U.S. oil and gas boom tamed by sharply lower prices
U.S. oil and gas production growth is slowing, as lower prices force shale firms to reduce new well drilling and completion rates, and the slowdown is set to intensify this year.
Low prices and the need to conserve cash, rather than a sudden conversion to the merits of investment discipline, have brought the drilling and production boom of 2017/18 to a halt.
U.S. crude oil output was up almost 9% in the three months between August and October compared with the same period in 2018, according to data from the U.S. Energy Information Administration.
But the annual growth rate had already slowed from a peak of more than 21% in August-October 2018 compared with the same period in 2017 (“Petroleum supply monthly,”, EIA, Dec. 31).
And the EIA forecasts growth will slow further to just 4.5% year-on-year in the final three months of 2020, dropping to 4.1% in the final three months of 2021 (“Short-Term Energy Outlook”, EIA, Jan. 14).
Given that global oil consumption has risen at an average annual rate of just 1.5% over the last 20 years, U.S. shale producers will still be increasing their market share and putting downward pressure on oil prices.
But the downward pressure on prices, and squeeze on rival oil exporters such as Saudi Arabia and Russia, is likely to be less intense than in 2018 and 2019.
Much the same story is apparent in natural gas, where U.S. production is forecast to experience an even sharper slowdown, after prices collapsed to multi-year seasonal lows.
U.S. dry gas output was up 9% in the three months August-October compared with the same period in 2018, but that was down from year-on-year growth of 13% in August-October 2018.
The EIA’s latest forecasts show gas production actually turning lower his month. Growth will go negative year-on-year by September-November and remain negative through most of the rest of 2020 and 2021.
Global gas consumption has grown at an average annual rate of 2.7% over the last 20 years, so the slowdown in U.S. output growth should help to tighten the market towards the end of this year and into 2021.
The slowdown in U.S. oil and gas production has coincided with a sharp drop in year-on-year prices, forcing shale firms to slow well drilling and completions to conserve cash.
Brent prices were down 26% year-on-year in the three months ending in September, though they have since rallied modestly and ended the year up slightly compared the very depressed prices at the end of 2018.
Gas futures prices have slumped even more badly, and were down more than 34% in the final quarter of 2019 compared with the same period in 2018, with no sign of increasing yet.
The total number of drilling rigs has fallen by more than 300 (28%) since the end of 2018, with big reductions in rigs targeting both oil (down 226, or 26%) and gas (79, or 40%), according service company Baker Hughes.
Some commentators have talked about the shale industry entering a new era of “capital discipline” that will curb output growth and focus on improving returns to shareholders by limiting drilling activity.
The implication is that drilling rates will remain low when prices start to rise, delivering a sustainable rebound in both revenues and profitability.
But the focus on capital discipline is cyclical: current promises to restrict spending echo earlier pledges during the 2009/10 and 2014/15 market downturns, which were gradually forgotten when prices climbed again.
In reality, there is not much evidence for “capital discipline” as opposed to “price discipline”. Sharply lower oil and gas prices have left shale firms no choice but to cut drilling to conserve scarce cash.
But the slowdown in drilling and output growth should eventually lead to tighter production-consumption balances in both oil and gas by the end of 2020 and in 2021, provided the global economy continues to expand.
Source: Reuters (Editing by David Evans)