Is the US Shale Production Nearing its Peak: Factors and Future Outlook
US shale production is largely dependent on the price of oil, a volatile market that oscillates through significant price cycles. While there is a vast amount of recoverable shale oil, the extraction process remains relatively expensive. Historically, when oil prices rise and remain high, it becomes economically feasible to expand shale production. However, recent trends and key factors suggest that the peak production of US shale might be nearing.
Price Cycles and Current Situation
The oil industry experiences price cycles that significantly influence operations. Currently, the oil price makes it challenging for domestic producers to sustain a marginal process. When oil prices rise, the producers ramp up their operations. This cycle continues as supply and demand dynamics adjust.
However, several critical and intersectional factors often evade proper discussion and analysis. These factors include the laws of diminishing returns and the high depletion rate common to shale oil. After three years, wells experience a 63% depletion rate, and after 12 to 15 months, the rate increases to 65%. By the 12-year mark, full depletion is expected.
The Challenge of Diminishing Returns and High Depletion Rates
The decline in returns poses a real threat to shale energy players. Maintaining production levels and reserves requires continuous drilling, which often results in higher financing costs and reliance on debt. Many smaller players have already dropped out, with bankruptcies on the horizon.
A recent observation is that production levels for wells drilled in 2018 are lower than those from 2016. This trend is evident in all major fields, including the Bakken, Permian, Eagleford, and others. The exploration is now shifting to Tier 2 plays, which have lower volume but are more prevalent after the richer Tier 1 plays were depleted.
Investment Banker Concerns and Future Trends
The trend of evolving drilling conditions has attracted the attention of investment bankers. There is a pullback in underwriting as investors and lenders become wary. The future outlook for US shale is not as rosy, with peak production possibly occurring between 2030 to 2035. This timeline may be shortened if electric vehicles (EVs) become more affordable, leading to a faster shift towards alternative energy sources.
The economic substitution of oil for fuel is another significant factor. In the US and Europe, fuel sales are currently flatlining, while growth is expected in the developing world and export markets. This shift may create new opportunities for the US shale industry, especially with the focus on building ethane cracker plants to produce and export plastics.
Future Reserves and Exploration
Despite these challenges, there are many untapped or inaccessible shale deposits in major fields such as the Monterey Shale in California and various offshore fields in the Gulf of Mexico. These reserves offer potential for future growth and exploration.
Ultimately, the future of US shale production depends significantly on the interplay of oil prices, technological advancements, and environmental policies. Understanding these dynamics will be crucial for stakeholders in the industry.