Trafigura considers US shale industry ‘on sabbatical’

The US shale industry has taken a breather during the Covid-19 pandemic and will eventually resume normality, although production growth may only emerge towards the end of next year, trading firm Trafigura's co-head of oil trading Ben Luckock said at the virtual Platts Asia-Pacific Petroleum Conference (Appec) 2020.

"It isn't dead, it's just on an enforced sabbatical," Luckock said.

Luckock said that the US crude production forecast has changed drastically. Pre-Covid-19, Trafigura had been expecting firm US production growth this year of around 700,000 b/d.

"That forecast was arrived at by taking as a starting point, the fact that due to the particular realities of shale, you need to replace 4.3mn b/d of production each year just to stay flat. Against that, we expected there to be 5mn b/d of new production coming on," Luckock said.

"The complete collapse in spending means that we now only expect 2.8mn b/d of new production to come on. But that underlying 4.3mn b/d decline does not change. So we are now left with an estimated net deficit of about 1.5mn b/d and that's a massive change to our balances."

This trend, with new additions in shale production unable to offset the natural output decline, will continue into next year. "Now we don't expect to see growth until the end of 2021," Luckock said.

Normal activity for the US shale industry will ultimately resume, although it is not quite clear what that will look like and where exactly the investment will come from.

"With rigs falling as much as they have done, we need to start tapping the DUCs [drilled but uncompleted wells]. That's the DUC inventory we need to get to, to maintain production," Luckock said.

DUCs for a long time have been the trump card of firms that have believed in the inexhaustibility of the US shale industry, as DUCs were considered "ready to go production". But with the recent big fall in rig counts, Luckock said analysts predict the DUC inventories could be exhausted possibly within two to three quarters. This meant that rig counts needed to rebound to keep US production growing.

"But a rebound in rigs means a rebound in spending and right now we're not seeing that," Luckock said, adding that US-focused capital expenditure had collapsed from $77bn initially forecast to just $45bn.

"So something needs to change, this tension between spending and production cannot last. But who is going to be spending that money?"

Many banks and investors had in the last few years suffered losses from the US shale exploration and productions sectors, which may curb their investment appetites. There were some expectations initially that as the US shale industry matured, that oil majors would then get involved in the sector, rationalise the fragmented industry and add scale and efficiency, Luckock said.

But with several majors announcing changes to their strategic visions, while their combined market capitalisation has also fallen sharply lately, it raised questions if they want to get into the US shale industry.

Luckock did not provide an answer, although he implied that a possible solution could be the oil price itself, in the shape of forward curves. Outright oil prices will likely remain low in the prompt months, which would encourage consumption and resolve the current oversupply. But prices should trend upwards in the longer term, reflecting the need for reinvestment, Luckock added.

By Azlin Ahmad