The Fuse

Doubts Surface On U.S. Shale And Energy Independence

by Alex Adams | @alexjhadams | January 30, 2020

In July last year, Khalid Al-Falih—then the Saudi oil minister—told reporters that American shale production was not here to stay. Speaking at OPEC’s Vienna headquarters, he said, “I have no doubt in my mind that U.S. shale will peak, plateau and then decline like every other basin in history.”

This is a view of domestic oil production in the United States that is not shared by some prominent voices in the U.S. energy discussion. In December 2018, a Wall Street Journal editorial noted, “Remember when America’s political class fretted about ‘peak oil’ and dependence on foreign energy? So much for that.” More recently, both President Trump and Energy Secretary Dan Brouillette have remarked that thanks to rising domestic oil production, the United States is now energy independent.

Headline statistics and tumbling milestones paint a picture of a domestic industry that has risen from a marginal player to one that has made the United States the biggest, and one of the most influential, oil producers in the world. In September 2019, the country posted its first full month in 70 years as a net exporter of crude and petroleum products. The U.S. Energy Information Administration has also predicted the United States will become a net exporter of crude and fuel for the first time on record on an annual basis in 2020.

At the heart of this resurgence has been the Permian Basin. An oilfield the size of New Jersey which straddles the Texas-New Mexico border, the Permian is currently reckoned to be the highest-producing oilfield in the world, producing more oil on its own than any OPEC member except Saudi Arabia and Iraq.

The Permian may be showing signs of peaking.

Yet while increased domestic oil production has unquestionably enhanced U.S. energy security, emerging statistics from the shale patch have started raising concerns that the Permian may be showing signs of peaking—making the goal of energy independence more elusive than ever.

Based on a diverse array of parameters including legacy well-production decline, rig counts and new production, Bloomberg’s Julian Lee calculates that Permian production will peak in early 2021 before falling into decline as legacy well declines outweigh new well production. “If the rig count falls by just 10 more units this April,” he adds, “the peak will occur this year.”

A similar outlook is shared by drilling companies Halliburton and Schlumberger. Both are reducing their business in U.S. shale as their 2019 losses totaled billions of dollars, with Halliburton CEO Jeff Miller telling investors that “the U.S. shale industry is facing its biggest test since the 2015 downturn.”

Capital markets are tightening shale producers’ access to funds.

In addition, capital markets are tightening shale producers’ access to funds—raising $19.4 billion last year compared to $56.6 billion in 2016—as shale production growth slows and shareholders seek returns on their investments.

Even when production does decline in the Permian Basin, the United States will still be a major oil producer and a significant exporter. But waning American output will offer some encouragement to OPEC oil ministers and their OPEC+ counterparts like Russia, who will see an opportunity to make their vast advantage in oil reserves gain greater relevance in the global oil market once again.

In addition, remarks on how energy independence has been achieved—and OPEC’s influence broken—through increased American energy production will be shown to be myopic.