“U.S. Shale Nears Limits of Productivity Gains”, By Irina Slav

“Natural depletion in shale reservoirs is signaling the end of rapid growth. * Despite advancements like AI…”

U.S. shale is the biggest source of oil and gas output growth on a global scale. It’s in every forecast and projection that sees continued depression in oil prices. But that role as a growth driver might be coming to an end due to natural processes.

Well productivity and efficiency improvements have been in the spotlight of U.S. shale oil and gas discourse ever since the industry served up a massive surprise to analysts by reducing the total rig count but boosting production by 1 million bpd last year.

The unexpected jump in output was attributed to efficiency gains that made it possible for drillers to extract more oil at lower cost, driving the substantial increase in 2023 overall production of hydrocarbons. Now, the Energy Information Administration has predicted that productivity improvements and efficiency gains would continue driving output higher. The question, as usual, is just how high.

In its latest Shot-Term Energy Outlook, the EIA forecast that total U.S. oil production next year would hit 13.5 million barrels daily. That would be up from an estimated 13.2 million barrels daily this year. The estimated 2024 average itself was an increase from 12.9 million bpd for 2023. In other words, over the past two years, total U.S. production of crude oil has increased at a rate of 300,000 barrels daily. Yet shale specifically boomed—but this is about to end.

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Well productivity in the Permian, the star shale play in the U.S. unconventional oil and gas industry, has declined by 15% since 2020, according to data from Enverus. However, at the same time, producers are drilling longer wells, and they are doing it more efficiently than before, squeezing ever more oil and creating a perception that there are no limits to the technological advancements that can keep that oil flowing.

As usual, there is a “but”. In this case, it goes like this: U.S. shale drillers—and, more specifically, drilling service providers—have done wonders of efficiency, but there are limits to all technological advancements. More importantly, there are also natural limits to shale reservoirs.

“We’ve tripled oil production in the last 15 years and we have doubled natural gas production.” But “there’s not a lot of gas left in the tank,” the chief executive of Quantum Energy Partners, Wil VanLoh, told Bloomberg back in September. “The US shale revolution has run its course,” VanLoh also said at the time, echoing warnings that some investors have been voicing for years, namely, that the pace of production growth that the U.S. shale industry has been keeping is unsustainable over a longer term.

Yet this doesn’t mean that growth is over for good. For one thing, AI has entered the oil patch and is helping drive additional efficiency gains, which has lowered breakeven costs in some parts of the patch, motivating higher production. According to Evercore ISI, AI and other tech could bring costs in the shale patch down by double digits as soon as this year. “There’ll be significant cost savings, at a minimum double digits, but probably in the 25% to 50% of cost savings in certain scenarios,” one analyst from KPMG, which compiled a report on the topic, told Bloomberg earlier this year.

There is also the factor of resilient demand for oil—perhaps more resilient than some forecasters would like it to be. This is, in fact, the strongest motivator for production growth anywhere. If there is demand for oil, there will be supply to respond to that demand—especially if producers can get the oil out of the ground more cheaply than before.

This is precisely what’s happening in much of the shale patch. In the Permian specifically, output from newly drilled wells has increased from some 350,000 bpd back in 2019 to over 450,000 bpd this year, per a recent report by the Energy Information Administration looking into the effects of improved efficiency in well output among 34 public oil companies. In evidence of the constraints that the industry faces, these same 34 public companies are currently producing as much oil as they were producing at the start of 2020—despite all the efficiency improvements, productivity gains, and lower costs.

Some would explain this with weakening demand, even though the oil demand growth trajectory remains on an upward curve despite apocalyptic predictions. A more likely reason for the EIA data—besides the devastating impact of pandemic lockdowns on demand—is natural depletion in some fields that offset stronger-than-expected growth in others.

U.S. shale producers are doing more with less, which has become something of their modus operandi in the past few years. Yet natural depletion is one fact of life that no one can change, and this fact of life means that as drillers run out of prime acreage and move on to relatively lower-quality reservoirs, production growth peak is on the horizon, as oilfield veteran David Messler wrote for Oilprice last year. Efficiency gains are certainly important—especially for investors who expect a steady stream of returns—but like everything else, these can’t last forever.

By Irina Slav for Oilprice.com