Sunday, March 19, 2023

"The End of Abundant Energy: Shale Production and Hubbert's Peak"

[Previously from Goehring & Rozencwajg: "Why Won't Energy Companies Drill?", Q2 (2022) Natural Resource Market Commentary, "The Distortions of Cheap Energy" and Goehring & Rozencwajg and Horizon Kinetics on Commodities.]

Highlights from Goehring & Rozencwajg's fourth quarter 2022 Natural Resource Market Commentary, "The End of Abundant Energy: Shale Production and Hubbert's Peak".

  • Few of us properly appreciate the importance of the shales. Not only were they the only source of incremental growth over the past decade, but they were also tremendous in absolute terms. Between 2010 and 2020, US shale oil production grew by 7.6 mm b/d, while natural gas liquids (nearly all from shale) increased by 4.0 m b/d. Total liquid production from the US shales grew by 11.6 mm b/d – more than Saudi Arabia’s production of 10.5 m b/d.
  • Shale gas production grew an incredible 65 bcf/d over the same period. When converted to barrels of oil equivalent, shale gas added another 10.8 m boe/d – equivalent to a second Saudi Arabia.
  • In recent years, Goehring & Rozencwajg has become convinced that shale production growth will slow and eventually turn negative. So far, the data has confirmed our thesis. If current trends continue and the shales do indeed plateau and roll over, global oil markets will have lost their only source of growth. Many of the resource depletion theories of the 2000s will likely return as critical issues in the 2020s. Investors would be wise to study them now.
  • The development of shale oil spelled the end of public interest in Peak Oil. Like Professor Hall, many openly dismissed and even ridiculed Hubbert’s work., US production bottomed at 4 mm b/d in 2008 and, driven entirely by the shales, has grown since to become the largest oil producer in the world.
  • While Hubbert’s predictions look ridiculous when considering total US liquids production, focusing only on conventional crude production suggests Peak Oil is alive and well. Last year, the US produced 3 m b/d of conventional crude oil – 7 m b/d or 70% below the peak reached 52 years ago. In other words, the shales bailed out total US production but did nothing to change the forces underpinning Peak Oil and depletion. On a global basis, conventional oil production (total production ex shale and Canadian oil sands) has exhibited no growth in 17 years.
  • E&P companies successfully determined over time the “sweet spots” of the basins, where attributes such as thermal maturity, thickness, permeability, porosity, and organic content were ideal. In 2014, we estimate 45% of all drilling occurred within Tier 1 areas, whereas by 2018, it had surged to over 65%. If the industry were getting better at drilling wells, then previously low-productivity drilling locations would be converted into high-productivity locations, allowing production to continue to surge. Instead, we determined the industry was “high-grading” or drilling its best wells first. Our neural network told us that companies were drilling their best top-tier locations in all their basins. If our neural network was correct, we argued in 2019 that per well productivity would peak and begin to fall as tier 1 prospects dwindled, leaving the industry to either drill many less productive wells or, if not, see their production decline.
  • Given the shale’s prodigious production growth, almost everyone believed they were limitless. Analysts talked about chronic oversupply without once thinking about the underlying geological constraints. Although the shales are extremely large, we determined they behaved precisely like traditional (albeit enormous) fields. We concluded that shale basins exhibited Hubbert-style production profiles: they ramped up, plateaued, peaked, and declined. The two earliest shale basins, the Barnett and Fayetteville, peaked between 2011 and 2014 and have both since declined by 70%.
  • Interestingly, the Permian has been the only basin to grow drilling activity since the end of 2019. In the Bakken and Eagle Ford, activity remains 10% below pre-COVID levels, whereas, in the Permian, activity is 5% above late-2019 levels. The answer is the superior inventory of remaining Tier 1 locations. Unfortunately, this superior inventory is being drawn down. We estimate that closer to 45% of all Tier 1 Permian locations have been drilled. The Permian is quickly approaching the same level of development as the Bakken and Eagle Ford in 2019. Our models tell us the results will be similar: Permian production will peak, plateau, and decline much sooner than anyone expects.
  • All five companies in our super-major survey increased capital spending and production in 4Q2022. Spending grew 22% compared with 2Q2022 from $11.1 bn to $13.6 bn. Year-over-year, super-major capital spending is up 25%. Increased spending was driven by Chevron (up 37%), Exxon (up 28%), and Shell (up 22%). BP and Total grew their spending much less: 10% and 5%, respectively.
  • Crude demand has proved far more resilient than most analysts have expected for nearly two decades. For example, economic activity slowed following the 1980 oil price spike, and demand fell almost 10%. It took nearly ten years for demand to surpass the 1980 peak. On the other hand, economic activity plummeted following the 2008 price spike and the global financial crisis. Instead of falling by 10% (or even more), crude demand fell by only 1.5%, surpassing the 2007 peak in 2010. The difference was that in 1980, OECD countries made up 68% of global oil demand, whereas by 2010 it was only half. Emerging markets have a much different price elasticity and demand profile than developed countries: consumption is far more resilient. More recently, during COVID, energy analysts argued vociferously that global demand would never again regain 2019 levels. Less than three years later, the International Energy Agency (IEA) expects 2023 demand will be 1.4 m b/d greater than in 2019.


Anonymous said...

I have lost the "romance" of the oil industry for good now, the industry is super corrupt just like everything else and I will no longer try to understand it or invest in it.

Anonymous said...

"Pierre Andurand that u?"