U.S. shale oil growth is slowing quickly and will effectively plateau in 2021 after years of accelerated activity, according to a new report from the IHS Markit research firm.
Shale oil growth will fall from a record high of 2 million barrels per day added in 2018 down to less than 500,000 barrels of daily growth in 2020 and then level out in 2021, the report said. Some modest growth could continue after 2021, but only at more muted levels unless oil prices rise considerably.
“Going from nearly 2 million barrels per day 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,” said Raoul LeBlanc, IHS Markit vice president for North American shale. “This is a dramatic shift after several years where annual growth of more than 1 million barrels per day was the norm.”
As Wall Street and banks have soured on the energy sector, shale firms are being forced to scale back and live within their financial means or risk falling into bankruptcy. In the past, capital markets would bail out shale players. But years of growth, debt accumulation and limited returns have pushed companies to reduce their spending and activity levels this year.
With the U.S. benchmark for oil expected to stay in the $50 per barrel range well into 2021, IHS Markit forecasts capital spending for shale drilling and completions to fall by 10 percent to $102 billion this year, another 12 percent to $90 billion in 2020 and by 8 percent to about $83 billion in 2021 — a nearly $20 billion 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 said, adding that shale firms won’t be bailed out by large loans and influxes of capital as they were in 2015 through much of 2018.
“This time around, capital markets are skeptical and wary, and the scope for further productivity gains is limited,” he said.
However, if oil prices rise above $60 per barrel and stay in that range, and shale players prove their financial success, then the industry could see a resurgence in the years ahead.
“There is certainly ample inventory of high-quality wells out there,” LeBlanc said. “Shale producers are making a deliberate change to the business model in response to investor demands. The question becomes, what are the new conditions for growth? The answer is that now the trajectory of production depends almost entirely on the oil price.”
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