The myth of US shale crude
In covering global energy markets for nearly four decades, one constant we can note is a tendency among analysts to simplify complex moving markets down to a single factor. An explanation may come down to peak demand, or peak supply, or China’s growth, or electric vehicles — which reflects an inherent human tendency toward over-simplification. We have seen such reductionism applied to shale crude and think it fitting to address this supply stream.
Almost everyone has heard some version of a story about US shale crude. Essentially, producers drill mile-long bores through geological formations and create synthetic sandstone by fracking. In the case of shale natural gas, the life of the well using this technique is comparatively long — wells can operate for 25 to 30 years. Many assume shale oil wells have similarly long lives, but that is not the case.
A shale oil well produces for only about five years. The inherent decline rate of a shale oil well is remarkably high and is front-end loaded. This means output falls by about 70 percent after its first year of activity, with the remaining 30 percent of the well’s life expended during the next four years. Pumping a liquid through pulverized rock involves a much more complicated set of physics than pushing natural gas through it.
In terms of cost, shale as a source of oil is at the high end of the spectrum. In fact, many US shale oil projects were uneconomic. The comparatively short life of a shale oil well made us view such output as little more than a burst of production, which is why we advise our clients not to view shale crude as the cure for oil supply. Our perspective ran contrary to the assertions of most pundits on Wall Street.
Back in 2019, the analyses we were publishing suggested that the short lifespan of shale crude wells was catching up on itself. US production was growing, but at a slower and slower and slower rate. The pattern reflected the increased difficulty in bringing on new production to offset the declines of output from existing shale oil wells. We wrote about and discussed the twilight of shale outlook in our research, and most thought our call was too early by six to eight years.
In 2020, when global oil demand contracted due to a shortfall in economic activity tied to the COVID-19 pandemic, we saw activity in the US oil patch retrench and with it US crude production. The mistake most made was believing — and publishing — a view that US crude production was going to come raging back in 2021. The consensus expected US output would grow by an average of one million barrels per day last year. Instead, US crude production fell by an average of 102,000 barrels per day.
For 2022, we expect to see US oil output grow on average but see the gains look set to be limited — this is the general pattern we forecast for all non-Organization of the Petroleum Exporting Countries supply, which runs counter to the consensus projection. Based on the latest available data, US crude oil production fell during November to February, which stands sharply at odds with the consensus view about output having risen.
For all of non-OPEC production — an update for which comes later this week — the rate in the first quarter of 2022 actually came in about 500,000 barrels per day below the consensus forecast. Russia was not even part of that miss, and prior to the invasion of Ukraine the projection from the International Energy Agency for this year’s non-OPEC oil supply was for the largest ever gain. We forecast this year’s non-OPEC supply growth will only be about half of what the IEA projected, and expect that non-OPEC supply numbers will continue to disappoint most market watchers.
• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life” which is available on Amazon.