The Fuse

The Shale Boom Shows Signs Of Slowdown

by Alex Adams | @alexjhadams | October 10, 2019

Although oil prices jumped in the days following the airstrikes on Saudi Aramco’s Abqaiq oil processing facility, they have since fallen back to their pre-attack levels. The fact that the market was able to shrug off a major attack on the centerpiece of Saudi Arabia’s oil infrastructure is due to a wide variety of factors, one of which is U.S. domestic oil production reaching record highs, thanks to shale.

However, this production boom is showing signs of slowing down—to the point where the long run of explosive U.S. shale growth is likely coming to an end.

According to figures from the Department of Energy, U.S. oil production grew by less than 1 percent in the first half of 2019, down from almost 7 percent growth over the same period last year. Although U.S. production is expected to reach an average of 12.2 million barrels per day (Mbd) this year, growth has been slower. Last year, for example, average production stood at 11.0 Mbd, and grew from an average of 10.0 Mbd in January to 12.0 Mbd by December.

Peak Production
“We’re getting closer to peak production and we are reaching the peak of the general physics of these wells,” James West, a managing director at Investment bank Evercore ISI, told the Wall Street Journal.

The prospects of limited growth are already being felt in the Permian Basin, the heartland of the U.S. hydraulic fracturing industry. The number of crews in the region that prepare drilled wells for production, has been falling since July and now sits at a 30-month low. Hotels have subsequently felt the strain, with revenue per available room falling 32 percent year-over-year in August, and declining 21 percent year-to-date.

Production companies are also struggling to counter pessimism among investors. According to consultancy Rystad Energy, the top 40 production companies spent $28 billion in capital expenditure in the first half of 2019, but only took $23.7 billion in cash flow from operations—even as some slightly positive returns among some companies have made the first six months of this year the best showing in years.

The pessimistic mood among investors is also shared by others in the oil industry. The latest quarterly Dallas Fed energy survey contains anonymous comments submitted by oil industry executives. “The overall industry conditions are not good. Prices are too soft and erratic, and costs are too high,” one wrote, adding, “My outlook for the business is pessimistic right now.” Another wrote that they expected “a slow and continued decline in drilling, with a focus on streamlining operations.”

Despite the pessimistic outlook and the signs of slower growth, shale oil production is still expected to remain high, enhancing U.S. energy security by reducing the need for imports. However, there is a growing number of indicators that suggest the rapid rise in U.S. output my be reaching a plateau.