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US Shale Decline: Trump’s Goal of “Energy Independence” Could Well Be a Pipe Dream

Even when the Permian does peak, the U.S. will remain a major oil producer and a significant exporter

DESPARDES — OPEC oil ministers will breathe a sigh of relief that the US shale gale may be starting to blow itself out.

Very little of the crude produced in the Persian Gulf region now finds its way to refineries in the U.S. Less than 5% of the 16.5 million barrels a day of crude and condensate — a light form of oil pumped from gas fields — that flowed through Strait of Hormuz in 2019 went to American refineries, according to tanker tracking data compiled by Bloomberg.

BloombergOpinion’s latest analysis indicates the region – the heart of America’s oil renaissance is found in the Permian basin — that’s driving U.S. oil growth is already showing signs of peaking.

If things don’t improve, Permian production will peak in early 2021, then go into decline, the analysis shows.

And for shale basins, that’s not a good thing. If the rich petroleum region wanes, U.S. oil independence will remain elusive and the OPEC may finally see off its greatest threat.

It will also make President Trump’s goal of U.S. energy independence as elusive as ever. Trump made the assertion during an address from the White House after Iran launched a barrage of missiles at two airbases in Iraq, that the U.S. doesn’t need Middle East oil.

US imports from the region had tumbled as domestic oil production soared with the shale booms, as shown in the chart above.

The Permian, spread across west Texas and southeast New Mexico, has been yielding more than a third of all U.S. oil production and it has contributed about two-thirds of the past three years’ worth of growth. Its boom has allowed America to export more than 3 million barrels a day of crude on a regular basis since May — more than every OPEC country except Saudi Arabia and Iraq. But the U.S. still imports twice that volume. A slowdown in the Permian would see that gap widen again.

Combinations of three parameters generated production profiles (chart below) that make things look not so good: Legacy-well production decline; Rig count; New production.

The latest EIA data was used to generate production profiles under various assumptions about rig counts, new well production rates and legacy-well declines. The results are worrying for those depending on ever-growing Permian output.

With the rig count flat at 400 units and the average new output per rig at 810 barrels a day — where the US is now — Permian basin production will peak in just over a year’s time, in Feb. 2021. After that it will start to fall at an accelerating rate as the burden of legacy-well declines continues to grow. If the rig count falls by just 10 more units by this April, the peak will occur this year.

Even when the Permian does peak, the U.S. will remain a major oil producer and a significant exporter. But for OPEC oil ministers it could be a sigh of relied. Geopolitics notwithstanding, energy is expected to be influenced by market demand and supply.

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