on the global oil market since 2008, its days are now numbered. It will be no more in 5-10 years.

    Still, the US Energy Information Administration (EIA) in cahoots with the International Energy Agency (IEA), Rystad Energy and BP Statistical Review of World Energy will continue to hype about booming production of shale oil with the Permian claimed to continue to set new production records and how shale oil is flooding the global oil market when the highest export figure US oil exports reached was 2 million barrels a day (mbd) in 2018 according to the authoritative 2019 OPEC Annual Statistical Bulletin.

    Moreover, the IEA and Rystad Energy will continue with their self-delusion claiming that US oil output particularly shale oil is projected to overtake the combined production of Saudi Arabia and Russia by 2025 at 25 mbd and that the United States is the world’s largest producer of crude oil ahead of Russia and Saudi Arabia.

    US oil output is projected to average between 10 mbd and 11 mbd this year declining to under 10 mbd by 2020 and under 9 mbd by 2021.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Daniel Porter on August 09 2019 said:
    So, we should listen to foreign sources about what the US is planning for oil? These "forecasters" are never right anyway. The fact is, people (i.e. oil producers) will continue to pump oil IF there is money to be made. The same thing applies to OPEC. For many years now, OPEC has tried to lower prices, and it doesn't work. Why? Because the US has been producing big-time. When the US slows down production, then prices increase. The writer of this article wants higher prices, and so he writes an optimistic (forecast?) article that he wants us to believe. If he is wrong, then there is no consequence to him, but just another reason to bash the USA. This is an easy concept folks.
  • Seth D on August 12 2019 said:
    Time Is Almost Up For U.S. Shale

    It like Batman and Robin with Nick Cunningham's predictably unbelievable headline followed (always) by a lengthy comment from Mamdouh Salameh. This time, Dr. Salameh takes the cake by stating that U.S. shale will be no more in 5-10 years.

    I don't know if I'm allowed to add links so instead find a Forbes article from 12-21-2018, America's Oil and gas reserves double with massive new Permian discovery.

    I laugh when Salameh quotes the authoritative 2019 OPEC Annual Statistical Bulletin. OPEC, the "Cartel" with significantly less market share than 50% and dropping steadily. After living through the 1973 Oil Embargo, the turn of events is very satisfying.
  • Joshua Jones on August 13 2019 said:
    Only a fool would invest in American oil! Everyone knows our friends in Venezuala, Russia, Iran, etc. will continue to supply us with artificially discounted crude indefinatey. And there is definately no potential for enhanced recovery using CO2 flooding in American shale fields - that never works. In fact, no one has ever made money on oil anywhere!
  • James Fosnay on August 14 2019 said:
    If one could accurately predict a political agenda in a already political arena, why would one waste his time stopping by and merely leaving such a little message?! This thing called oil is much bigger than speculation!
  • Martin Lohmann on August 15 2019 said:
    I have been fortunate to work in this industry for 25 plus years. I have, as many of you, seen the forecasts and conversations around D&C and cost per BOE. The overwhelming majority are incorrect. What many fail to see is that the good ole' USA is the leader in technology and we will continue to do so. Our spud to rig release time continues to shrink, drilling 400-500 ft per hour!! Our ability to complete more stages in record time is amazing. Understand and know your the rock! All this tech allows us to complete more wells using less rigs and less crews. Costs continue to decline allowing more wells to become economical. The latest buzz phrase from all companies is Free Cash Flow(FCF). Really not sure why this is all of a sudden the buzz phrase as we well know the run of bankruptcies and layoffs over the last several years indicate the boards of most companies have had their collective heads in the sand and borrowed cheap money like there was no tomorrow. Are we really surprised that the equity markets have tightened up and most energy companies have lost roughly 50% of their respective values. The energy industry is at a crossroads. We continue to oversupply the market while boards and CEOs attempt to return shareholder value. A very tough spot for us. The good news is that it even when tankers are stolen and the threat of trade wars has little affect on market price for WTI and Brent we know that the market has returned to a true supply and demand basis. My two cents.

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