“OPEC is back in the driver’s seat,” John Hess, chief executive of the eponymous oil company, told an investor conference in Miami on Nov. 17, tacitly acknowledging the U.S. shale revolution has run its course.
For a decade between 2009 and 2019, the surge in U.S. petroleum and other liquids production transformed the availability and price of oil around the world, marginalising other producers:
U.S. production of petroleum and other liquids more than doubled to 19.5 million barrels per day in 2019 from 9.1 million bpd in 2009, according to the U.S. Energy Information Administration (EIA).
U.S. production grew at a compound annual rate of +7.9%, five times faster than the +1.6% annual growth in global petroleum consumption (“Short-Term Energy Outlook”, EIA, Nov. 8).
U.S. output growth dwarfed increases by producers in the rest of the world, where output increased at a compound rate of just +0.5% per year.
U.S. marginal production (+14.5 million bpd) captured nearly all the increase in global consumption (+14.8 million bpd) between 2009 and 2019.
U.S. producers captured all the incremental global consumption in three out of 10 years in the decade (2014, 2018 and 2019) and at least two-thirds of incremental consumption in six years (2011-2014 and 2018-2019).
As a result, U.S. producers boosted their share of global production and consumption to more than 19% in 2019 from less than 11% in 2009.
In 2022, however, U.S. production is expected to be only +0.7 million bpd higher than in 2019, the last year before the pandemic, despite prices well above the long-term average in real terms, a significant deceleration in growth.
In a narrow sense, the shale revolution refers to the widespread application of horizontal drilling and hydraulic fracturing techniques to increase output from shale and other tight rock formations.
Hydraulic fracturing had been practiced on a small scale since the 1950s and horizontal drilling had been pioneered in the 1980s (“Drilling sideways: a review of horizontal well technology and its domestic application”, EIA, 1993).
But the techniques were increasingly used in combination to boost production, starting with gas-rich formations from 2005-2006, then oil-rich formations from 2008-2009.
Both techniques have since improved, showing learning curves, allowing wells to be drilled deeper, faster, with more and longer lateral sections, and with more sophisticated pressure pumping to shatter formations more precisely.
“Fracking”, as the combination of horizontal drilling and hydraulic fracturing became colloquially known, evolved from a small-scale experimental technology in 2009 to become the dominant production approach by 2019.
The shale revolution’s technology has become mainstream, resulting in a long-term increase in output, and in doing so it has lost its revolutionary character.
In a broader sense, the shale revolution describes the transformation of the entire onshore U.S. oil and gas industry with an extraordinary boom in investment, drilling, pressure pumping and investment.
The first phase, focused on gas, lasted between 2005 and 2008, when it was cut short by the global financial crisis and the ensuing recession.
The second focused on oil and lasted between 2009 and 2019, punctuated by a short-lived slump and recovery between late 2014 and early 2016.
In this broader sense, the revolution transformed onshore oil and gas exploration and production, including the oilfield supply chain, and certain communities in Appalachia, North Dakota and the southwestern United States.
Like other new technologies, including railroads and the internet, in its early stages the shale revolution involved significant over-investment, cost inflation, duplication and waste, resulting in poor returns for many shareholders.
Like other technologies, however, shale production has eventually settled into a more mature and conservative phase, hastened by the traumatic shock to oil and gas markets during the coronavirus pandemic.
In the revolutionary stage, shale producers were pioneers, innovators and disruptors, focused on rapid growth, securing more investment, boosting market share at the expense of rivals and transforming the industry.
In the post-revolutionary phase, shale firms have become incumbents, focused on consolidation, eliminating excess capacity, avoiding over-production, controlling costs, increasing profit margins and returning capital to shareholders.
U.S. shale industry leaders now talk about their investment and production strategy using almost identical language to Saudi Arabia and the other members of the OPEC⁺ group of major petroleum exporters.
END OF THE REVOLUTION?
U.S. petroleum production is at least 10-11 million bpd higher than it would have been without horizontal drilling and hydraulic fracturing, but it appears to have settled onto a slower growth trajectory.
In 2022, the Biden administration has tried to cajole domestic oil producers to increase their output, without much success.
In that sense, the global petroleum market has reverted to conditions that look much more like the pre-2009 world, bringing to an end a decade of profound disruption.
U.S. shale producers are expected to account for a much smaller share of global growth in petroleum production and consumption in the next few years.
If that proves correct, OPEC (in reality Saudi Arabia to some extent the other Persian Gulf producers) will be able to exercise significant market power, as they did before 2009.
OPEC’s market power will persist unless and until the horizontal drilling and hydraulic fracturing are applied in new geographies, in the United States or internationally, or another new disruptive technology arrives.
On the consumption side, the most likely disruptor is the large-scale deployment of electric vehicles, which has the potential to reduce petroleum demand significantly in the medium and long term.
On the production side, given the long gestation of most major technical innovations, disruption is likely to come from the application of one or more existing technologies, separately or in combination, in new ways or to new areas.
Until then, OPEC and its allies will be back in the driving seat.
John Kemp is a Reuters market analyst. The views expressed are his own (Editing by Tomasz Janowski)