# Analysis-Energy hungry Europe can’t look to U.S. shale to fill any OPEC gap Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-12-02 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Is the U.S. Shale Boom Over? Outlook Grim as Production Meta Description: Learn how U.S. shale industry reaching its limits may impact global oil prices ahead of the OPEC meeting. Find out more here. URL: https://financedigest.com/analysis-energy-hungry-europe-cant-look-to-u-s-shale-to-fill-any-opec-gaphtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-12-02t195404z2lynxmpeib10xqrtroptp4usa-shale-independents-1736814773535-compressed.jpg) By Laila Kearney, Liz Hampton and Arathy Somasekhar NEW YORK/DENVER/HOUSTON (Reuters) – U.S. shale oil drillers turned from scrappy wildcatters into multi-millionaires over the past two decades, propelling the United States to become the world’s largest producer, but now they are running out of runway. [Oil output gains are slowing and executives from some of the largest firms](https://www.financedigest.com/uk-oil-gas-firms-to-leave-years-worth-of-output-in-ground-with-tax-hikes-report.html "UK oil, gas firms to leave year’s worth of output in ground with tax hikes-report") are warning of future declines from overworked oilfields and less productive wells. On Sunday, the Organization of the Petroleum Exporting Countries (OPEC) meets to decide whether to hold the line or cut its output, no longer afraid that their [policy decisions might provoke a surge](https://www.financedigest.com/yen-retreats-after-boj-policy-tweak-sparked-surge.html "Yen retreats after BOJ policy tweak sparked surge") in shale production in the way they did in the years before the pandemic. The sidelining of U.S. shale means consumers around the world may [face a winter of higher fuel prices](https://www.financedigest.com/bristol-myers-pfizer-abbvie-drugs-likely-to-face-u-s-price-negotiation.html "Bristol Myers, Pfizer, AbbVie drugs likely to face U.S. price negotiation"). Russia has threatened to block [oil sales to countries supporting a European Union price cap, and the United States is winding down releases from emergency oil stockpiles that helped cool energy inflation](https://www.financedigest.com/oil-rises-about-2-with-u-s-and-china-inflation-in-focus.html "Oil rises about 2% with U.S. and China inflation in focus"). U.S. shale production [costs are soaring](https://www.financedigest.com/amazon-other-retailers-revamp-free-shipping-as-costs-soar.html "Amazon, other retailers revamp ‘free’ shipping as costs soar") and there is no sign that tight-fisted investors will change their demands for returns rather than investment in expanding drilling. During a decade of stunning growth, shale consistently defied production forecasts, and opposition from environmentalists, as technology broke open more and more shale plays and revolutionized the [global energy industry](https://www.financedigest.com/german-industry-calls-for-delay-to-global-minimum-tax-bdi.html "German industry calls for delay to global minimum tax – BDI"). But there appears to be no new industry-transforming [technologies in the works](https://www.financedigest.com/what-is-5g-technology-and-how-it-works.html "What is 5G technology and how it works") or cost-savings that could change the picture this time around. Inflation has pushed up costs by up to 20%, and less [productive wells are crimping the industry’s](https://www.financedigest.com/carlsbergs-poland-unit-could-stop-production-lack-of-co2-threatens-food-industry.html "Carlsberg’s Poland unit could stop production; lack of CO2 threatens food industry") ability to produce more. Research and engineering spending at [top oilfield firm SLB this year](https://www.financedigest.com/global-crypto-regulation-body-likely-in-next-year-top-official-says.html "Global crypto regulation body likely in next year, top official says") dropped to 2.3% of revenue through September, from 2.4% in the same period a year ago. At Helmerich & Payne, one of the largest drilling contractors, its R&D [budget will rise only $1 million](https://www.financedigest.com/uk-budget-fashion-chain-primark-to-invest-140-million-stg-in-stores.html "UK budget fashion chain Primark to invest 140 million stg in stores"), from 2022’s $27 million. Industry spending on new oil projects, said analysts last week at Morgan Stanley, “is modest at best and the absolute level of investment is still historically low.” Shale has proven naysayers wrong in the past. After the 2014-2016 [OPEC price war put hundreds of oil](https://www.financedigest.com/oil-prices-rebound-after-opec-upgrades-china-demand-outlook.html "Oil prices rebound after OPEC upgrades China demand outlook") companies into bankruptcy, shale innovated with less expensive ways of operating. Their subsequent gains gave the United States by 2018 the title of world’s largest crude producer, a distinction it still holds. FIZZLING OUT Investors have put dividends and [share buybacks](https://www.financedigest.com/abb-to-launch-1-billion-share-buyback-on-april-3.html "ABB to launch billion share buyback on April 3") ahead of more production gains in the past few years, said executives. That has changed the ability of shale producers to react to spikes in international [oil prices](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure"), said Bryan Sheffield, who sold producer Parsley Energy and now runs an energy-focused private equity fund. Shale can’t come back to become a swing producer,” Sheffield said, because of the [investors’ unwillingness to finance](https://www.financedigest.com/optable-closes-20-million-series-a-financing-broadens-investor-syndicate-in-new-round.html "Optable Closes Million Series A Financing, Broadens Investor Syndicate in New Round") growth. The demand for payouts and repeated [price busts have forced oil producers and service companies “to cut](https://www.financedigest.com/tesla-expands-discounts-with-price-cuts-in-europe-singapore-israel.html "Tesla expands discounts with price cuts in Europe, Singapore, Israel") back on science projects” that fed past production breakthroughs, he added. Technology [development that led to innovations](https://www.financedigest.com/avaloq-enlarges-innovation-ecosystem-through-launch-of-developer-portal.html "Avaloq enlarges innovation ecosystem through launch of developer portal") such as multi-stage hydraulic fracturing “will slow down and has slowed down,” said Richard Spears, a vice president at researcher Spears & Associates. “If you want to advance how far you can drill out and how fast, that now becomes a problem.” The industry also has less time to regain its former leadership, said Hess Corp CEO John Hess. He estimates rivals have about a decade of running room before they fizzle out. Shale is “no longer in the driver’s [seat” with OPEC regaining control over the market](https://www.financedigest.com/rising-concerns-towards-safety-of-child-are-expected-to-drive-demand-for-baby-car-seat-market.html "Rising Concerns Towards Safety Of Child Are Expected To Drive Demand For Baby Car Seat Market"), said Hess. The U.S. government expects overall oil production to reach a new peak next year, but it has several times this [year cut](https://www.financedigest.com/inpost-sees-better-margin-in-poland-plans-no-job-cuts-this-year.html "InPost sees better margin in Poland, plans no job cuts this year") its forecasts. It recently slashed 2023 production [growth outlook](https://www.financedigest.com/agriculture-container-and-tank-cleaning-equipment-market-witness-positive-growth-outlook-during-forecast-2028.html "Agriculture Container And Tank Cleaning Equipment Market Witness Positive Growth Outlook During Forecast 2028") by 21%, to a gain of about 480,000 barrels per day (bpd), to 12.31 million bpd. That could mean less growth compared to the mere 500,000 bpd gain this [year](https://www.financedigest.com/hong-kong-home-prices-drop-15-6-in-2022-snap-13-years-of-gain.html "Hong Kong home prices drop 15.6% in 2022, snap 13 years of gain") – which is already well short of lofty expectations of an about 900,000 bpd gain this spring. SHALE’S WANING INFLUENCE Shale’s waning influence is clear in North Dakota. Once the vanguard of the U.S. shale oil industry, poor well productivity in the [state’s Bakken region and labor shortages have left it far from its boom days](https://www.financedigest.com/india-to-hold-one-day-state-mourning-on-passing-away-of-queen-elizabeth.html "India to hold one day state mourning on passing away of Queen Elizabeth"). About 4% of its shale drilling inventory remains high producing, or Tier 1, locations, down from 9% at the start of 2020, according to production technology firm Novi Labs, which focuses on oil and gas well returns. As the number of prime drilling locations decline across all shale fields, the outlook is grim. Shale [production declines](https://www.financedigest.com/roche-flags-2023-earnings-decline-on-slump-in-covid-products.html "Roche flags 2023 earnings decline on slump in COVID products") rapidly after peaking compared to conventional oil wells, falling about 50% after the first year. It’s kind of a canary in the coal mine for what’s going to happen in the other unconventional oil plays,” said Ted Cross, director of [product management](https://www.financedigest.com/understanding-management-theories-and-maximising-productivity.html "Understanding management theories and maximising productivity") Novi Labs and a former oil company geologist, referring to North Dakota. The Permian Basin of west Texas and New Mexico, the largest and most important U.S. oilfield, is the only U.S. shale region to exceed its pre-COVID-19 [pandemic oil production](https://www.financedigest.com/smart-working-versus-presenteeism-enabling-productivity-in-a-post-pandemic-hybrid-work-culture.html "Smart Working Versus Presenteeism: Enabling Productivity in a Post-Pandemic Hybrid Work Culture") levels, according to U.S. Energy Information Administration data. Even that field is showing [signs of stress](https://www.financedigest.com/4-reasons-your-finance-employees-are-showing-signs-of-stress.html "4 reasons your finance employees are showing signs of stress"). There are a bunch of underlying causes, but frac sand is so expensive now, tight [labor markets](https://www.financedigest.com/u-s-labor-market-powers-ahead-as-weekly-jobless-claims-fall-layoffs-hit-24-year-low.html "U.S. labor market powers ahead as weekly jobless claims fall, layoffs hit 24-year low") make last-mile logistics difficult, and public producers are generally more willing to miss on production than on capex,” said Matt Hagerty, a senior analyst for FactSet’s BTU Analytics. Initial production [rates on a new well in the Central Midland basin section of the Permian averages about 790 barrels per day of oil](https://www.financedigest.com/oil-dips-as-potential-fed-rate-hike-overshadows-falling-stocks.html "Oil dips as potential Fed rate hike overshadows falling stocks"), according to researcher BTU, down from 830 bpd just six months ago. Its outlook for initial output in another shale field, the eastern Eagle Ford, is down to 778 bpd from 828 bpd. [PERSISTENT LABOR SHORTAGES](https://www.financedigest.com/u-s-job-growth-regains-momentum-worker-shortages-persist.html "U.S. job growth regains momentum; worker shortages persist") We’re going to go into 2023 with a serious workforce shortage,” said North Dakota Department of [Mineral Resources](https://www.financedigest.com/copper-miner-teck-resources-rejects-glencores-22-5-billion-offer.html "Copper miner Teck Resources rejects Glencore’s .5 billion offer") Director Lynn Helms. The northern state has historically had difficulty attracting workers, and the tight labor market has worsened the problem. Attracting laborers for crews needed to run frac fleets and rigs has been stubbornly difficult, Helms said, adding that more drilling rigs have moved south to the Permian. The number of oil and gas extraction workers in North Dakota fell by 12% between 2019 and 2021, the most recent annual Bureau of [Labor Statistics data](https://www.financedigest.com/dollar-firms-after-u-s-labor-data-suggests-more-rate-hikes.html "Dollar firms after U.S. labor data suggests more rate hikes") show, compared to New Mexico’s 9.6% drop. [Lower production rates](https://www.financedigest.com/how-insurtech-is-helping-to-lower-car-insurance-rates.html "How InsurTech is Helping to Lower Car Insurance Rates") are “a longer-term prospect,” said Mike Oestmann, chief executive of shale producer Tall City Exploration. Other issues depressing potential shale gains: a lack of regulatory clarity and the U.S. government’s desire to shift away from [fossil fuels](https://www.financedigest.com/eu-approves-effective-ban-on-new-fossil-fuel-cars-from-2035.html "EU approves effective ban on new fossil fuel cars from 2035"), he said. With producers determined to put limited resources into the best drilling prospects, “we won’t be able to keep this up forever,” said Kaes Van’t Hof, [finance chief](https://www.financedigest.com/bootmaker-dr-martens-warns-on-profit-as-finance-chief-walks.html "Bootmaker Dr Martens warns on profit as finance chief walks") at Diamondback Energy, in a recent earnings call. GRAPHIC – Lowering expectations for U.S. output https://fingfx.thomsonreuters.com/gfx/ce/movaknjebva/Pasted%20image%201668699492043.png ![Lowering expectations for U.S. output](https://www.globalbankingandfinance.com/wp-content/uploads/2022/12/610.jpg) (Reporting by Laila Kearney, Liz Hampton and Arathy Somasekhar; editing by Gary McWilliams and Claudia Parsons) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---