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The US shale production, the chief source of rapid growth that made the US the world’s largest oil producer, is slowing down fast, according to a new report by analytics firm IHS Markit

42253422592 2775f354ac cShale production is entering a new era of moderation in growth as producers focus on greater capital discipline and shareholder returns. (Image source: Tony Webster/Flickr)

The new outlook for oil market fundamentals for 2019-2021 expects total US production growth to be 440,000 bpd in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022.

But those volumes would still be in stark contrast to the boom levels of recent years, said Raoul LeBlanc, vice-president for North American unconventionals, IHS Markit.

“Going from nearly two million barrels per day annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” said LeBlanc. “This is a dramatic shift after several years where annual growth of more than one million barrels per day was the norm.”

The major challenge for producers now is to meet investors’ new focus on the return of capital. This comes at a time when companies are facing a prolonged period of lower prices and when access to financing from capital markets has become difficult, the report added.

Exploration and production (E&P) companies are trading at multiples that are half to one-third of what they were in 2017, and debt markets are unwilling to provide fresh debt for all but the largest shale players.

“The combination of closed capital markets and weak prices are pulling cash out of the system,” LeBlanc noted. “Investors are imposing capital discipline on E&P’s by pushing down equity prices and pushing up the cost of capital on debt markets.”

These financial trends will impact operations in turn. With WTI prices expected, at this point, to average around US$50 in 2020 and 2021, IHS Markit forecasts capital spending for onshore drilling and completions to fall by 10 per cent to US$102bin this year, another 12per cent to around US$90bn in 2020 and another eight per cent to around US$83bn in 2021, a nearly US$20bn decline in annual spending over just three years.

“It all represents the strongest headwinds for shale producers since the oil price collapse in 2015,” LeBlanc stated.

Aggravating the situation is that some options for weathering the storm that worked then will not be available this time, the report said.

“Operators were able to outperform the price collapse in 2015-2016 because they were able to vastly outspend cash flow thanks to accommodative debt and equity markets, while at the same time achieving huge leaps in well productivity and capital efficiency,” LeBlanc added. This time around, capital markets are sceptical and wary, and the scope for further productivity gains is limited.”

Nevertheless, the industry retains the ability to still grow rapidly under the right conditions, the report found. The IHS Markit analysis shows that a US$65 per barrel oil price would provide the ability to post strong volume growth while also providing meaningful returns to shareholders.

The crucial tipping point for this new shale era appears to be oil prices somewhere near the mid-US$50s—the point where it remains viable to have both some production growth and deliver shareholder returns, the report said.

“There is certainly ample inventory of high-quality wells out there,” LeBlanc said. “Shale producers are making a deliberate change to the business model in response to investor demands. The question becomes, what are the new conditions for growth? The answer is that now the trajectory of production depends almost entirely on the oil price.”