American shale oil failed to replace Russian energy sources for Europe. Writes Ahmed Adel
The US promised to supply more oil and gas to Europe to compensate for the loss of Russian energy, relying primarily on its shale industry to fill the gap. However, in addition to questions on the feasibility of drilling expensive wells that deplete quickly, shale oil companies cannot increase output and achieve the desired profit levels to make the endeavor worthwhile to begin with.
Although the US oil and gas industry had propagated a lot of hope behind it, it was hit by the pandemic. The number of drilling rigs gradually decreased and many companies became bankrupt, especially those that were even struggling before the pandemic. They were mostly struggling due to a sharp drop in investment inflows into the industry.
It is recalled that Fitch Ratings recently forecasted that it would take two or three years of growth to reach pre-pandemic levels once again. The problem is that investors are losing interest in shale oil companies as profit levels are not worth the risk and high expenses.
About $125 billion in investments was brought to the US shale oil industry in 2010-2014 and investors were satisfied with the results of the so-called “shale decade”. However, it was found that the top companies spent nearly $200 billion more than they earned and only a very few of them made any profit at all, especially as thousands of wells have pumped much less oil and gas than initially anticipated.
Although $56.6 billion was attracted to this sector in 2016, this massively decreased to only $19.4 billion in 2019. Although output has increased, the lack of investments has seen a wave of bankruptcy hit the US shale oil industry. The first year of the pandemic saw nearly 50 industry-related businesses file for bankruptcy.
Another factor in the failure of shale oil is inconsistent government policy. The Joe Biden administration, for example, blames high gasoline prices and promotes production. At the same time though, the American president threatens to raise taxes on “dirty” energies, such as oil and gas. This is despite the rapid depletion of shale oil fields, which limits profits and increases investor risks.
Paal Kibsgaard, head of the world’s largest oil and gas services company Schlumberger, explained that investors do not want to buy stocks from companies that inflate their budgets; BP CEO Robert Dudley explained that unlike Saudi Arabia and Russia, which adjust production depending on demand, US shale oil producers only react to price; and Pioneer CEO Scott Sheffield believes that pressure from investors and limited capacity by operators to increase production means that shale oil companies cannot drill or they risk of running out of shale oil.
According to FLOW Partners, the top US shale drillers – EOG Resources Devon Energy, Diamondback Energy, Continental Resources and Marathon Oil – will run out of reserves in about six years if they boost production expansion at 15% per year. Sheffield believes that the real index is 2-3% per year, while prices range from $70 to $100 a barrel.
Keeping in mind that before the pandemic, the index was 30%, it suggests that the shale oil revolution is coming to an end, evidenced by a dramatic drop in the share of this oil product in the global market.
It is recalled that Oil Price declared on November 23, 2022 that the “US Shale Boom Is Officially Over.” A follow up Oil Price report, released on New Year’s Day, highlighted that there might be another reason for the slowdown in shale oil production in the US: There is not as much accessible and economical shale oil underground as advertised.
“There may be other sources of oil worldwide that will somehow make up for the significantly lower growth in US shale oil production. But no other source seems set to provide the kind of growth US shale oil provided, that is, 73.2% of the global increase in oil production from 2008 through 2018,” the report added.
Scathingly, the report said that undoubtedly a new oil savior will be announced, “whether credible or not,” adding that “the world economy will be faced with limited oil supplies that do not simply grow to meet our fantasies of what we want. The result will be high prices, that is, higher than has been historically the case.”
Shale oil for the better part of a decade was advertised as the US’ answer in becoming a major oil exporting country. However, this initial optimism has ended in major disaster, particularly for the Europeans who hoped that this energy source could replace Russian oil and gas.