Shale peak potential puts oil market on edge

If Washington is upset about the influence of the OPEC+ cartel over global oil markets, wait a few years – because it will only get worse.

Many analysts now predict that US oil production could peak around 2024, meaning the global oil market will have to do without its largest short-cycle “swing” producer to keep pace with global population and global growth. energy demand.

It’s a disturbing thought.

The theory that global oil demand peaked in 2019 has been completely proven wrong. Even the most pessimistic forecasters, such as the International Energy Agency (IEA), expect it to exceed pre-pandemic levels in 2023. Indeed, despite current recessionary pressures, most analysts now do not expect peak oil demand to occur until 2030 at the earliest.

The prospect of another decade of growth in global demand, combined with a peak in production in the United States within two to three years, is extremely worrying.

After all, US supply growth has almost single-handedly matched global demand growth in recent years. This year, for example, the United States will add about 500,000 barrels per day for an average total production of 11.75 million per day. According to the federal Energy Information Administration, US producers will add an additional 610,000 barrels per day in 2023 for an average of 12.36 million barrels.

But after that, if respected forecasters like Energy Aspects and Rystad Energy are right, the US supply growth story will end. This will shift the responsibility of meeting growing global demand to other countries, which have historically produced around 1 million barrels per day.

The problem is that there’s not a lot of capacity expected to come online over the next decade outside of OPEC stalwarts Saudi Arabia and the United Arab Emirates, which are each planning to add about 1 million barrels before 2030.

Yes, non-OPEC producers like Brazil, Guyana, Canada and Norway will add significant volumes in the coming years. Yet these contributions will be reduced if US production stagnates.

Within the OPEC+ cartel, Western sanctions have crippled some of the world’s largest reserve holders, including Iran, Venezuela and Russia. The IEA expects Russian production to fall by 1.9 million barrels per day by February due to EU sanctions and embargoes.

Together, this will put more market power in the hands of Gulf OPEC members like Saudi Arabia and the United Arab Emirates.
United Arab Emirates
. And let’s face it, recent events, including OPEC’s decision to cut production by 2 million barrels a day as the global economy teeters on the edge of recession, show that these countries will put their interests ahead of those from Washington. This means higher oil prices for American consumers.

This is why many experts have warned of the pitfalls of underinvestment in the oil industry in recent years.

So why should US shale growth dry up so soon, even as oil prices remain high?

Investor demands for financial discipline largely explain the underinvestment in new drilling. Investors have taken advantage of the oil sector to obtain liquidity in the form of dividends and share buybacks for some time. They want cash returns, not growth — and companies that stray from the dividend path are seeing their stocks plummet.

In the longer term, questions arise about the economics of shale and the scale and viability of the resource, which raises the break-even point for projects to generate both cash returns and growth in capacity. production.

U.S. benchmark West Texas Intermediate crude oil futures — currently hovering around $78 a barrel for next year — are expected to rise above $80 to provide enough incentive for shale producers to invest more.

Prime drilling land is also disappearing, with only a few counties in Texas’ Permian Basin — the engine of U.S. production growth — offering the so-called “Tier 1” acreage that generates profits.

Some shale players have been warning about this for years. In 2018, shale pioneer Mark Papa, founder and former CEO of EOG Resources
EOG
spoke of “resource depletion,” arguing that shale oil would not grow beyond 2025 due to inventory degradation.

This has since become the consensus view. At the recent Barclays CEO Energy-Power Conference, Pioneer CEO Scott Sheffield said some operators have started drilling in less productive Tier 2 and 3 areas.

The shale industry depleted much of the best acreage and drilling inventory during the post-pandemic downturn.

Decline in oil well productivity from less acreage could lead to harder extraction, higher breakeven costs and less incremental drilling, making it more difficult to continue U.S. production growth . This should make any observer of the oil market worried about the future.

Carol N. Valencia