Shale oil revolution, a reality facing headwinds

Shale oil revolution, a reality facing headwinds

/ Oil & Gas / Friday, 20 December 2019 11:21

The U.S. has undergone an “unprecedented energy transformation” and is changing international energy market dynamics to such an extent that other countries are only just accepting it, according to the U.S. assistant secretary of state for energy resources Frank Fannon. According to the International Energy Agency, U.S. shale oil production will reshape global energy markets in the years to come, bolstering the country’s influence over OPEC nations. It has shown some signs of moderation in recent months and production growth could be slowing, but experts such as Mohammed Barkindo, secretary-general of the Organization of the Petroleum Exporting Countries, said that despite growth in American output being slow, its role remains essential to stabilize oil supplies and the U.S. shale revolution won’t be stopped any time soon.

Jason Bordoff, professor and director at Columbia University’s Center on Global Energy Policy and former adviser to President Obama, believes that the export story is a long-term project which won’t end soon. “The growth in production is going to slow but it’s still growing, so we’re still going to see the U.S. become a net oil exporter and put a lot of barrels on the market and that’s really important,” he says.

The U.S. is expected to become a net energy exporter in 2020, exporting more energy products ranging from oil to natural gas, than it imports, according to the U.S. Energy Information Administration (EIA). It had been a net importer of energy since 1953, the EIA noted in its annual energy outlook which makes projections for the next 50 years.

As a first step, the agency said that the U.S. will start increasing export activities of crude oil and petroleum products more than it will import by the final quarter of 2020. As a next step, it is planned to remain a net oil exporter for years to come to set new records through 2027, when it begins to level off.

Towards the end of its 50-year forecast period, EIA expects the U.S. to once again start importing more petroleum products than it exports, as economic growth fuels demand for gasoline.


Last year, the nation’s drillers broke the annual record which goes back to 1970 by pumping an average of 10.9 million barrels per day. Once production cracks 14 million barrels per day in the coming years, EIA expects the U.S. output to stay above that level through 2040. Generally, most growth will be recorded from shale fields where drillers use advanced methods to free oil and gas from rock formations. The technology of fracking has led to the development of shale gas first and then of oil from shale rocks, raising total American oil production to an estimated 12.8m barrels per day for November — up by more than 3m b/d in just three years. Now total US production exceeds that of both Saudi Arabia and Russia.

Shale drilling will also lead to a rise in natural gas liquids (NGL) production, which is the production of byproducts like ethane, propane, and butane. These NGL have many benefits. They’re used to make a wide range of products and chemicals, including plastics. EIA says NGL output could account for about a third of total liquids production through 2050.

According to The Financial Times’ Nick Butler, the past year has seen something of a pause in shale development because the infrastructure necessary to move additional volumes, particularly from the giant Permian field in Texas and New Mexico, had to be put in place. Nevertheless, US output rose by over 1m b/d last year. Shale gas has taken market share from coal in the US and despite the best efforts of the Trump administration, the gradual decline of coal will continue. Shale gas has also undermined the US nuclear business.

Revolution to be continued?

Oil supply and demand dynamics are being closely watched amid efforts by major oil producers in OPEC, and non-OPEC producers. OPEC members curbed production in November, led by kingpin Saudi Arabia, before agreeing to deeper cuts. OPEC and partner countries such as Russia want to maintain crude oil prices at a minimum level despite a decline in global trade and abundant reserves.

Total output of crude by the cartel declined by 193,000 barrels per day (bpd) from October to a total of 29.55 million barrels per day (mpd) according to secondary sources cited by OPEC in its monthly oil report. Saudi Arabia accounted for most of the decline with an output cut of 151,000 bpd last month.

OPEC and its allies agreed to cut production by 500,000 bpd to stem prices. Saudi Arabia agreed to reduce production by an additional 400,000 bpd on a “voluntary and supplemental” basis. The kingdom nevertheless pumped 9.85 mpd in November, exceeding the level of 8.80 mpd in September, when its oil installations were hit by attacks.

OPEC has struggled to maintain oil prices at a level it deems satisfactory, where a barrel of North Sea Brent crude oil exchanged hands for just under $64.

The US shale oil boom has provided markets with lots of crude, but the OPEC report said that US activity would weaken next year and that output by non-OPEC countries is estimated to grow by just 2.17 mbd in 2020, a bit less than initially forecast.

The 14-member global oil producer group OPEC said in its closely-watched World Oil Outlook report released in early November that its own production of crude oil and other liquids is expected to decline over the next five years, falling to 32.8 million bpd in 2024, from a current level of 35 million bpd in 2019.

The U.S. Energy Information Administration projected U.S. crude output will rise to 12.3 million bpd in 2019 from a record 11.0 million barrels per day in 2018. It forecasts that U.S. crude oil production will rise by 0.9 million bpd in 2020 to an annual average of 13.2 million bpd.

Yet there are signs of moderation too. Baker Hughes’ closely-watched weekly Rig Count data, seen as an early indicator of future output, showed that there were 817 active rigs in the U.S., down from 264 in 2018.

Lorenzo Simonelli, chief executive of Baker Hughes, one of the world’s largest oil field services firms, said that a decline in capex (capital expenditure, essentially, investment within an industry) was being witnessed in the North American shale oil sector currently.

“We’re seeing North America capex down in the fourth quarter as well as going in to next year so it’s more challenging in North America than here in the Middle East,” he said, agreeing that there was “definitely” less investment in shale at the moment. “We’re looking at high single digit to low double-digit declines in capex for our major customers in North America and that’s going to be impacting shale,” Simonelli added.

Nevertheless, the U.S. shale industry is still attractive to companies like Mubadala, the investment arm of Abu Dhabi, and its Petroleum & Petrochemicals platform. Mubadala Petroleum & Petrochemicals’ CEO Musabbeh Al Kaabi commented that the company had made a “substantial investment” in the U.S. petrochemical space and an LNG developer, and was still optimistic about the region.

“We’re still very bullish about the U.S.,” he said. “By far, in the last ten years, it is a true disruption in our energy landscape so we have made a substantial investment, taking advantage of the opportunities offered by the shale revolution in the U.S.”

He said the company’s investments in the U.S. had been driven by the understanding that “the shale revolution will continue” but worried about anti-fracking comments from Democratic presidential nominee Elizabeth Warren, who said she would ban fracking “everywhere” if elected. However, “there are headwinds including what some of the Democratic nominees (in the U.S. election race) are promoting and I think the consequences of these decisions need to be evaluated and fully understood. It might be a very challenging decision to switch off the activity,” he said.

The revolution is happening but has not yet been exported. The potential exists. There are shale rocks in China, southern Africa, Russia and many other places around the world. But progress has been slow, not least because additional supplies are simply not needed in a saturated market.

Now, however, the situation is beginning to change. Shale development in Argentina and Canada is growing and the big energy companies, including BP and Chevron, are investing at a material level for the first time.

The lesson of the US experience is that once a new industry is in place with the necessary skills and infrastructure, output from identified basins can grow beyond all initial expectations. The global shale revolution has barely begun, and the changes to the pattern of trade that we have seen so far are no more than a hint of the disruption to come.

America has certainly shaken up the norms when it comes to energy production and supply. Aside from its so-called “shale oil revolution” that has made it the largest crude oil producer in the world, closely followed by Russia and Saudi Arabia, it has also (in the space of a few years) become one of the major global players in terms of liquefied natural gas (LNG) exports.

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