Earlier this summer, it seemed that U.S. shale oil growth was beginning to slow. But then production growth picked back up headed into the fall, and is presently at 12.6 million barrels per day (BPD) – equal to its all-time high.
But a new market outlook from data provider IHS Markit projects that shale oil growth will slow in 2020, and then flatten in 2021. Raoul LeBlanc, Vice President for North American unconventionals, forecasts the strongest headwinds for the shale industry since the oil price collapse in 2015:
“The combination of closed capital markets and weak prices are pulling cash out of the system. Investors are imposing capital discipline on E&P’s by pushing down equity prices and pushing up the cost of capital on debt markets.”
IHS Markit projects U.S. shale production growth of 480,000 BPD in 2020 – less than half this year’s rate – and then no growth in 2021.
They are not alone in this assessment.
Pioneer Natural Resources Co. Chief Executive Officer Scott Sheffield recently said that shale producers are heeding investor calls to stop burning through cash. He also expects growth to slow next year, which should help boost oil prices. In a call with analysts, Sheffield said “I don’t think OPEC has to worry that much more about U.S. shale growth long term”, adding that he’s “definitely becoming more optimistic that we’re probably at the bottom end of the cycle regarding oil prices.”
Former EOG Resources CEO Mark Papa has been talking about a slowdown all year, but recently lowered a forecast he made just nine weeks ago. Papa lowered his 2020 shale growth forecast to 400,000 BPD from the 700,000 BPD estimate he made in early September. Papa added “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 and later years than most people currently expect.”
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Papa blamed depletion of the best drilling locations, and too many wells drilled too close together for the slowdown.
Even Russia joined the bearish bandwagon, with Russia’s Energy Minister Alexander Novak predicting the death of U.S. shale, stating, “This is clearly a trend,” adding that at current oil prices, U.S. shale production will not grow as fast as it did in previous years.
OPEC, meanwhile, doesn’t seem to expect a slowdown. In its recent annual report, OPEC projected that U.S. shale-oil output will climb more than 40 percent to reach 17 million BPD by 2025. This is an increase of 3.1 million BPD more than OPEC projected in last year’s report.
If OPEC plans for much higher U.S. oil output – and that doesn’t happen – then that could set up short-term tightness in the market.
By Robert Rapier
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The excessive hype by the US Energy Information Administration (EIA) in cahoots with the International Energy Agency (IEA), Rystad Energy and BP Statistical Review of World Energy about rising shale oil production doesn’t for one minute hide the fact that shale oil production is already fast slowing down and that the EIA’s figure of US oil production this year at 12.6 million barrels a day (mbd) is a plain lie.
How could this be true if there was a decline of 203 oil rigs this year alone with Texas the home of the Permian which accounts for 60%-70% of total US shale oil production having the fastest rig drop.
Baker Hughes rig count is a pivotal indicator of the state of oil market in the United States and shale oil production. Rig counts don’t lie. They tell the truth as it is on the ground.
If a loss of 203 oil rigs this year has had no effect on the growth of shale oil production, then why don’t shale drillers drop another 200 rigs so production could grow by 1 mbd to 13.6 mbd.
Two days ago, the Post Carbon Institute said in a new report that projections of explosive and long-term potential for US shale may rest on some faulty and overly-optimistic assumptions.
The EIA’s figure of 12.6 mbd includes natural gas liquids (NGLs) which come from natural gas wells as well as such gases as ethane, propane, butane and pentanes which may not qualify as crude oil. Moreover, there is a difference ranging from 600,000 barrels a day (b/d) and 1 mbd between EIA's weekly and monthly production figures. Taking both into account would reduce actual US oil production to under 10 mbd.
If OPEC is projecting that US shale oil output will reach 17 mbd by 2025, then either it has been infected by the EIA’s hype or it has joined the fancy world of IEA and Rystad Energy who projected that US oil production will exceed the combined crude oil production of Russia and Saudi Arabia by 2025. Anybody who believes such projections must be living on a different planet.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
The linkage here is simple. As demand for oil weakens, price become less responsive to efforts to restrict supply. OPEC and others become incapable of supporting (or unwilling to support) prices high enough for shale to sustain production growth.
Any suggestion that declining shale production would inevitably tighten supply enough to bring about higher priced oil keeps shale producers and their investors in the game. The narrative that demand will not peak anytime soon is exactly what shale investors are betting on.
So a sustained decline in shale investment is tantamount to capitulation on the future of oil demand. Investors will need to be firmly persuaded before this capitulation. Thus, it is most likely that US shale will not peak until it becomes evident to all that oil demand is peaking or has already peaked. Or to put another way, the price of oil just won't stay high enough long enough to keep drilling much.