What China Doesn't Understand About the U.S. "Shale Game"

What China Doesn’t Understand About the U.S. “Shale Game”

by | published December 4th, 2019

I am always having conversations with international contacts, regardless of time zones or which airport I’m going to (or from).

Some of these discussions have a persistent habit of developing into common themes, and there is one that has been emerging over the past several weeks.

This most recent topic began over a month ago during talks in Canada, and emerged again in late October during a London meeting with large energy investors and financiers. I then heard it again during a session two weeks ago in Paris.

But this time, those assembled were not the usual sources for such an opinion; these were colleagues at the usually objective International Energy Agency (IEA).

The topic? An impending ceiling in U.S. shale production.

Now, this subject has been bandied about for years, but this marks the first time some of the global heavyweights are taking it seriously.

And as of this weekend, those considering the matter genuine include Saudi officials, OPEC analysts, and Chinese energy planners.

In other words, the discussion is getting serious…

China Believes There Is a U.S. Oil Downfall

When U.S. oil and natural gas shale production becomes the focus of attention, it used to be that questions of how long it could be sustained involved estimates of extractable reserves. That, early doubters claimed, would put the life of significant extraction levels at no more than two decades.

Well, things have changed.

Significant improvements in drilling technology, better proppants (the material than keeps rock fissures open longer to extract more hydrocarbons), increasing the number of wells from the same pad, and a better understanding of how much is really out there has extended the anticipated life span of the shale age.

Today, it is not how much is available, but that the issues are gravitating toward the breakeven point for operators.

This has always been about the market, not what Mother Nature provides; if profits decline, so does the drilling.

It is this constricting market environment that is currently animating Chinese views of the U.S. shale patch. Conclusions are already prompting Beijing to reevaluate how it looks at American volume in the international market.

What results is a divided view.

On the one hand is U.S. shale gas. Here, the issue translates quickly into it being a primary source for exports of U.S. liquified natural gas (LNG). Those exports, in turn, are a major factor in calculating how Asia is to meet a rapidly increasing energy demand picture.

The current U.S.-China trade disagreement has cast uncertainty over what had been considered a major upward trajectory in American LNG trade to the continent. The tiff has also put China in a bind, as it searches for alternative sourcing. U.S. LNG is still moving into China, but under tariff pressures and at a rate less than had been estimated.

Meanwhile, China is facing a second successive winter with the prospects of sufficient energy supplies requiring higher prices than budgeted.

Most international analysts agree that, politics aside, U.S. LNG is going to have a major impact on worldwide energy trading patterns.

The issue here is maintaining sufficient profit margins in a depressed domestic operating environment. Included additionally are limitations on pipeline capacity and export venues. An expanding market, however, results in sufficient CapEx availability to address such issues.

Something Big Is Going Down on December 31

New bills and mandates are introduced quite often.

But this latest one has some kick to it.

On December 31, a California mandate goes into effect, and every contractor, developer, and home builder will need to have this technology by then.

This mandate will dramatically affect the state’s entire population – over 39 million people – and there’s a very good chance it will affect everyone in America not long after.

Michael Robinson has been following this for some time, and he’s ready to share the implications – and the profit potential – with you now.

Just click here to watch Michael tell you all about it.

But gas is not an independent consideration. Most of U.S. production is not from standalone conventional gas reserves. Rather, this is predominantly becoming shale reservoirs and/or associated gas existing at oil fields.

And that brings me to China’s (and others) main interest.

U.S. Oil Production Has Grown By Staggering Amounts

There is an intensifying opinion that there are several factors combining to cap how much U.S. shale oil will be added to the volume flow. These include:

  • Domestic demand levels,
  • The stretched pipeline network,
  • Substantial near-term port capacity limitations,
  • The increasing cost of credit, inflation on oil field service (OFS) expenses, and
  • A major cutback in the development of new fields.

Barely eleven years ago, U.S. oil production plummeted to an historic low of 3.8 million barrels a day. Most recently, the most recent figure put aggregate daily production at a staggering 12.9 million barrels.

In 2008, over 60% of American oil production came from stripper wells (wells nearing the end of their lives), each providing ten barrels or less a day (and often accompanied by up to twenty barrels of water). Today, as much as 80% of add on production comes from shale.

Therefore, when estimating what the sustainable production levels are for U.S. operators, this has become a “shale game,” a game that has far more repercussions to the energy trade than what becomes of the U.S. local picture. Despite huge reserve figures in Saudi Arabia and Venezuela, the ability to move extraction quickly to market has thrust U.S. shale into a new role.

What had been the world’s “call on OPEC” for addressing the level of supply to meet projected demand, has now become a “call on shale.” U.S. reserves are now the effective global factor in deterring prices.

And OPEC+ (OPEC and major outside producers led by Russia) know this. They have already given notice that, in the Vienna meeting this month to set production levels, U.S. shale will not be given a pass.

There will be an approval to extend the current daily cuts of 1.2 million barrels, with the possibility of increasing that to 1.5 million (although Moscow seems to be pushing back on this further cut). But this will be accomplished without spiking the price.

That provides us a bellwether indicator on where U.S. shale is going.

I will be releasing my 2020 projections in a few weeks, but this much I can tell you now.

Global Opinions May Only Be Half Right

With Brent (the primary global benchmark crude rate set in London) in the mid $60 a barrel range and West Texas Intermediate (WTI), the benchmark used in New York hovering about $58 a barrel, it is not possible to sustain the “in excess of 12 million barrel a day” level current in the U.S.

My estimate will see the average daily production for 2020 closer to 11 million barrels, with that perhaps scaling back even further to 10.5 million by the end of the year. That will provide some space for a renewed merger and acquisition (M&A) cycle in primary U.S. production basins, and a further delay in new full-cycle well development.

Rather, those companies able to extend existing fields with new close in (or “step out”) wells will be coming in at better margins… at least as long as the reservoir pressure holds out.

This is the basis of what the Chinese believe, and that is a belief shared by analysts among my contacts at OPEC’s International Energy Forum (IEF) in Riyadh, along with a widening number of foreign energy investors.

Make no mistake, the demise of U.S. shale is still some time off.

But the impact of U.S. shale oil on the global price of oil may indeed be undergoing a change.



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