Is the Shale 'Revolution' Over?

While the shale boom has reshaped global oil markets over the past decade, new research suggests the heyday could be coming to an end. Over the past decade, oil and gas output in the United States has soared by 57%. The increase has been largely thanks to production in shale-rich areas like the Permian Basin and Eagle Ford.

Now, new data from oil field services company Baker Hughes warns that the lucrative shale boom could be slowing down. In the second last week of October, analysts noted the US oil rig count dropped by 17, representing a fall of more than 2%. This marks the largest US oil drilling decline in six months, a trend that reflects the downward trajectory drilling has been on for most of 2019.

Analysts describe shale investors as "catatonic"

Analysts suggest the decline is largely due to capital discipline demands placed on shale producers by investors. While producers have successfully increased US oil production to record highs, the returns haven't generated huge profits for shareholders. Now, investors are no longer channelling cash into unprofitable growth. Instead, they're forcing production companies to take a more disciplined approach to spending. This has led to a decrease in new drilling projects which could ultimately see the shale industry come to a grinding halt.

"Investors are damn near catatonic, E&Ps have no viable options except M&A. Shale is not a panacea of production growth. It's quickly coming to an end," warns James West, an analyst at global independent investment banking advisory firm, Evercore ISI.

Ageing wells and sluggish market blamed for shale slowdown

Other analysts attribute the slowdown in shale production to ageing wells. In 2017 and 2018 significant expansion saw the market flooded with "young" wells that produce large amounts of oil. Now, they're starting to slow down which has seen a rapid decline in output.

Weak oil prices aren't providing much incentive for shale drillers to pick up the face, with Rystad Energy predicting that sluggish markets will see the shale slump continue into 2020, if not indefinitely. The trend could have implications for the upcoming OPEC meeting in Russia, with analysts predicting a continued slowdown in the shale market could trigger a bullish trend for oil prices.

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