In order to prevent a decline in world oil production by 2025, the International Energy Agency (IEA) has announced that shale oil extraction and energy trading platforms would have to be increased two or three times over. However, in the United States, shale oil continues to lose money…
The consequences of the supply crunch envisaged by the IEA promise to be particularly severe for Europe. A wake-up call?
The International Energy Agency is sounding the alarm bell louder than ever before in its latest annual report, published at the end of 2018.
World conventional oil production
World conventional oil production (almost 3/4 of total oil production) “peaked in 2008 at 69 million barrels per day (Mb/d), and has since declined by just over 2.5 Mb/d”. The IEA estimates that this decline will not be interrupted (cf. World Energy Outlook 2018, p. 142); it should be noted that this fateful development was correctly predicted as early as the end of the 1990s: it is only a confirmation of a state of affairs.
Excerpt from the summary to decision-makers
Excerpt from the summary to decision-makers: “The risk of a tightening of supply is particularly acute for oil. Over the last three years, the average number of new conventional oil production projects approved is only half of the volume needed to balance the market until 2025, given the demand outlook in the “New Policies” scenario. Shale oil alone is unlikely to take over.
By 2025, in order to push this spectre back again, IEA says shale oil production must double or even triple if conventional oil discoveries remain as they are today: lower than ever, despite unprecedented investment over the last decade.
The spectacular rise of shale oil in the United States seems to the IEA to be the only lifeline available to a technical mankind that is more than ever addicted to black gold, and which is in no way prepared for withdrawal.
This salvation plan seems decidedly rotten. In the United States, more than three-quarters of small and large companies specialising in shale oil continue to invest more than they earn, almost 10 years after the boom in this unconventional oil extracted by hydraulic fracturing of the rock began.
The production profile of shale oil wells is characterized by a rapid decline in crude oil flow: after one or two years, production is only a small fraction of initial production. As a result, shale oil producers must continually drill new wells to maintain their production. This constant investment effort is usually much higher than the “cash” generated by the sale of crude oil. This was true when the barrel was over $100, and even more so today, when the barrel is around $50, despite technical progress supposedly capable of sustaining the sector.
How can an industry that has been steadily losing money since the beginning of the decade not collapse? Because people continue to buy its shares and debt. There are signs that this could stop soon.
I don’t know whether the US shale oil industry should be predicted to crash as spectacularly as its boom has been so far. Some analysts do not hesitate to do so, with some arguments. It is not out of the question that the country that has already offered us Enron and subprime mortgages may be able to create a gigantic Ponzi scheme again.
Be that as it may, the mood in the shale oil sector today is one of consolidation: shareholders in search of dividends have been insisting for more than a year now that companies that have invested continuously to develop their production in Texas or North Dakota should slow the pace and concentrate on developing their existing wells. Analysts with a reputation for conservatism (as seen here in Forbes) are predicting at least a slower pace of production growth in 2019. Rystad Energy expects production from Eagle Ford, Texas’ second largest shale oil play, to fall sharply during the year.
All of this does not provide an ideal context for serenely predicting a doubling or tripling of shale oil production by 2025 – a necessary condition to prevent a “supply crunch” by then, according to the IEA.
A vigorous resumption of global economic growth, and thus a rise in crude oil prices, would provide a favourable context for shale oil, and with it world oil production, to continue to grow.
But a further slowdown in global growth appears to be underway, marked by a slowdown in growth in China. For several months now, “end of the cycle” has been the expression that can be found on almost every page of the international economic press (two significant examples here and there).
Last week’s decision by the U.S. central bank to halt its promised interest rate hike confirms the extraordinary difficulty of emerging from a long period during which the 2008 debt crisis was cauterized by accumulating more debt. A 2008 crisis that may well have been fundamentally triggered by the end of easy oil. The prism of physical trade and long time, which is the one favoured on this blog, provides some interesting signs from this point of view.
Let’s summarize :
– Shale oil industry production would have to double or triple over the next 6 years to prevent the decline of many, many historic oil regions from dragging the world economy down the path of forced and unanticipated crude withdrawal;
– the future profitability of the US shale oil industry seems by no means assured, and if the sector concentrates and rationalises, it will probably be to the detriment of the continuation of its thunderous production growth;
– more generally, the looming slowdown in the world economy should do nothing to help the oil industry revive the investments needed to prevent the “supply crunch” that the IEA fears in the summary to decision-makers in its latest annual report.
So, where is the lifeline now to prevent peak oil?
Since 2008, and the historic peak then crossed – for fundamentally geological reasons – by conventional oil, non-conventional oils and shale oil in the first place have formed this lifeline.
In 2010, the Obama administration’s top oil analyst (whose exclusive interview was the occasion for the launch of this blog) did not see the scale of the shale oil boom coming, and therefore believed that a decline in global liquid fuel production could be imminent. Today, the IEA shows that if shale oil’s boom had not been what it is – powerful, unexpected and so far persistent – this expert from the Obama administration would have been right, since the peak of conventional oil has occurred.
No one can say today what the next lifeline will be, to push back the inevitable limit of what the Earth still has to offer us as intact and accessible sources of oil.
Europe has reason to be particularly wary.
For we are surrounded by oil-producing areas in structural decline that is very probably irreversible: the North Sea (a textbook case in point), Algeria and Africa in general, and probably soon (again according to the IEA) Russia, which today remains the European Union’s leading supplier of hydrocarbons.
Making our technical systems (much) more sober as a matter of urgency is a vital issue, not only for the climate, but also to avoid a Mad Max world. Is democracy capable of making rational choices that require it to move away from the slope of least resistance that it has so far followed? … There is work to be done.
Modern democracy has germinated in a bath of energy abundance. It seems reasonable to fear that the winter of this era is just around the corner. I propose once again that we consider the danger seriously.