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The U.S. Shale Boom Is Officially Over

The days of explosive growth in U.S. shale oil production are over. American oil production is rising, but at a much slower pace than it did before the 2020 crash, and at lower rates than expected a few months ago.

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.

The Biden Administration’s mixed signals to the American oil and gas industry, with frequent blaming of the sector for high gasoline prices and, most recently, 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.

Oil Production Growth Forecasts Lowered 

This year, the U.S. Energy Information Administration (EIA) and various analysts have been downgrading their forecasts of crude oil production for 2022 and 2023. Although the EIA still expects output to set a new annual average record next year, it has significantly revised down its projections since the start of this year.

Oil firm executives, for their part, say the U.S. Administration’s policies and anti-oil rhetoric, inflation, contractor time delays, and regulatory uncertainty are negatively impacting drilling and production planning.

The EIA expects U.S. crude oil production to average 11.7 million barrels per day (bpd) in 2022 and 12.4 million bpd in 2023, which would surpass the record high set in 2019, per the November Short-Term Energy Outlook.

Despite the expectation of a record output next year, the EIA has downgraded the numbers several times in 2022 so far. The latest cut is a massive 21% reduction in the growth estimate, according to calculations by Reuters.

In the October forecast, the EIA had already downgraded the average production estimate for 2023 to 12.4 million bpd from the September forecast of 12.6 million bpd.

“Lower crude oil production in the forecast reflects lower crude oil prices in 4Q22 than we previously expected,” the administration said in October.

Weeks before the Russian invasion of Ukraine, which upended global energy markets, Enverus Intelligence Research expected U.S. oil production growth to accelerate in 2022 above around 900,000 bpd.

However, inflation and supply-chain delays from the second quarter onwards have materially worsened the outlook on U.S. crude oil production growth. Enverus Intelligence Research (EIR) cut this month its forecast for U.S. production growth, due to “the headwinds created by oilfield services limitations, the risk of recession and reduced performance from wells drilled recently in the Permian Basin.”

Therefore, the Lower 48 oil production forecast has been significantly downgraded and EIR now expects growth of around 450,000 bpd exit-to-exit in 2022 and 560,000 bpd growth for 2023.

“OPEC Back In The Driver’s Seat” 

A top industry executive said last week that the U.S. shale patch is no longer the swing oil producer and OPEC is back as the most important driver of oil supply fundamentals.

“Shale was thought of as a swing producer, the Saudis and OPEC have waited this out. Now, really OPEC is back in the driver’s seat where they are the swing producer,” Hess Corp CEO John Hess said at a conference in Miami last week.

The executive believes that U.S. crude oil production will average 13 million bpd over the next few years, where it will plateau, as investors pressure U.S. oil companies to focus on returning money to shareholders instead of investing in aggressive growth strategies.

The current state and prospects of the U.S. oil industry are in stark contrast with the growth of the decade to 2019.

Between 2009 and 2019, U.S. producers captured all the incremental global consumption in three out of 10 years and at least two-thirds of incremental consumption in six of those years, according to estimates by Reuters’ senior market analyst John Kemp.

“US liquids production increased by 10 million b/d from 2011 to 2022, capturing a scarcely believable 10% of global supply in the process,” Wood Mackenzie said last month. Nearly 6 million bpd of that increase came from Lower 48 crude and condensate production, with two-thirds from the Permian Basin alone, while the rest of the increase is natural gas liquids produced from shale gas plays.

This year, while U.S. oil and gas production continues to increase, the growth is capped by cost pressures and supply-chain delays, executives said in the Dallas Fed Energy Survey for the third quarter. The shale patch cites labor and equipment shortages, as well as the Biden Administration’s inconsistent policies, as the key hurdles to expanding drilling activity.

“The administration's lack of understanding of the oil and gas investment cycle continues to result in inconsistent energy policies that contribute to rising energy costs. This continued inconsistency increases uncertainty and decreases investments in energy infrastructure,” an executive at an oilfield services firm said in comments to the survey.

“We are in an energy death spiral that will lead to higher highs and lower lows. Volatility will increase, and the public is in for a very difficult ride.”

By Tsvetana Paraskova for Oilprice.com

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