At a Glance
- Thanks to shale-oil production, the U.S. is now the biggest producer of crude oil.
The Energy Information Administration, the statistical arm of the Department of Energy, said this year the U.S. surpassed both Russia and Saudi Arabia to take the crown as the world’s largest crude oil producer, the first time since 1973 the U.S. led the world in oil output.
That the U.S. is in the crude-oil pole position might have been hard to imagine a few short years ago. Between 2015 and 2016, prices fell more than 70 percent because of a global oil glut, causing some producers to go bankrupt and others to significantly cut output. But the shale industry bounced back from the blows the sector sustained a few years ago and now output is set to reach a record this year.
U.S. shale-oil production has become a vital part of the global energy mix, and its contribution is even more critical as some members of the Organization of Petroleum Exporting countries like Venezuela struggle to pump much of any petroleum and Iran faces sanctions on selling oil.
The EIA forecasts U.S. crude-oil production will average 10.9 million barrels a day in 2018, up from 9.4 million b/d in 2017, and forecasts output of 12.1 million b/d in 2019.
Meanwhile, OPEC’s production will largely remain flat, forecast around 32.5 million b/d as outages are balanced by higher production from members with spare capacity, says Natixis.
Shale “Changed The World”
With the EIA and the International Energy Agency both expecting global demand to rise slightly in 2019 the world may be relying more on shale production than before.
“The shale oil producers obviously changed the world,” says Phil Flynn, senior energy analyst at The Price Group.
During the global oil glut when prices fell more than 70 percent, production dropped to 8.831 million b/d in 2016 from 9.431 million b/d in 2015, according to the EIA.
Jay Hatfield, co-founder and president of InfraCap, says shale-oil producers learned some hard lessons during that time. “They became way more disciplined about capital. They started limiting their drilling to their operating cash flow,” he says.
Cash-flow discipline, improvement in efficiencies and learning to better control production helped the rebound, he says.
“The U.S. became the swing producer in the world, both on the downside and the upside, and that’s driven by both very attractive return on investment and some capital discipline,” he says. “They will actually cut back on capex when prices drop. But conversely when oil rises, they can drill more and all the oil comes online relatively quickly.”
Despite the world becoming more dependent on shale, it’s not going to replace traditional oil projects, Flynn says.
“In fact, we’re just starting to see the impact of the trillion dollars of underinvestment in traditional forms of energy that we saw back during the price crash, leading us to an area where we have run our global spare production capacity down to a historic low,” Flynn says.
There are some worries that the shale industry in the U.S. might be short-lived, given how the oil is pumped. Much of shale production is front-loaded, meaning the bulk of it comes in the early stages of drilling and can deplete quickly.
That’s known as the decline rate, the number of barrels being lost to older, less productive wells, measured from their peak to current levels, in barrels per day. It varies from month-to-month. There is some concern that production out of the shale region is unsustainable at worst and may be less of a factor in coming years at best. In a research note, Goldman Sachs analysts say the “shale tail,” when shale becomes a less meaningful driver of global oil, is still several years away.
“The average life span for most transformative areas of global oil supply has been seven to 15 years, and shale is now at the lower end of that range, roughly seven years…. we still see shale as the primary driver of global supply growth with expectations U.S. oil can continue to grow 1 million bpd/year until 2021 at the earliest,” the bank’s analysts wrote.
More to Explore
Hatfield says while shale wells do deplete faster, people don’t appreciate shale’s geology and that shale deposits exist at all levels. “Like in west Texas, there can be a shale formation at 10,000 feet below 15,000, 20,000 feet, and a lot of these haven’t even been explored yet, so the chances of us having found all of them is extremely remote,” Hatfield says.