The conventional wisdom recently has been that North America will keep producing shale oil for some time despite the higher costs associated with hydraulic fracturing and the 50% drop in oil prices over the past eight months.
The thing about conventional wisdom is that it tends to be challenged, sometimes successfully. And shale’s biggest producer in the United States, EOG Resources Inc., is saying the recent rapid growth in its own shale production will end this year. And this idea is supported by people with experience in oil.
Certainly, though, the logic behind the theory of continued shale production is solid: Oil prices will bottom out, then begin to rise to the point where crude from shale becomes profitable again despite the cost of fracking. The only question is whether OPEC would then accept U.S. shale as a competitor and cut its own production to shore up prices.
A forecast issued February 17 by BP was more specific. The BP Energy Outlook 2035 expects U.S. production will grow rapidly for the immediate future, then “flatten out.” Or, as BP’s chief economist, Spencer Dale, told The Wall Street Journal, “U.S. [shale] oil can’t continue to grow rapidly forever.” And OPEC will be ready to fill that vacuum.
That may very well happen a bit sooner, Houston-based EOG Resources said February 19. It said it was “intentionally choosing returns over growth.” The company stressed, though, that if oil prices were to rise back to around $65 per barrel from the current $50, it could resume “double-digit” growth in 2016.
Until and unless that rebound comes, EOG said, it is cutting capital expenditures this year by about 40% and holding back on its crude reserves to make sure it has enough product in the event of such a short turnaround on prices. Other U.S. shale producers, notably Noble Energy of Houston and Devon Energy of Oklahoma City, are cutting expenses at about the same rate.
Will more companies do the same? “EOG is viewed as the premier company in shale development, and if they’re not going to grow, it is a very important signal to the market,” Michael Scialla, an analyst at Stifel Nicolaus & Co. in Denver, told Bloomberg. “The argument that this slowdown is going to take a while to have an impact on supply is completely wrong.”
Cutting costs is the key. Shale oil wells deplete quickly, so continued production requires constant drilling for new sources. And the drilling involves the more expensive method of hydraulic fracturing, or fracking, which isn’t consistent with cutting costs.
Despite the expense of fracking, shale oil has at least one important edge over conventional oil fields, which often are shared by competing oil companies. Under conventional oil extraction, a company that stopped drilling to cut costs ran the risk that another company would take all the oil from that reservoir for itself.
That doesn’t apply to shale, because the oil is locked tightly within underground rock and isn’t available without specific drilling, helped by fracking. That means shale producers can afford to suspend extraction until it becomes profitable again without fear of losing the oil to competitors.
Or as Harold Hamm, the CEO of Continental Resources Inc. of Oklahoma City, told an oil conference in January, “[Now] you can leave it in the ground. In the old days you had to produce because everybody was sucking on the same straw.”
The only question that remains is whether the price of oil rebounds, and how soon. That will depend largely on whether OPEC finally decides to cut its own production.
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.