More and more commentators are beginning to question whether the seemingly endless production of US shale oil can continue to put a limit on OPEC’s ability to increase the world price of oil.  Since the slump in world oil prices a couple of years ago, the production of shale oil in the US is certainly not profitable, especially at the current $50 a barrel, and growth in production is beginning to wane in many wells due to the high costs of producing a dwindling supply.

Energy watcher Tom Whipple had this to say this week on the current thinking about the future of the US shale industry:

 

US Shale Oil Production: The future of oil production from the Permian Basin (in Texas) remains in the spotlight. There seems to be general agreement that major increases in US shale oil production will have to come from the Permian or not at all. Most observers believe that increased drilling may push up production from the Bakken and Eagle Ford by a few hundred thousand barrels a day but that neither of these basins has much future as the cost of production there will continue to grow as the high producing sweet spots become fewer and fewer.

While some continue to tout a brilliant future for the Permian basin, the number of voices saying this will not happen at today’s prices continues to grow. At a recent energy conference, consultant Art Berman told the group “that on balance, the Permian Basin shale plays are, in most cases, marginally profitable “because costs are very high and you have to balance the costs with the results,” he said. “These wells, these companies, these plays are totally dependent on outside capital.” If companies spend more than they make, they need outside help paying the bills, he said. Otherwise, they have to scale back operations, “which means you won’t grow production. And if you scale back, that means you cut jobs. A few companies are making good money, and there are companies with break-even costs at $50 oil. But overall, that’s not enough to make the economics work, particularly with the very high acquisition prices people have been paying.”

While Berman has been saying that most Permian oil production is not profitable for a long time, other observers are starting to echo the warning. The Houston Chronicle, citing Wood Mackenzie, points out that shale oil drillers spend just $5 billion on land deals in the basin during the last six months in comparison to $35 billion in the prior nine-month period.

Last week, the Wall Street Journal made the same point. “Future oil production is notoriously difficult to predict, and a surge in prices could certainly improve the economics of American shale. But a growing chorus of oil industry leaders, including some shale trailblazers, believes U.S. growth may peak sooner than government forecasters think—a development with ramifications for global oil markets. In recent years, shale production has reliably filled any voids in world supply, effectively taming volatile price gyrations. Potential limits to shale growth call into question predictions that this trend will continue. “There are no new shale plays that have come forward,” said Mark Papa, chief executive of Centennial Resource Development Inc. and former CEO of EOG Resources Inc. “Their ability to spew forth infinite streams of oil is just a myth.”

Moody’s made the same point. “The extraordinary cost reductions achieved by North American oil and gas companies have likely reached their limit, and any boost in profitability for much of the US shale and Canadian oil sands industries will have to come from higher oil prices.” Moody’s studied 37 oil and gas companies in Canada and the U.S., concluding that although the oil industry has dramatically slashed its cost of production in the past three years and is currently in the midst of posting much better financials this year, there is little room left for more progress.

The growth-at-all-costs model for shale drillers has succeeded in increasing US oil production, but it hasn’t led to many profitable oil companies. A group of activist investors hopes to change this arrangement by breaking the link between the pace of drilling and CEO pay. Reuters reports that some activist investors are pushing for fundamental changes to executive pay so that rewards will come from making profits rather than just higher production financed by Wall Street.

 

See also Business InsiderUS shale isn’t as strong as it looks

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