Hi, everyone. What seems like forever ago, when I was an energy analyst just starting out, I used to hear the term energy security all the time. Maybe it was because I was based in Washington, d C. But if your policy makers use it constantly to push for an all of the above energy approach, so the U S would be less relied on other nations for its energy, particularly oil. But around two thousand nine that term really peaked when shale oil and hydraulic fracturing came into play.
It changed the game, taking the U S from importer to net exporter of oil and gas, and the impacts of shale oil reach across all sectors and across the globe. Today on the show, we've got Tai Lieu and Anidialinus U S oil analysts for ben F. They're going to tell us about the state of US shale oil, how oil demand rising to pre pandemic levels is impacting prices, and how oil producers are dealing with all of it.
Our discussion is based on report titled U S Sail Oil Quarterly Outlook three Q twenty twenty one being if users can get this report on beef, go on the Bloomberg terminal beanef dot com and Bloomberg Mobile. As a reminder, beaneif does not provide investment or strategy advice, and you can hear the full disclaimer at the end of the show. I'm Mark Taylor and you're listening to switch on to be an f podcast. Ti Anna, Thanks for joining. So
we've brought you in to talk about US shale oil today. Ana, can you start us off and tell us a bit why we're talking about US shale. So, US shale oil is a really interesting part of the global supply picture for oil, and if you think about it, it's quite different from a lot of the rest of the oil production that we have in the market. Especially for people who don't usually think about oil too much. You usually probably picture things like the Beverly Hillbillies when you're envisioning
oil production. I think my generation we tend to think about armageddon, you know, when they're on the offshore rig and Harry Stamper hits the uh, the gusher and all the oil comes out the top. Yeah. Yeah, well, the same same idea, right. You kind of have this hole that you've drilled, all the oil flows out just very easily. That's oil production. Shale is quite different. Shale oil is a fairly newer technology that has come onto the market.
It was developed actually, you know, sort of by the US government and stuff funded by them for decades, but it really came onto the scene around early two thousand's and in this you extract oil from solid rock, from shale rock, it's a tight oil supply. In order to do this, you have to use technologies like hydraulic fracturing and injection of fluids to help open some of these pores that hold oil molecules and allow it to flow to the surface. So it has a very different production
profile than a conventional well. But the benefit is it actually takes much less time to get the well to production, and the wells don't last nearly as long as conventional wells,
which actually makes them quite responsive. Anyways, shale is something that was developed, as I mentioned, in the early two thousands in the US and really started booming because there's actually a lot of opportunity for shale in across the US, and so starting around two thousand eight or so, we saw production coming online and then we just over the past few decades have seen phenomenal growth in this sector.
I mean, especially you look back just a few years ago, US production was growing about twenty six percent from US shale basins on an annual basis. Production grew to the point where US was the largest producer of oil due to this shale production that was coming out. So it's
been a really important feature of the U. S supply story. However, the problem is that as the US was just flooding the market with all of the shale oil, there was also competition with OPEC for who can sort of supply into this market where demand is pretty stagnant, and as a result, prices were tanking. We've had very low oil prices of the past few years, and this meant that actually the profitability for a lot of these companies was
looking worse and worse. They were putting borrowing a lot of money to invest in new production, and yet they were receiving low prices for that production, and therefore they were hiteing negative cash flow, not good returns for shareholders.
So all of this was kind of happening in the background of the U S shale industry, and this was all going on, this discussion of do they need to be profitable, do you grow production, how do you balance those two, and then COVID hit, which completely destroyed all demand.
Oh man, what a roller coaster. I mean kind of halfway through what we're saying there is thinking like when I started in the energy industry, I guess, like in renewables, really we kept hearing, you know, we have to do all this for energy security, you know, US energy security and all that. But with shale it kind of seemed to kind of end. I didn't I don't heard much about that in years, but I guess then it became a different problem, right of profitability and keeping the flow
going or keeping the oil coming. Yeah, so shill was great for security in the sense of the US became sort of a goal an exporter of oil where the we were the largest producer. But you know, the quite was what's the cost of all of that and is it sustainable? Right? So, ty, can you tell us about
what did happen during COVID. I think the first thing was that it's interesting that right before COVID, Russia and OPEC was actually having a price war the head for about a week or two, and then COVID hit, So it was like a double ramby for the for the all markets. You know, first you have the price war right with Russia and OPAC, and they drove prices down, and then like two weeks after one or two weeks after that, COVID hit and prices just crumbled. I mean
right after COVID struck world. I guess OPAC and Russia went into a truce immediately. But the mass took a big hit, and so did all crisis. I think all prices that w t I at one point, at some point it was like straaighting at negative prices, but that was because they were running our storage. They have basically no nowhere to put the oil in Oklahoma, so the
demands took a huge hit. And all these producers because it's kind of like for surprised to catch up demand, there's usually a lag on the way up or on the way down, and you really need like all parsons to go down to web to wally low level before these producers are willing to start shutting off the weals.
But that was what we saw, you know, and and producers had to like we're forced shooting out after production during the trap, during the bottom of the pandemic, when when the when demand failed out the bottom, and now they're starting to turn it back on. Well, I should say about the third quarter a fourth quarter of last year, they started turning on the worst down to all worlds back on when demand slowly recovered. And so that was
what happened in the physical markets. On the financial side, for like on the police companies from the westing side, what really changed in the past years that the industry has really changed from like a growth industry as and I just mentioned, so really are for industry that's focused on returns and cash bro physically meant I know w T I is West Texas Intermediate and an oil price bantomork Okay, so tie. So it's changed for the financial markets. So what do you mean by well, I guess I'm
end set. Before the US shell production was growing at a very fast group in the past, but that's a pretty much funded by that our companies to going out off that to fund this production growth. Nowadays, a lot of investors um they want these companies to de leverage because that's seen too much financial risk and they want these companies to start paying back the show that's fastest other in the ways of like higher dividend payout or
insuring purchases. So the industry has really transformed in the past year. So it sounds like they went from kind of a bonanza of production, you know, where everything was just going great too a much much tighter market with much more scrutiny over returns. And how has this change in the all US oil industry, I guess the shale industry at large, but also the recent changes, how has that impacted the global oil market? Yes, so on the US, the first thing is such the U S laws about
two mullion bills the day of production. During the pandemic, we were producing about thoting million barrels per day of oil. Now we're only doing eleven million barrels. So that's the first thing. The second thing is the world all demand growth was you pretty much met by us all surprised or production growth. Now we a, we pretty much lost that engine. And so when and when all demand returns US,
our production is not going to be there to meet demand. Wow. Okay, so demand tanked during COVID, right, and that's what caused all that that those challenges last year with over supply, they turned off the wells. But now demand is starting to pick back up. Is that right? And then you're saying that the supply won't be there when the demand comes back, There's going to be some difficulties of securing supprise.
If we assume the growth rate that we had before, I think it's still we still have like speckup spac capacity from OPAC to meet demand growth. But when we turn demand we covers. But when it starts growing again, we're gonna have to figure out where those are. How how are you going to and mark? Maybe One interesting thing to note about shale is that, as I mentioned, shale wells are different than most other conventional wells in that the production because it's you're pulling it out of
this tight rock. You get a lot of production in the first few months, but then it actually declines quite significantly over the next year or two. So you lose about sev your well's output in the first few years. So that's why in the US shale patch, producers need to constantly be injecting capital into their operations in order to do drill new wells to offset the declines of old wells. So in order to keep production flat, you
need to constantly be drilling new wells. Anyway, in order to grow production, you need to drill even more wells, So you just got to keep going. Yeah, exactly. So that's where because there was so little investment in new production during COVID, a lot of those wells saw massive declines. That's why a lot of the output from the region has fallen off. And now as time ENTI and US producers are just very reluctant to invest significant amounts of capital such that that output will grow and sort of
replace the lost barrels. On the U S side, do you think they'll come back? Do you think they will meet the demand in time? And do you think that
oil will have to come from somewhere else? I mean, you say the i A is already expecting oil demand will return to levels but sometimes in two right, so next year, yeah, I think it's going to have to come from like several places, not just from U S. Show who probably actually draw down their spank capacity compared to what they did for some of the national oil companies were probably have to pick up the slack um some of those private companies which are not so much
under the financial microscope, they're not so much under the scrutiny of the investing community, they probably have a lot more leeway to grow production compared to properity companies, and we might even need some of those Urani umbrelros mak wow. Okay, so they might turn coming back from from everywhere. Will be the impact of this possible demand on price, so the price definitely go up. There is this there a
scenario where we might see a price tip. I think chances are we will probably see like the market continue to tighten, especially if you continue to draw down OPEC spec capacity. Historically there's some correlation between christ and opex aspect capacity, well negative correlation, and so I think there's definitely more upside risk to prices than dan Cy risk.
In terms of dancy risk. I mean, you really have to have the vaccine proout programs to hit a big bump and and you know, maybe some of these countries starts going back in terms of infection rates and then you have to shut down passes the economy again. I think that's probably the biggest risk as far as I can see. Okay, so if vaccine progress kind of stalls and then demand goes back down, then you'll see the
price follow right. Yeah. The only other one would probably be if OPEC just didn't time their production correctly, right, like as time mentioned, they have a lot of spirit capacity that they're slowly bringing online as they see demand ramping up. But if they missed time that they could end up over supplying the market when demand is still instilled flux. Is there a history of that is that does that happen? I'm as an outsider, I have just
no idea. Yeah for sure. I mean I think before this pandemic, OPAC member has like a history of like cheating their quotas um so they always had produced like a little bit more than what they said they would. But this time around, surprisingly that Pakistano has been surprisingly disciplined about the production. And I think special Saudi Arabia, I mean they you know that really took like bills of their own production offline. Who did this year just
to keep the marketing balance. So this time around they are where we disciplined. But as we as surprises guests higher and higher, you know, the temptations to cheat higher. So yeah, cheeze okay, so needs to stay. We're in for for an exciting year in oil global oil regardless. One more question about about price, So I want to quote you, so in your report you say the following You say, although this price range is well above what the vast majority of US oil players need to achieve
for profitability. We're doubtful US oil companies will turn on the production spigits yet. So my question is, even if the well has become profitable at a certain price, you're saying that oil companies will not yet turn on production. So why is that? I don't quite get it. So I think, Um, if you look at bricky even point of you, the vast majority of US show praise in the money at these while prices, but they are really resisting putting more capital into the ground to put more
surprise onlines because that will be busipin done debt. All these uh mentioned they are are. They took on a lot of that during the news to feel the growth. So now, um, like all bubbles, when it bursts, you know that you just have to work off the excess on leverage. That's the first thing. The second thing is a lot of investing community, allow of investors are demanding faster payback for the investments in our companies. So even after these companies woke of the dead, there would be
under pressure to increase like different and share buybacks. Okay, So effectively they're kind of on a diet in a way. So broadly speaking, what can we expect from the industry going forward for the rest of the year and actually
poste anything different than we already mentioned already. So I think going forward, because the US is no longer a big growth engine of production, all prices realities will be a lot more sustainable going forward because if you look in the past, in the past like ten years or so, there were more than several occasions when the growth of US our production has like derailed price raieties and the end up that OPEC had to like cut back the
production to make room for for US oil growth. But without that, all prices are probably all price rarities are probably much more sustainable than in the past. Yeah, and the other thing on the US supply side, just as time mentioned, producers really are even with the prices where they are at the moment, producers are sticking to the story of capital discipline, maintaining flat production, putting any increased
revenue towards debt reduction and shareholder payout. When they think past into two, some of them are starting to talk about slow production growth, so growth of maybe three percent or five percent nowhere near the double digit growth rates that we saw before. At the moment, it seems like the investor community seems okay with that. We didn't see any major stock price movements when they made those announcements
on their earnings calls. So it looks like if demand does recover and things are going well into next year, we might see a bit of growth out of the U S. Shail patch, but nothing like it was before. And they do seem to be watching what the opex doing and sort of deferring to being more reactive to OPEC rather than as time mentioned before, when they were
sort of ready to compete for a market share. Okay, okay, so a little bit less ambition, more what do you call it, fiscal discipline, much better term than I used a diet. Yeah, but moderate growth coming yeah. Okay. So we're gonna take a quick break and when we come back, we're going to talk a bit more about what the players are doing, who they are, and the next areas of research for the U. S. Oil team. Stay with us.
So in the report, I noticed something that that we were talking about before we hit record, was that a lot of the players that you mentioned in this report, I've never heard of so shale production comes mostly from a handful of areas in the US are basins, and the players are mostly independents, is that right? Or they listed or they just you know, companies we were just not familiar with. Can you describe it a bit in
the U S all page. A lot of these show players on what we called US independent companies, So they're not like the examble or show VP majors, the all majors that most people are familiar with. They have like one names like yog Resources, Devon Energy, Diamondback Energy, just companies that people will only be familiar with. Your few in the industry. I think it's like some history to that because shore He's okay, that's not been big enough
of an impact for the all majors. So a lot of these all majors dident invest in show until like the later years. So that's why we have a lot of like the smaller independent companies took over in the early days, and some of them actually produce sizeable quantities of oil. Actually at these points in times like EO G and Occidental, they're they're pretty big, publicly traded companies
for what they produce. But yeah, there's a ton of those medium sized guys and a ton of consolidation in the industry actually, so you'll constantly hear of mergers and acquisitions in this space. Are they particularly active like I think they're in your report? You mentioned their five main shale basins. Do they like have home home turf for you? Know that this is that they are more active in one versus another. How does that work? There's like two models.
One is that's definitely more focused in one region so they can larage all the expertise and know how and supply change in the one basin. And then they're like a couple of companies that spread out so they can diversify the risks, or they're spread out in the various regions. Can we talk about the basins for a second. Is there a basin that really stands out as being a
top performer? Definitely the Permian if you're talking about size and performance, the Permans probably is producing about four point
six million bells with it right now. And the significance if you consider the US is only its producing about eleven million belts today, so almost half of the US output it's coming from a one basin in the Permian and for those of you who aren't familiar with oil basins in the US geography sector, it's sort of in western Texas and the sort of southeast corner of New Mexico. That's where the Permian sits. And how are these plays different from each other? They're all shale that are they
different geologically or anything like that. I think, on a very hard level, shell geologically are pretty much the same. They have the same characteristics, but the quality of the rock definitely could be very different from not only from basin to basin, but even from county to Candy. And the other questions the maturity of these play Some of these played, um, like the Legal Food which is in
South Texas, They've been very drewed out. They've been around for a long time, and the productivity for these worlds are just not as good as they were before. So that's definitely like an age and quality aspect, as well as other characteristics to like infrastructure of variability and so on and so forth. Is there anything that you want readers or listeners to know about any of the you know, the outlook for any of these basins besides you know,
Eagle Ford is is drawing down. Is there anything else that stands out, you know, we put you know research, We think that US a production show production will pretty much be fratished for the next eighteen months, will probably grow by only a hundred sixty tho pars per day wh should now and in December, and all of the growth will be coming from the premier. The other basins will probably be like out of threat or slightly over. Yeah.
So if the perman ever stops growing for whatever reason, the growth trajectory is, it's not going to be exist in existence. So, either from the report or not. What are some of the major takeaways from your recent research, so, like, what are you seeing in the market and what are US oil producers saying. I think on that definitely a couple of big takeaways. The first one is that hire all prices, unlike in the past, it's not going to translate into a more oil production, at least in the
US companies. The producers are really busy putting down to debt and returning capital to shareholders, and they are where we reluctant to invest capital more capital into the ground to increase production. So even if higher commodities prices states run for a while, production is not going to concrease. That's the first one. I think the second one would be, like that's colder of that is that all Pakis back
in control of all surprise. Historically, like and I mentioned that all Pakis made adomy macroom for US production growth. Now there's no longer the case. All Pakistani back in control, but definitely all prices ready is going to be more much more sustainable than in the past without the undergrowth engine in the US and taking it to our clients, your listeners might know or not know that. One of the things that we do is we talk to two clients quite a bit, people that are reading the research,
using the tools, using the data. Are they asking anything particularly lately, any common themes of what you're hearing from them, or what are some of the debates out in the market right now? I think that like two big questions from from our clients. The first one is that you are um at these high all price levels, US producers
gonna increase the production or not? And I think at least one they will not increase production in any meaningful way now beyond um and I mentioned that your producers probably comfortable increasing the production, but like where we slow
single digit through to five. So if you're looking at like US all production at eleven million bills they right now through five percent is probably about three hundred five fifty bellars per day of increase on an annual basis, so very far away from what we've seen before about one mon and a half million bellars per day of increase every year right before the pandemic hit. UM. The
second question is, Marcus, it is more philosophical. UM is that will will these us all producers changed the tune and you know, are they're gonna ever going to increase production? And I think the answer to that is, and this is, um, it does not lies with producers. It probably lies more
with the investors. So if investors added to change and they're like, hey, you know what if you guys, I think it's okay if our companies start producing the production a bit faster than five percent, if they allow that without you know, setting off the stock. Whenever these new these ARE producers said they're going to increase production, I think you know, we could see more product, faster production
growth from us ARE producers. Further down the line. The two things that come to mind on my side, I mean, it's time mentioned One of the big ones is what would it take for US production to come up back online? And that would really just be a change in strategy amongst the producers themselves and the investors who back them. H If there is appetite for shale growth, it's there if you come back fairly quickly, but it would require
the capital to shift towards that end. The other question I think that is hounding the industry at the moment is what should the focus be? Right we talked about this trade off between focusing on production growth and focusing on capital returns, But then there's this other question of like where does sustainability fit into this puzzle too. You have some of the majors, especially across Europe, looking to transition towards zero carbon diversify away from oil and gas.
At the moment, most of the US producers, especially these smaller independent ones, are really focused on production. And then the question is do you produce a lot and put all your capital into increasing supply or do you keep
production flats and just generate returns. You know, the third option would be do you take that capital and transition it to some other energy source or some other type of growth for the company, and I think that's a question that especially some of the bigger, you know, more financially sound of these companies are starting to think a bit about or starting to see pressure on And you can see this obviously at the highest levels with Excell
and having the activist investor pressure now to change up their board and change up how they're thinking about things. But some of the bigger independence like Occidental Pioneer, are also starting to talk a lot about what their emissions are, what their plans are for sort of the longer term lower carbon future, and they've made investment in a yeah exactly that they've made investments and things like carbon capture.
They're doing things like emissions tracking, which makes sense. You have Biden newly elected and a new focused on emissions um and then you have sort of the demand picture you can't escape to. Right. We just published our the electric Vehicle Outlook for be Enough and it's showing an even faster adoption of electric vehicles globally than we'd anticipated before.
So it looks like sort of peak peak oil demand is going to start edging even closer, and so especially when the outlook for oil is looking more and more tenuous, the question comes if you are doing this long term strategy of financial returns, do you just ride out the oil wave is it declined slowly, or do you try and actually actively pursue other industries. Okay, these aren't just little debates, these are existential questions. Is pretty heavy stuff.
And I think in the electric vehicle outlook that just came out, they said they can pretty confidently call peak new automobile or new internal combustion engine vehicle sales what four years ago, I believe. So if that's a you know, indicator of what's to come for oil, I mean yeah, wow, Okay, existential indeed, yeah, there are some demand sector is certainly still growing. I mean aviation. We anticipate aviation demand will grow.
We anticipate petrochemical demand will grow. But it does point to the fact that you know, you have to pick and choose your battles at this point too. So what's next in your line of research? So what are you looking at? Are you trying to answer these debates or go somewhere else in new direction? What are you looking at?
One of our next research on operature right now is I'm looking at gas production in the US UM since we brew out like most of the models for for use all production already, and gas production is pretty much follows like a similar track in terms of like a mothering and forecasting. So we're working on that right now. Yeah, and then on the bigger picture discussions. The note that I think is going to be really interesting is some of our colleagues covering oil demand out of Asia are
looking into divestment. So sort of on that same note of oil companies deciding how much exposure to have to the upstream oil and gas space, a lot of the majors, especially the international oil companies, are starting to diversify away and divest out of maybe their most heavily polluting assets
or their most expensive assets. So if they sell off major assets via acreage in Alaska or offshore or whatever, that can not only reduce their exposure to oil and gas, but also take a huge chunk of emissions off their
books and put it on someone else's, right. Yeah. So that's the question though, is who's buying it um A lot of these seem to be private producers purchasing them, or some national oil companies purchasing them, where the transparency around emissions is a lot murkier and so that's something I think we'll be diving into it in a bit more depth. Is what's happening around this divestment, what assets
are being divested, who's divesting them, and who's buying them? Well, these all sound like upcoming shows for they will have to have you back for ti Anna, Thanks for joining, Thank you for having us. Thank you so much. Mark. Today's episode of Switched On was edited by Rex Warner of gray Stoke Media. Bloomberg any App is a service
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