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Page added on November 18, 2017

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The IEA Is Grossly Overestimating Shale Growth

Production

This week, the IEA said that U.S. shale would dominate the oil and gas markets over the next decade, rising to “a level 50 percent higher than any other country has ever managed.” With a “remarkable ability to unlock new resources cost-effectively,” U.S. shale will add millions of barrels of new oil supply by 2025.

But some view such heady predictions as fanciful. There are a variety of reasons why U.S. shale could struggle to add several million additional barrels per day over the next few years. But here are just a few.

First, shale suffers from steep decline rates, much steeper than conventional wells. That means drilling is like running on a treadmill—more and more wells need to be drilled just keep production flat. The extraordinary rate of drilling over the past few years means that the industry not only needs to keep going at that frenzied pace, but it needs to expand its rate of drilling to add more barrels.

Just to cite a small example of the challenge the industry faces, the Permian Basin—the most prolific in the U.S.—has a legacy decline rate that has exploded over the past few years.

According to the EIA, the basin will lose 165,000 bpd of production in December, meaning that the industry needs to add that amount in fresh supply to keep output from falling. The agency does see the industry bringing 223,000 bpd of new supply online in December, but that nets out to only an addition of 58,000 bpd after the decline rates are factored in. The Permian hasn’t yet seen its output peak, but it will be very tall task to keep production growing for years to come, especially since the decline rate grows larger and larger.

Second, drillers go after the sweetest spots first, which means that they will have to downgrade to less desirable locations in the years ahead. That makes the job of growing production all the more difficult.

Third, the rig count has already started to decline in the past few months, evidence that shale drillers were sputtering with WTI in the low $50s per barrel.

Which brings us to the fourth, and perhaps most important point: the shale industry, by and large, is not profitable. It wasn’t at $100 per barrel, and it hasn’t been at $50 per barrel. There are, surely, some exceptions, but in the aggregate, shale drillers are burning through more cash than they are generating.

Fifth, without profitability, Wall Street will sour on the industry. The only thing keeping the shale bonanza going is extremely loose credit and plenty of hungry investors that have been hoping the enormous growth rates would someday translate into profits. That has thus far not been the case.

Investors have not abandoned the industry yet, but they are pressuring companies into dialing back on drilling in favor of focusing on profits. There are signs that shale executives are finally heeding the advice of their impatient shareholders. Gordon Douthat, an analyst at Wells Fargo, told the WSJ that more and more companies are starting to say that “even if we get some upside in the commodity, we’re not going to plow that into the ground—we’re going to remain disciplined.”

The WSJ cited the case of Marathon Petroleum, which has laid out a capital spending plan for 2018 that assumes an oil price of $50 per barrel. If oil prices end up much higher than that, the company will probably use the extra cash to pay down debt rather than step up drilling. The more companies restrain themselves, the less production growth the shale industry will achieve.

Morgan Stanley recently came out as one of the more skeptical voices on the shale boom. The investment bank said in a recent research report that it is highly unlikely that U.S. shale adds the 1 mb/d next year that a lot of other analysts assume is in the pipeline. “Right when the world’s reliance on shale is growing, its limits are starting to become apparent, and there seem to be two aspects to this: ability and willingness,” Morgan Stanley analysts wrote last week.

In the latest quarterly reports, a group of 18 shale companies reported an average increase in oil production by just 1 percent compared to last year’s levels, “hardly the runaway growth that overwhelms the oil market,” Morgan Stanley analysts wrote.

By James Stafford of Oilprice.com



9 Comments on "The IEA Is Grossly Overestimating Shale Growth"

  1. Sissyfuss on Sat, 18th Nov 2017 11:27 am 

    “Some view such heady predictions as fanciful.” I’d opt for criminal.

  2. Davy on Sat, 18th Nov 2017 11:33 am 

    Maybe energy hubris is just another one of the many peak oil dynamics. Let’s get suckered into thinking shale will save us then pop “it don’t” happen.

  3. William Sadler on Sat, 18th Nov 2017 12:12 pm 

    I do not understand the shale production figures. NDIC says the Bakken in down 100K/month from the peak. RRC says Texas is down every month this year from last year. In other words, reported production does not match estimated production.

    So what will happen to future production? DOWN from here.

  4. Sissyfuss on Sat, 18th Nov 2017 12:35 pm 

    You got the hubris connection correct, Davy. It colors everything man’s current actions entail. We as a species are too wonderful for the present day predicament to be our fault.

  5. MASTERMIND on Sat, 18th Nov 2017 11:25 pm 

    Would you rather the IEA to tell the truth and collapse the system early?

  6. Makati1 on Sat, 18th Nov 2017 11:30 pm 

    MM, YES!!! Today would be fine with me. Bring it on! That will allow the world to get on with living and the ‘junk yard dog’ to be totally toothless. Maybe even put-down.

  7. MASTERMIND on Sun, 19th Nov 2017 12:00 am 

    Madkat

    There is no living after the collapse. Because the thousands of nuke plants will be abandoned and they will melt down and blow tons of radiation into the atmosphere and the jet stream will spread it around the entire world. And the people alive will be coughing out their internal organs within weeks and dying horrible painful deaths. Now if they do somehow shut down the nuke plants everywhere worldwide without them melting down. If that is even possible. Then the small amount of people living in very remote areas like the rain forest who still hunt and gather for their food and water might survive the collapse. Everyone else is screwed. If you own a farm or garden etc. It will all be raided by gangs of goons who are hungry and armed and desperate.

  8. Makati1 on Sun, 19th Nov 2017 4:55 am 

    MM, dream on. Collapse only means that many things taken for granted in the 1st world will be gone. Many forms of waste will be gone. The fear of the empire will be gone.

    Nuke plants will go on, or be safely shut down.
    Electric will go on in most areas, but may not be reliable.
    Some form of trade will go on. Even international.

    The world financial system will reset to a totally different set of rules, maybe gold based. The Stock Market Casino will close or be shrunk to a small fraction of today. Many non-productive careers will end. Capitalism will probably be history, I think.

    Billions will survive and many will prosper. Those with the most to lose will be the most hurt. The West and their wannabees. That heavy hurt is mostly in the (sub)urban sprawl of America where everyone needs a car.

    Those with little or nothing may not even notice the change. Most of Asia, South America, Africa, etc., outside of the cities. Collapse is not the end of the world. It is just a major change. A huge reset.

    BTW: Your stupidity is showing. “… thousands of nuke plants will be abandoned…” There are only about
    450 nuke plants TOTAL in the world. Are you Fear Mongering? LMAO

  9. Davy on Sun, 19th Nov 2017 5:52 am 

    “Billions will survive and many will prosper. Those with the most to lose will be the most hurt. The West and their wannabees. That heavy hurt is mostly in the (sub)urban sprawl of America where everyone needs a car. Those with little or nothing may not even notice the change. Most of Asia, South America, Africa, etc., outside of the cities. Collapse is not the end of the world. It is just a major change. A huge reset.”

    Mad kat lives in the unreality of his human emotional projection of US destruction and Asia advancement. It even goes as far as if a collapse happens it is the US pain and Asia will not feel it much. What mad kat does not understand is the reality of overshoot Asia is in at all levels especially food, water, and energy. This includes those noble subsistence people he has no idea about. He lives in the financial district of Manila an rarely ventures out. WTF, would he know about the Asian poor. Asia is a huge continent. Asia is in the worst possible situation in population overshoot. Asia is in food insecurity and famine without a global economy. It is in water insecurity. It is heavily dependent on energy. It has mega cities and regions that cannot be supported without globalism. These mega regions will spill out into the countryside making the entire continent of Asia one big danger zone.

    Nope, I am not playing the extremist game of saying Asia is in trouble but the west is not. Both face the predicament of overpopulation and overconsumption risk of a finite planet. Both are at risk and the risk is interconnected. What is so crazy is how many people believe mad kat and his rants of bad west and good Asia. He is so childish and unimaginative. The lowest of human nature is when people talk themselves up and others down. He wants so hard for people to see the poor will not feel the pain because they already there. What he will not acknowledge is how precarious the poor live and how close to death they are. He does this because he thinks if it gets bad he will bug out to the fantasy farm and all will be well in his jungle refuge. LMFAO, the old man wants to live forever and it shows with his judgments. What a joke.

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