Recent consolidation has shaken up the US shale patch and resulted in bigger operators that likely have the scale to ride out this year's crude price slump. But smaller producers that lack the depth of inventory to keep going it alone may be forced to strike deals with rivals to weather the downturn, given the sector's high decline rates. At the same time, US crude output is fast approaching a tipping point, having held up surprisingly well so far as companies have become leaner by curbing spending and shedding jobs.
That day of reckoning could yet be delayed if further advances in technology figure out how to crack the code and improve low recovery rates, according to executives at last week's Energy Intelligence Forum in London. US oil supply growth will peak over 2027-30 before starting to decline, US independent Occidental Petroleum's chief executive, Vicki Hollub, said. "That might be accelerated a little bit with prices being what they are," she added, with the US benchmark hitting a five-month low last week because of growing fears of a glut.
Occidental itself is finished with big acquisitions for the time being, but some other firms will need to do deals just to grow, Hollub said. Her views on shale's future trajectory were similar to those expressed by her counterpart at ConocoPhillips, Ryan Lance, who added a caveat that US output could still show signs of growth if prices rebound. "If prices stay at $60/bl or go into the $50s/bl, you probably are plateauing or slightly declining," Lance said. "If they go back to $65/bl or $70/bl longer term, you probably hold the plateau for a little bit longer."
Either way, given the "immense resource" of the shale sector, US crude production is unlikely to suffer a sharp drop any time soon, Lance said. Executives were also bullish on longer-term oil prices, given years of under-investment in the oil industry and forecasts for demand to keep growing. "The mid-cycle [oil price] has to come up to generate the supply to meet demand," Lance said. "I think it's going to $70-75/bl over time." The market may trade in a narrow range this year and next but "beyond that, prices will have to go up", Hollub said.
Fellow Permian producer ExxonMobil chief executive Darren Woods said shale's key challenge is not looking for deposits but rather being able to access them. "With shale, we know where it's at, the challenge is producing it," Woods said, estimating current recovery rates at 5-10pc, which is below the 10-12pc range referenced by Lance.
Price of independence
Unlike smaller players that lack the same technology and scale of the top US major, Woods says ExxonMobil sees production growth extending well into the future. Technology gains have already gone some way towards helping shale firms cut drilling costs. While it may have taken 16-17 days to drill a well five years ago, nowadays that process can be done in seven days. And drilling four-mile lateral wells has "lowered the cost of supply over just a conventional one-mile well by 60pc", ConocoPhillips' Lance said. Companies may yet find a way to profitably drill less-attractive acreage even at oil prices of $60-$65/bl. "But it is very price-dependent in terms of where we end up," he acknowledged.
The fact that around 70pc of shale production comes from wells that have been completed within the past three years shows the scale of the challenge, Occidental's Hollub argued. The US' hard-won energy independence could be at risk unless new technology is pursued, such as using CO2 for enhanced oil recovery to squeeze more out of existing reservoirs. "It's a technology that works and so what we believe is that it should be the technology that comes next for use in shale development," Hollub said.
