US dominance in crude shows no sign of faltering

Updated November 24, 2019

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THE US shale revolution has been a game-changer. Not only has it altered the global energy dynamics, but it has also impacted the associated geopolitics in a big, big way. In the backdrop, many saw the United States, and not Saudi Arabia, as the new oil king of the world. — AFP/File
THE US shale revolution has been a game-changer. Not only has it altered the global energy dynamics, but it has also impacted the associated geopolitics in a big, big way. In the backdrop, many saw the United States, and not Saudi Arabia, as the new oil king of the world. — AFP/File

THE US shale revolution has been a game-changer. Not only has it altered the global energy dynamics, but it has also impacted the associated geopolitics in a big, big way. In the backdrop, many saw the United States, and not Saudi Arabia, as the new oil king of the world.

Courtesy the shale output, for the first time since 1978, last September the States recorded a surplus in the petroleum trade. A month earlier, in August, the US Energy Information Agency (EIA) reported: Petroleum and natural gas production in the United States jumped by 16 per cent and 12pc, respectively, in 2018, setting new production records, making the US world’s single largest producer of oil and natural gas.

The Organisation of the Petroleum Exporting Countries (Opec) in its World Oil Outlook 2019 also conceded that the US will overtake it in terms of crude oil output within the next five years. “Non-Opec supply prospects have been revised up sharply, as US tight (shale) oil, in particular, has again outperformed expectations,” Mohammad Sanusi Barkindo, secretary-general of the Opec, emphasised.

But all this is currently under focus. The debate is intensifying: ‘With the current low, crude market prices, is the US shale revolution going bust?’

The US oil production growth is in for a ‘major slowdown’. The IHS Markit outlook for oil market fundamentals for 2019-2021 expects the total US production growth to be 440,000 barrels per day (bpd) in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022. But those volumes would still be in stark contrast to the boom levels of recent years, Raoul LeBlanc, vice president for North American unconventionals, IHS Markit was quoted as saying.

“Going from nearly 2 million bpd annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” LeBlanc added. “This is a dramatic shift after several years where annual growth of more than one million barrels per day was the norm.”

With WTI prices expected to average around $50 in 2020 and 2021, IHS Markit forecasts capital spending for onshore drilling and completions to fall by 10pc to $102 billion this year, another 12pc to around $90bn in 2020 and another 8pc to around $83bn in 2021 – a nearly $20bn decline in annual spending over just three years.

“It all represents the strongest headwinds for shale producers since the oil price collapse in 2015,” LeBlanc says.

Investors no longer appear willing to write the industry a blank cheque. Companies that made the US emerge as the worlds eminent oil and gas producer, are in a crisis, struggling to stay afloat. Bankruptcies and layoffs are up, and, drilling is down. Halliburton has laid off nearly 3,000 workers. In the Permian Basin, the most prolific oil field in the US, employment has almost completely stalled out — after growing more than 11pc last year.

Meanwhile, many of the smaller producers who piled up debt are struggling to pay it back. That has led to a wave of bankruptcies — nearly three dozen so far this year. All this is constraining output growth.

Yet, the EIA is not giving up. In its November Short Term Energy Outlook (STEO), the EIA has revised up its forecast of WTI Crude prices by $2 a barrel to $56 in November, and by $1 per barrel in both December and January to $55 and $54 a barrel, respectively.

With the increase in price outlook, the EIA has also revised up its forecast of the US crude oil production by 30,000 bpd, or by 0.2pc, from the October STEO. Forecasts for next year’s production also went up by 119,000 bpd, or by 0.9pc, compared to the projections provided in the October outlook.

The current US administration is singularly focused on energy security, or “energy dominance” – as they put it. Last Thursday, it announced a plan that could allow oil drilling on over three-quarters of the nation’s largest piece of unprotected wilderness, the 23-million acre National Petroleum Reserve, Alaska. Ranked as one of the most ecologically valuable, yet, it holds promising oil prospects. Recent discoveries suggest it could hold as much as 8.7bn barrels in undiscovered oil. If the administration goes ahead with the plan, it could add significantly to the US output.

Despite real headwinds, the US energy dominance is here to stay for some more time, one needs to concede here.

Published in Dawn, November 24th, 2019