There is quite a bit of disagreement over how much U.S. shale will grow next year, and a lot hinges on the magnitude of the slowdown.
The three main energy forecasters – the EIA, IEA and OPEC – have all largely stuck with the conventional wisdom that U.S. shale will more or less continue to grow at a rapid clip. The EIA says that the U.S. will add roughly 1 million barrels (mb/d) of fresh supply in 2020. In October, the Paris-based IEA said that the U.S. would add a whopping 1.3 mb/d in 2020, although it also made reference to “a slowdown in activity.” The agency will publish revised figures on Friday.
OPEC itself put out its latest report on Thursday, and it paints a confusing portrait of U.S. shale. The group says that U.S. shale might grow by another 1.02 mb/d. However, a day earlier, OPEC’s Secretary-General Mohammed Barkindo told reporters that shale drillers are slowing down, which makes the cartel’s job easier. “Talking to a number of producers, especially in the shale basins, there is a growing concern by themselves that the slowdown is almost graduating into a fast deceleration,” Barkindo told CNBC. “And the numbers are starting to show it. They are the operators, they are the ones investing, and they are telling us that we are probably more optimistic than they are considering the variety of headwind challenges they are facing.”
To recap, the three forecasters that garner the most attention in the world of oil are all mostly saying that U.S. shale will continue to add large volumes of new supply next year. But they don’t seem to be entirely confident.
“The EIA is not really convinced that’s the case,” Bob Yawger, director of the futures division at Mizuho Securities USA in New York, told Bloomberg, referring to the supply growth estimate. “It seems to me that they will walk those numbers down.”
Meanwhile, aside from the big three agencies, a growing number of forecasts predict a more dramatic deceleration in U.S. shale.
Goldman Sachs put out a report on November 11 that said U.S. production growth could drop to just 0.6 mb/d, which is notable since the investment bank has often painted bullish scenarios on shale. But the bank noted that three factors – shrinking access to capital, company decisions to focus on capital discipline, and “mixed” productivity results from operations – all point to lower growth.
JBC Energy offers some interesting details on how it views 2020. The firm sees U.S. shale growing by 780,000 bpd in 2020, a figure that it arrives at by assuming the industry completes 1,270 wells per month, not far off from the recent pace of drilling.
But the output growth is surprisingly sensitive. “However, a mere 5% deviation to the downside from our forecast to roughly 1,200 completions per month from October 2019 onwards would eliminate [month-on-month] supply growth and reduce 2020 [year-on-year] growth to 350,000 b/d,” JBC Energy wrote.
In other words, it doesn’t take much of a pullback in drilling to dramatically cut into production growth. The reason is obvious and well-known – shale wells decline precipitously soon after they come online, requiring a frenzied pace of drilling to grow production overall. JBC said it found “additional indications that this treadmill is accelerating” in North Dakota.
“The initial gas-to-oil ratio and the water cut is higher in and growing faster over the life of a well drilled at a later stage than in an older well. This points towards steeper decline rates moving forwards,” JBC concluded. “The risk regarding supply additions is also skewed to the downside as initial production rates may suffer from the fact that the sweetest spots have already been drilled.”
Some of the shale drillers themselves are much more downbeat than independent forecasters. “At a September investor conference, I predicted that 2020 total U.S. year-over-year oil growth would be 700,000 barrels per day which at that time was considerably below consensus,” Mark Papa, CEO of Centennial Resource Development, said on an earnings call on Tuesday. “Given additional data I now think that 2020 year-over-year oil growth will be roughly 400,000 barrels per day which is below current consensus.”
A dramatic slowdown in the shale industry has global implications. The widely anticipated supply glut in 2020 may not be as bad as previously thought if U.S. shale undershoots forecasts.