January 29, 2023

Oil production is slowing and executives from some of the largest companies are warning of future declines from overworked oil fields and less productive wells.

On Sunday, the Organization of the Petroleum Exporting Countries (OPEC) is meeting to decide whether to hold the line or cut production, no longer afraid its policy decisions could provoke a surge in shale production like it has in the past years ago have done pandemic.

The move away from US shale oil means consumers around the world could face a winter of higher fuel prices. Russia has threatened to block oil sales to countries that support a price cap in the European Union, and the United States is halting releases of emergency stocks of oil that have helped cool energy inflation.

The cost of US shale production is skyrocketing, and there is no sign that narrow-minded investors will change their yield expectations in lieu of investing in expanded drilling.

During a decade of staggering growth, shale has repeatedly defied production forecasts and opposition from environmentalists as the technology blew up more and more shale fields and revolutionized the global energy industry.

But there don’t seem to be any new industry-changing technologies in the works or cost savings that could change the picture this time around. Inflation has pushed up costs by as much as 20%, and less productive wells are hampering the industry’s ability to produce more.

Research and development spending at leading oilfield company SLB fell to 2.3% of sales this year through September, down from 2.4% in the same period last year. At Helmerich & Payne, one of the largest drilling companies, the R&D budget will only increase by $1 million from $27 million in 2022.

Industry spending on new oil projects, Morgan Stanley analysts said last week, “is modest at best, and absolute levels of investment are still historically low.”

Shale has a history of proving naysayers wrong. After the 2014-2016 OPEC price war bankrupted hundreds of oil companies, Schiefer introduced more innovative, lower-cost ways of operating. Its subsequent gains gave the United States the title of the world’s largest crude oil producer until 2018, a distinction it still holds.

Hissing out

Investors have put dividends and share buybacks ahead of more manufacturing gains in recent years, executives said.

That has changed the ability of shale producers to respond to spikes in international oil prices, said Bryan Sheffield, who sold producer Parsley Energy and now heads an energy-focused private equity fund.

“Shale can’t come back to be a swing producer,” Sheffield said, because investors are unwilling to fund growth. Demands for payouts and repeated price breaches have forced oil producers and service companies to “cut back on scientific projects” that fed previous production breakthroughs, he added.

The technological advancement that led to innovations like multi-stage hydraulic fracturing “will and has slowed,” said Richard Spears, vice president of research firm Spears & Associates. “If you want to advance how far and how fast you can drill, that’s becoming a problem now.”

The industry also has less time to regain its former leadership, said John Hess, CEO of Hess Corp. He estimates that rivals have about a decade to play before they fizzle out. Shale is “out of the driver’s seat” as OPEC regains control of the market, Hess said.

The US government expects total oil production to hit a new peak next year, but has lowered its forecasts several times this year. Recently, production growth forecast for 2023 was cut 21% to increase by about 480,000 barrels per day (bpd) to 12.31 million bpd. That could mean slower growth compared to the mere 500,000 barrels per day gains this year — already well below lofty expectations of around 900,000 barrels per day this spring.


Shale’s waning influence is evident in North Dakota. Once the vanguard of the US shale oil industry, poor well productivity in the state’s Bakken region and labor shortages have taken it a long way from its boom days.

About 4% of its shale drilling inventory remains in high-producing, or Tier 1, locations, up from 9% at the start of 2020, according to production technology firm Novi Labs, which focuses on oil and gas wells.

With the number of best drill sites declining in all shale fields, the outlook is bleak. Shale production declines rapidly after peak relative 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 fields,” said Ted Cross, director of product management at Novi Labs and a former geologist at the oil company, referring to North Dakota.

The Permian Basin in western Texas and New Mexico, the largest and most important US oil field, is the only US shale region to have exceeded pre-COVID-19 pandemic oil production levels, according to US Energy Information Administration data.

This area also shows signs of stress.

“There are a number of underlying causes, but frac sand is so expensive now, tight labor markets are making last-mile logistics difficult, and public producers are generally more willing to forego production than investment,” Matt Hagerty said , a senior analyst for FactSet’s BTU Analytics.

The initial production rate from a new well in the Central Midland Basin section of the Permian is averaging about 790 barrels of oil per day, compared to 830 bpd just six months ago, according to researcher BTU. Initial production prospects at another shale field, the eastern Eagle Ford, have dropped to 778 bpd from 828 bpd.


“We will enter 2023 with a severe labor shortage,” said Lynn Helms, director of the North Dakota Department of Mineral Resources. The northern state has had trouble attracting workers in the past, and the tight labor market has made the problem worse.

It has been stubbornly difficult to recruit manpower for crews needed to operate frac fleets and rigs, Helms said, adding that more rigs have moved south into the Permian.

The number of oil and gas exploration workers in North Dakota fell 12% between 2019 and 2021, the latest annual data from the Bureau of Labor Statistics shows, compared with a 9.6% decline in New Mexico.

Lower production rates are “a longer-term perspective,” said Mike Oestmann, managing director of shale producer Tall City Exploration. Other issues hampering potential gains from shale oil: a lack of regulatory clarity and the US government’s desire to move away from fossil fuels, he said.

With producers determined to pour limited resources into the best drilling prospects, “we’re not going to be able to sustain this forever,” Kaes Van’t Hof, chief financial officer at Diamondback Energy, said on a recent conference call.

GRAPH – Lowering expectations for US production

(Reporting by Laila Kearney, Liz Hampton, and Arathy Somasekhar; Editing by Gary McWilliams and Claudia Parsons)

By Laila Kearney, Liz Hampton and Arathy Somasekhar

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