Not for shale anymore: the proto-oil boom in the USA is coming to an end
The US shale boom is coming to an end. Companies are cutting production and shutting down drilling rigs amid falling oil prices. Why the country does not expect a return to production volumes, which were 10 years ago, is in the Izvestia article.
Why is the United States abandoning shale oil
Oil and gas companies are shutting down drilling rigs and cutting costs, contrary to the promises of US President Donald Trump to "accelerate" the production of shale hydrocarbons. According to The Financial Times, oil prices are "eating up" all profits.
Shale producers evaluate the profitability of the industry in different ways. According to a quarterly survey by the Federal Reserve Bank of Dallas, companies need a price of at least $65 per barrel to reach zero. Today, American WTI crude oil is trading below $62 per barrel.
Norwegian Rysrad Energy has estimated that the break-even threshold for production in the US shale fields that have not yet been developed is $45 per barrel. The cost of production is also different.
In the early 2000s, the shale revolution in the United States helped the American economy by boosting GDP growth, trade balance, and the labor market. The development of the industry is due to high global gas prices: initially, it was blue fuel that was extracted, and then they began to develop gas condensate, which is now called shale oil.
Having its own oil has weakened Washington's dependence on foreign suppliers from the Middle East, in particular from Saudi Arabia.
However, although hydrocarbon production technologies in low-permeability reservoirs are constantly being improved, the process remains very costly and sensitive to fluctuations in global prices.
Not surprisingly, cheaper oil has forced producers to stop drilling rigs. If 13 years ago there were about 2,000 of them, today there are about 500 left — four times less.
The main problem is that old profitable wells are being depleted, and drilling new ones is too expensive: they cost an order of magnitude more. To launch fresh projects, oil prices should be higher, but the market is clearly in no hurry to grow.
Trump didn't help
Immediately after his inauguration, US President Donald Trump lifted restrictions on drilling and the issuance of licenses for new LNG plants, promising the "energy dominance" of the United States. However, six months later, the situation does not look so rosy.
According to S&P Global Commodity Insights, this year, for the first time in a decade, oil production will fall to 13.3 million barrels per day. This means that Trump failed to make the promised breakthrough. Whether investors don't believe in the prospects, or the market is overheated, "energy leadership" remains more of a slogan than a fact.
It turns out to be a vicious circle: oil is getting cheaper, production is falling, but there is nothing to raise it with, because investing in new fields is quite risky. Previously, American shale producers reduced costs and successfully competed with OPEC+ due to new technologies, but now even automation, breakthroughs in exploration and the use of neural networks cannot compensate for the growing costs of producers.
In addition, the US technological leadership in this area has been shaken by the trade wars unleashed by Trump. They have hurt the pockets of oil companies: the aluminum and steel they need have already jumped in price by 10%, and this is not the limit.
Experts interviewed by Izvestia summarize that the American shale boom, which lasted for almost 20 years, is coming to an end.
What do the experts think
Investment advisor, founder of the University of Finance, Yulia Kuznetsova, cites data from Baker Hughes, according to which the number of drilling rigs in the United States has been declining for the third week in a row.
— Against the background of OPEC+'s decision to increase production, American shale producers are sounding the alarm: rising costs, high duties on equipment and falling prices make the expansion of drilling economically impractical. Currently, Brent crude, which is the basis for pricing many other types of oil, is trading around $64.5 per barrel, which is the low of May, the analyst said.
According to her, attempts at a rebound are limited to the level of $65 per barrel, and the market remains under pressure.
— From the point of view of technical analysis, a decrease in the price to $63-62 may lead to an accelerated fall to the $60-58 zone. This is a critical milestone for shale companies, especially those with high leverage. They don't drill because the shale model is profitable at a price of $60-65, but unstable with sharp fluctuations. Increasing duties and logistical costs reduces margins, and investors demand discipline and capital repayment from companies, rather than expansion," the expert explained.
The political factor does not help the industry either.
— The United States risks losing its status as a driver of the oil market, and energy leadership is shifting back to OPEC+. The winners are the Gulf states, which are able to act long—term and flexibly regulate the supply. If the price trend continues in the range of $60-65, then by the end of the year the shale industry will switch to survival mode, not growth. This can change both the global balances in oil geopolitics and the behavior of large funds," Kuznetsova summed up.
Igor Rastorguev, a leading analyst at Amarkets, shares a similar position.
— Yes, we can reasonably talk about the beginning of a new crisis in the American shale industry and, possibly, the end of the era of the "shale boom" in its former form. The problems have been accumulating for a long time, and the current situation with falling quotations, rising costs and the unexpected decision of OPEC+ has only exacerbated the structural weaknesses of the sector," the expert noted.
The expert emphasized that the shale business in the United States has always been characterized by high cost.
— Compared to traditional oil production, shale oil production requires constant drilling, as wells are depleted in one to two years, due to expensive hydraulic fracturing and active logistics. Unlike projects in the Persian Gulf or Russia, where the costs are covered by years of stable production, American companies are forced to spend millions of dollars every quarter just to maintain the current production level, the analyst said.
All this makes shale companies particularly vulnerable to oil price volatility.
— In addition, initially the shale companies relied on cheap loans and investments, but in the last decade the market has been demanding profits. After 2014, when the first wave of the shale boom hit a collapse in prices, investors began to insist not on growth, but on sustainability and the return of capital," Igor Rastorguev emphasized.
As a result, the companies faced a refusal to expand, a reduction in drilling and a wave of bankruptcies in 2020.
— Against this background, the plan for the "energy leadership" of the United States, actively promoted under Trump and Biden, began to slip even then, — the expert summed up.
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