Oil prices have surged more than 75% in the U.S. this month. But don’t expect a quick rebound in supply from shale explorers. The quick turnaround in oil markets is exposing the shale industry’s big weak spot: Lightning-fast production declines. Shale gushers turn to trickles so quickly that explorers must constantly drill new locations to sustain output. And they haven’t been doing that. Drilling activity touched an all-time U.S. low after Covid-19 lockdowns crushed global energy demand and explorers slashed spending to survive a crash that has erased tens of thousands of jobs and pushed some companies into bankruptcy.
It’s a phenomenon that’s ultimately attributable to the very geology of shale. Just like a shaken bottle of champagne explodes when its cork is popped, a fracked shale-oil well erupts with an initial burst of supply. The froth is short-lived, however, unlike old-fashioned wells in conventional rocks that are characterized by steadier long-term production rates. To offset the decline curve, shale explorers used to keep drilling. And drilling. And drilling.
“We just have no new drilling and these decline curves are going to catch up,” said Mark Rossano, founder and chief executive officer of private-equity firm C6 Capital Holdings LLC. “That hits really fast when you’re not looking at new production.”
Shale explorers have been turning off rigs at a record pace because the oil rout has gutted cash flow needed to lease the machines and pay wages to crews. Going forward, management teams may be hesitant to rev the rigs back up again despite higher crude prices because of fears of flooding markets with oil once again and triggering yet another crash.
Left unchecked by new drilling, oil production from U.S. shale fields probably would plummet by more than one-third this year to less than 5 million barrels a day, according to data firm ShaleProfile Analytics. That would drastically undercut U.S. influence in world energy markets and deal a major blow to President Donald Trump’s ability to wield crude as a geopolitical weapon.
Such is America’s reliance on new drilling that 55% of the country’s shale production is from wells drilled in the past 14 months, according to ShaleProfile.