The past six months have profoundly changed the outlook for US tight oil, triggering a slowdown in the rate of growth with a lower peak now expected.
After several years of remarkable growth, the 2020 price collapse pitched US tight oil production into a year-on-year decline for both 2020 and 2021. After that jolt, starting in 2022, Lower 48 oil production returns to growth but at a far slower rate than before the pandemic. Volumes will be nearly 2 million b/d lower than previously expected over the next five years due to 2020’s events. In addition, peak production late this decade will be 600 kb/d lower than our previous projection.
Unlike the oil price downturn of 2014-2016, there is far less room for the sector to make sweeping improvements in well performance and operational efficiency. Companies that survive the unfolding shakeup will need to rebuild trust with investors. Even if they do, higher prices will not mean unbridled growth, making tight oil a less elastic source of supply. Heightened policy risks will put additional downward pressure on investment. Technological breakthroughs could be a boon for the industry, but outside of this the uncertainties weigh heavily to the downside.
For the oil market, the shift downward in our forecast for the US Lower 48 helps offset the steep losses in oil demand, especially in 2020 and 2021. However, from 2022, the cuts to our US supply outlook and slowing rate of growth mean a growing reliance on OPEC capacity to meet demand through this decade. The loss of US L48 supply heightens the risks of a tighter global market and higher prices this decade.
An unprecedented early run
US shale seemed unstoppable for a while, a 21st-century equivalent of the 1840s gold rush. Tens of billions of dollars were poured into tight oil assets by E&P companies of all shapes and sizes. Science as well as capital led to more and more productive wells as the best rock was delineated and developed. In the last decade, Lower 48 oil output tripled to 10 million b/d.
But it was never sustainable
Two years ago, we saw the emerging signs of a slowing sector and called for the peak rate of growth in 2018, a view we still hold today. Capital became harder to source as Permian players fervently outspent cash flow. Well-productivity gains stalled, and the reality of over-drilling reservoirs set in. Spending eventually disconnected from prices as operators prioritized cash flow over production growth at investors’ behest.
Then a setback in 2020
This year’s price crash drove a sharp pullback in tight oil, with a more rapid response and deeper cuts than the prior price crash four years ago. In a single quarter of 2020 – Q2 – Lower 48 oil production fell 2 million b/d (20%), driven largely by shut-ins and curtailments. Drilling and completions activity dropped by more than two-thirds, and these deep cuts will result in at least two consecutive years of decline. Investment capital is in short supply with US Independents financially stretched, and bankruptcies mounting.
Supply expectations are reset
Tepid growth was already in our forecast but it’s even lower now, and from a lower base. The average growth rate over the next decade will be less than one-fifth that of the previous three years, when prices were US$10/bbl lower. It will be like driving with the parking brake on.