Oil/Gas Gravy Train Nears End of Line

February 7, 2023

Every once in a while the Wall Street Journal posts a piece that is just quietly mind-blowing. This is one of those.
People have talked about the end of oil and gas for a long time, but with the writing so clearly on the wall that this industry is facing a decline, with the inevitable rise of EV transportation, the implications seem fairly strong here.

Wall Street Journal:

The end of the boom is in sight for America’s fracking companies.

Less than 3½ years after the shale revolution made the U.S. the world’s largest oil producer, companies in the oil fields of Texas, New Mexico and North Dakota have tapped many of their best wells.

If the largest shale drillers kept their output roughly flat, as they have during the pandemic, many could continue drilling profitable wells for a decade or two, according to a Wall Street Journal review of inventory data and analyses. If they boosted production 30% a year—the pre-pandemic growth rate in the Permian Basin, the country’s biggest oil field—they would run out of prime drilling locations in just a few years.

Shale companies once drilled rapidly in pursuit of breakneck growth. Now the industry has little choice but to keep running in place. Many are holding back on increasing production, despite the highest oil prices in years and requests from the White House that they drill more.

The limited inventory suggests that the era in which U.S. shale companies could quickly flood the world with oil is receding, and that market power is shifting back to other producers, many overseas. Some investors and energy executives said concerns about inventory likely motivated a recent spate of acquisitions and will lead to more consolidation.

Some companies say concerns about inventories haven’t factored into their decisions to keep output roughly flat. For several years before the pandemic, frustrated investors had pressured companies to slow production growth and return cash to shareholders rather than pump it back into drilling. Companies have promised to limit spending, though some executives recently said high prices signal a need for them to expand again this year.

U.S. oil production, now at about 11.5 million barrels a day, is still well below its high in early 2020 of about 13 million barrels a day. The Energy Information Administration expects U.S. production to grow about 5.4% through the end of 2022. 

Big shale companies already have to drill hundreds of wells each year just to keep production flat. Shale wells produce prodigiously early on, but their production declines rapidly. The Journal reported in 2019 that thousands of shale wells were pumping less oil and gas than companies had forecast. Many have since marked down how many drilling locations they have left. 

Some shale companies will eventually have to start spending money to explore for new hot spots, executives and investors said, and even then, those efforts are likely to add only incremental inventory. Few are currently doing so.

Pioneer Natural Resources Co., the largest oil producer in the Permian Basin of West Texas and New Mexico, raised its oil production between 19% and 27% a year in shale’s peak years. Now, Pioneer is planning to increase output only 5% a year or lower, for the long term.

Scott Sheffield, chief executive of Pioneer, said the combination of investor pressure and limited well inventory means he cannot drill as he once did. “You just can’t keep growing 15% to 20% a year,” he said. “You’ll drill up your inventories. Even the good companies.”

Pioneer bought two smaller drillers last year, Parsley Energy Inc. and DoublePoint Energy, in deals valued at almost $11 billion combined. Mr. Sheffield said that with those acquisitions, his company has about 15 to 20 years left of inventory. Pioneer’s pool of potential drilling locations would last only about eight years at a 15% to 20% growth rate, he said.

While privately held oil producers have increased their output in the Permian this past year, Mr. Sheffield warned even the largest of those would drill through their inventory rapidly if they kept it up.

Mr. Sheffield said he expects U.S. oil production to grow around 2% to 3% a year, even if oil trades from $70 to $100 a barrel. U.S. oil prices settled at $88.26 a barrel Wednesday.

Many drillers say they will never return to pre-pandemic production growth levels of up to 30% a year, in part due to rising costs for raw materials and labor, a lack of available financing and the enormous number of new wells it would require. 

Five of the largest shale companies—EOG Resources Inc., Devon Energy Corp., Diamondback Energy Inc., Continental Resources Inc. and Marathon Oil Corp.—all have about a decade or more of profitable well sites at their current drilling pace, according to the Journal’s review.

They would exhaust that inventory within about six years if they grew output 15% a year, according to analytics firm FLOW Partners LLC, which provided one of the analyses the Journal reviewed.

Much more at the link

Amy Bandyk in the Detroit News:

The unexpected and dramatic rise in gas prices this year is triggering massive shortfalls. Based on their current estimates, the customers of Michigan’s investor-owned utilities will pay over $700 million more for electricity in 2023 than they did in 2022. That translates into a nearly 7% increase in the electric rate for DTE customers and about a 14% increase for Consumers Energy customers.

Gas is not the only factor that goes into these power supply costs — it also includes other fuels like coal — but since gas generates around 40% of the state’s electricity, more than any other source, it is the biggest factor.

While customers and utilities may have become accustomed to low gas prices over the past decade, these periods of volatility have occurred many times in the past. Commodities like fossil fuels will always be volatile, and the only way to eliminate that risk is to transition away from fossil fuels.

Fortunately, alternatives to gas are here and, in most cases, they are actually cheaper than gas power plants. Wind and solar power have no fuel costs and so the price of their power is not subject to these volatile swings we are seeing with gas-fired power. Sources to back-up renewable energy on days of low wind, cloudy days and at night, like batteries, have been getting cheaper and cheaper. States that mostly use gas to heat homes, such as Michigan, can take advantage of the billions of dollars of grants and tax credits found in this summer’s Inflation Reduction Act and the earlier Infrastructure Investment and Jobs Act (IIJA) that will pay for replacing gas-burning furnaces with electric heat pumps.

Michigan utilities, however, continue to emphasize gas over alternative sources. DTE’s recently-released integrated resource plan, for example, proposes converting coal plants to run on gas for years to come and leaves the door open to building new gas plants. This is precisely the kind of plan that customers, regulators and policymakers should work together to fix.


8 Responses to “Oil/Gas Gravy Train Nears End of Line”

  1. jimbills Says:

    Fracked oil in the U.S. (plus several economic downturns) prevented global peak oil supply. If it falters, where is the other supply that can fill the gap? The Saudis and the IEA, at least, see a near term supply problem:

    “The latest oil market report from the International Energy Agency out Wednesday forecast global oil demand will increase by 1.9 million barrels per day in 2023 to reach a record 101.7 million barrels per day — with nearly half of that coming from China. The agency meanwhile expects oil supply growth to slow to 1 million barrels per day in that same period.”

    The question over the next decade is if EVs can cause oil demand to drop sooner than a drop in supply causes economic havoc.

    • Mark Mev Says:

      Wouldn’t russia going back to pre-pandemic oil production levels take up that slack?

      • jimbills Says:

        Production dropped across the board, in the U.S. and Saudi Arabia as well, because global oil demand dropped during the pandemic. As oil demand gets back to pre-pandemic levels, production will increase everywhere, too (and Russia will go back to their 2019 levels). The problem is growth in demand as time goes on. Will there be ‘new’ supply to meet that growth in demand, or will EVs kill demand before supply problems cause a major spike in prices, with all the economic turbulence from that?

    • J4Zonian Says:

      This is one of the leading oil producers in the world with not much else in their economy, and the same IEA that has dissed & dismissed renewables for a generation (PTP).
      Ramez Naam https://rameznaam.com/2020/05/14/solars-future-is-insanely-cheap-2020/

      Moore’ law for computers, Swanson’s law for solar. 20% cheaper for every global doubling of capacity. But Naam points out that solar prices have actually decreased more than an astounding thirty percent for every doubling.

      Meanwhile, for more than a decade, Saudi Arabia has been announcing huge investments in solar, every one followed by crickets. Or locusts. Its percentage of renewable generation hasn’t budged, despite its obvious solar capacity and the financial advantages of saving its oil for export.

  2. John Oneill Says:

    ‘Wind and solar power have no fuel costs and so the price of their power is not subject to these volatile swings we are seeing with gas-fired power.’ In fact increasing shares of VRE lead to greater swings in availability of power, and so make prices much more erratic.
    ‘In South Australia, for example, the share of solar and wind in the generation mix rose from around 24% to 50% between 2011 and 2019. Over the same period, average yearly within-day price volatility increased by around 180% …This increase was driven roughly equally by a combination of more extreme periods when prices were either zero or negative (“electricity is free”) or more than twice the average (“except when you really need it”) and by more generalized day-to-day volatility owing to the varying availability of solar and wind throughout the day and across seasons (impacting the residual demand, or residual load, which is the demand met by dispatchable generators—that can be turned on and off according to demand—after subtracting variable renewable generation) ‘https://www.bcg.com/publications/2022/free-electricity-unlikely-when-needed
    The best hedge against volatility is a high percentage of nuclear and geothermal, which tend to very stable output. Hydro and coal used to do the same job, but hydro is starting to suffer from the same problem as wind and solar – variable weather is affecting its ‘fuel’ supply. Some of gas’ extremes are rubbing off on the other fossil fuels – Australian coal export prices went up 800% from Sept 2020 to Sept 2022. Political moves like China’s ban on imports from Australia, and the EU’s carbon tax, can also affect availability. Places like Pakistan were priced completely out of the Liquefied Natural Gas market, so are importing more coal even with high global prices.

  3. J4Zonian Says:

    7:48 No, moving from coal to gas can’t save “emissions” because when methane is included, gas is as bad as coal for climate.
    8:12 No, we are not staying under 1.5. We’ll almost certainly pass it by 2035. The chances of staying under 2 are so close to zero there’s no point in even mentioning that ”goal” any more except in term of WHEN we’re going to blow past it.

    Given the huge increases in European W+S+B in 2022, & China’s continuing massive efforts in every category of sustainability, there’s sudden hope that the world won’t end by 2100 in a spasm of violence, chaos & suffering. But without a huge increase in the US & other places to renewablize the grid, electrify primary energy, give up chemical-industrial agriculture for small-scale low-meat organic permaculture, & move to ecological industry, that hope may be our 2nd or 3rd or 4th worst enemy. Or 5th. Amongst our enemies…

  4. Gingerbaker Says:

    “…But without a huge increase in the US & other places to … give up chemical-industrial agriculture for small-scale low-meat organic permaculture.”

    Good grief – that is a perfect recipe for disaster, what with 11 billion people to feed by 2100.

    That large-scale nonorganic “chemical-industrial agriculture”, as you so uncharitably put it, combined with livestock agriculture, is how we can easily feed the entire world right now, and almost certainly will be the only way we will be able to do so in 2100.

    It is why the UN FAO spends its time teaching Western agriculture and livestock techniques around the world, because small-scale organic agriculture is a failed enterprise in the developing world and also, in a statistical sense, in the developed world.

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