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U.S. Shale Growth To Disappoint In 2023

Despite the fact that U.S. crude oil production has recently hit the highest level since the pandemic low of below 10 million barrels per day (bpd) in May 2022, the growth rate has markedly slowed this year as the shale patch struggles, labor shortages, supply chain delays, and the high cost of supplies while producers focus on returns instead of drilling.

U.S. oil production hit nearly 12.3 million bpd in September, the latest month with comprehensive data published by the EIA in its Petroleum Supply Monthly report last week. Between January and September, daily U.S. crude oil production averaged 11.733 million bpd, and 11.7 million bpd is the administration’s current projection for average U.S. crude oil production for this year.

Although output is growing, the pace is half the growth rate seen in the rebound after the 2015-2016 oil price slump when American oil production in 2018 and 2019 soared by 1 million bpd—and even more—per year.

Those days of surging growth rates may be gone forever as producers continue to prioritize payouts over drilling, while cost inflation and supply chain issues hold back even those who are willing to boost output.

The September production was much higher than the 9.7 million bpd seen in May 2020, when American producers curtailed output after global and U.S. oil demand plunged at the beginning of the pandemic.

Since then, output has grown, but not at the same pace as in 2014 or 2018-2019.

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So far this year, U.S. oil production has risen at an annual rate of around 600,000 bpd-700,000 bpd, according to EIA data compiled by Reuters market analyst John Kemp. That’s less than half the growth rate just before and after the 2015-2016 oil price crash.

The EIA expects U.S. crude oil production to average 11.7 million bpd in 2022 and 12.4 million bpd in 2023, which would surpass the record high set in 2019, per the November Short-Term Energy Outlook.

Despite the expectation of a record output next year, the EIA has downgraded the numbers several times in 2022 so far. The latest cut is a massive 21% reduction in the growth estimate, according to calculations by Reuters.

In the October forecast, the EIA had already downgraded the average production estimate for 2023 to 12.4 million bpd from the September forecast of 12.6 million bpd.

Some shale executives say activity has flatlined. Others note that the U.S. shale patch is no longer the swing oil producer and OPEC has returned as the most important driver of oil supply fundamentals.

“Shale was thought of as a swing producer, the Saudis and OPEC have waited this out. Now, really OPEC is back in the driver’s seat where they are the swing producer,” Hess Corp CEO John Hess said at a conference in Miami last month.

“Shale can’t come back to become a swing producer,” Bryan Sheffield, the founder of Parsley Energy which was bought by Pioneer Natural Resources in 2020, told Reuters last week.

Lynn Helms, Director of North Dakota’s Department of Mineral Resources, said in October, “There are tens of thousands of jobs open in the state and not very many applicants. We’re going to go into 2023 with a serious workforce shortage and that’s going to continue.”

In the Dallas Fed Energy Survey for Q3, oil and gas executives cited costs and the availability of services and supplies as key constraints to expansion.

“The cost of supplies and wait times for delivery have increased substantially,” an executive from an exploration and production firm said, while another noted that “Oil and gas industry activity has flatlined. We should incentivize equipment and material manufacturers and suppliers to increase supplies.”

“Sustained double-digit inflation is not the solution for a healthy industry, and projects are becoming uneconomical,” the executive added.

By Tsvetana Paraskova for Oilprice.com

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