The latest long-term forecast from the U.S. Energy Information Administration (EIA) for domestic oil production has America on track to achieve the type of “energy dominance” long touted by President Trump.
It’s already commonly understood across the industry that domestic oil output – driven by persistent gains in the major shale plays – will continue to break records, including surpassing 11 million barrels per day before the end of this year. The big takeaway from the EIA report is that gains from tight oil are no flash in the pan.
America’s shale formations should be counted on to deliver massive volumes of oil and natural gas for decades to come. In short, the economic, trade and geopolitical benefits that America is enjoying show no sign of ending – as long as federal and state legislators don’t pursue policies that undermine the boom.
Based on its “high oil and gas resource and technology case,” the EIA sees U.S. crude oil production steadily rising to mid-century, reaching the 15 million barrels-a-day range around 2030, and pushing further toward the 19 million barrels-a-day range by 2050.
This is EIA’s most optimistic scenario under which U.S. oil companies continue to make cost-saving technological advances that allow them to unlock shale’s full resource capacity. Even so, the agency’s base or “reference” scenario isn’t exactly bleak by comparison. EIA’s base scenario has output leveling off between 11 million and 12 million barrels a day for most of the forecast period and only starting to show signs of decline near 2050.
Shale continues to lead the charge of rising U.S. production, accounting for 65% of overall domestic output in the EIA reference case from 2017 to 2050. Output begins to plateau in the coming years when “development moves into less productive areas and as well productivity declines,” according to the EIA. However, even this outcome suggests shale is a sustainable resource, capable of competing with low-cost production from the Middle East to Russia.
This future is by no means guaranteed, though. Long-term forecasts are exercises in guesswork. Nobody, including the EIA, saw the shale revolution coming a decade ago. These projections can also be self-serving. It’s no surprise that OPEC, which risks losing market share to shale, sees the future differently. The members of OPEC believe shale oil production from the U.S. and elsewhere will peak around 2025 before declining. “This growth is heavily front-loaded, as drillers seek out and aggressively produce barrels from sweet spots in the Permian and other basins,” OPEC has predicted.
Maybe so, but the cartel has underestimated shale’s potential before, having lost a two-year price war that prompted it to reinstate supply cuts in late 2016 to bolster prices. OPEC’s most recent forecast, unveiled late last year, predicts shale output will rise from 5.1 million barrels a day in 2017 to 7.5 million barrels a day by 2021, and 8.7 million barrels a day in 2025. The 2021 estimate is more than 50% higher than its 2016 forecast.
Where OPEC’s next forecast for shale goes is anyone’s guess, but it may be more concerned about shale as a long-term competitor than it says publicly. U.S. exports of crude topped 2 million barrels a day at times last year, surpassing the production of nine of OPEC’s 14 member states. America is set to become a net energy exporter by 2022 – cause for concern in Riyadh, Tehran, Moscow and other major oil-producing capitals.
The International Energy Agency has also been bullish on shale, as have independent analysts including the Oslo-based consultancy Rystad Energy. An independent estimate of world oil reserves performed by Rystad in 2016 determined that, at 264 billion barrels, the U.S. holds more recoverable oil than both Saudi Arabia and Russia, with more than half of that being tight oil.
Texas alone holds more than 60 billion barrels of shale oil, according to the survey, which remains controversial. Less controversial is data from oil giant BP, which for decades has compiled a statistical review of global oil reserves and output. BP sees significant growth potential for both OPEC and the United States, with OPEC accounting for 70% of global supply growth – increasing by 9 million to 48 million barrels a day by 2035 – and the United States, which it sees expanding by 4 million barrels a day over that same time span.
Regardless of which forecast you prefer, for the U.S. shale sector to reach its full potential it will need to be supported by smart policies at the state and federal levels that encourage expansion. The Trump administration has moved aggressively here with its deregulatory agenda and on efforts to open more lands and offshore areas to drilling. The new corporate tax reform law should also give the industry more cash to invest. Rystad estimates the Republican tax reform could end up increasing operating cash flows for all shale drillers by more than $5 billion per year.
The administration and industry need to guard against those who think energy dominance is bad for our country. The Keep It In The Ground Movement isn’t going away simply because pro-growth Republicans hold the White House and both chambers of Congress. The administration should continue to push forward long overdue efforts to reduce permitting timelines and remove redundancies from the federal process. If Republicans lose control of the House in November, their ability to move legislation will be severely restrained. At the state level, attempts to tax the use of fossil fuel and ban hydraulic fracturing are a threat to America’s energy economy, as is the divestment movement and talk of climate risk disclosure.
The ability for American producers to continue to innovate and develop new technologies and drilling techniques is key to their achieving the rosy forecasts mentioned above, particularly as the known “sweet spots” are depleted over the years. The use of “Big Data” and “digitalization” are now more than industry buzz words – they are actually resulting in better wells with superior production rates.
Oil prices will have an enormous impact on shale’s ultimate performance. U.S. output has proven a critical component in determining world prices thanks to the sector’s ability to ramp up or down in a matter of months. The United States doesn’t need to be the swing producer or even the marginal producer for the shale boom to continue. As long as companies can grind it out on the marginal cost curve somewhere below $80, they will be in business. The sweet spot for oil prices is now $65 a barrel. But watch out, service costs will rise more than anticipated and worldwide economic growth has to be in sync to achieve the kind of demand numbers necessary to consume growing output.
Perhaps most importantly, the shale sector needs to start delivering solid returns to shareholders or risk falling out of favor with investors. Investors won’t put up with the current “cash burn” rate forever and closure of capital markets to shale producers could be catastrophic to the sector. Shale players have promised better capital discipline and vowed to improve shareholder returns, but their track record is short – and weak. Can the sector keep growing without requiring new injections of outside capital and what is shale’s potential if outside investment dries up?
Wood Mackenzie believes the “stars seem aligned” for U.S. shale producers to generate positive cash flow in 2018, two years earlier than the consultancy previously predicted. That would go a long way toward addressing the fears of investors who worry shale is destined to flame out like other once high-flying non-OPEC plays like the North Sea.