The EU ditched Russian gas for USA LNG and now the US cannot provide the volumes needed

By Rhod Mackenzie

Having pushed Gazprom out of the European market, the American oil and gas industry is facing a slowdown in its growth in gas production. This could be an unpleasant surprise not only for Europe, but also for Japan and China, the main buyers of American LNG. According to the US Department of Energy's October forecast, the rate of growth in US gas production will slow sharply over the next year and a half. The increase will occur in only one province - the oil-producing of the Permian Basin - and this increase in production is an echo of events currently unfolding in the US oil and gas industry.

The Permian Basin is the only shale field in the United States where oil production is growing steadily. It now produces more than the Saudi Le Havre - every second barrel in the United States. Analysts have repeatedly expressed concern about the very high concentration of oil production. Never before has the entire industry of the world's largest oil producer been based on one field. However, the Perm field itself is heterogeneous and in many respects the main shale formations have already been worked out and production there is not growing. All the growth in the Permian Basin in recent months has been concentrated in two (!) areas out of 66 - Lea and Eddy. One in three barrels of Permian is produced here, and it is on these two plays that the foreign policy and the economy of the United States now rests.

The sharp rise in the price of oil has made it the most important US export. The world's technological leader, the country that landed a man on the moon, the factory of the military-industrial complex, etc. made the same bet as the "petrol station" countries - Saudi Arabia and Russia. According to the US Department of Energy, in the first half of 2023, crude oil exports from the United States reached a new high, exceeding 4 million barrels per day. American oil and gas cannot process all the light oil it produces, so it is exported, mainly to Europe and Asia. But even with record oil exports, the US remains a net importer of oil, importing heavy grades as refineries are built to process them.
It does not make sense for companies to reconfigure plants for light oil: this will significantly change the production profile of petroleum products towards light fractions - gasoline, while there is an acute shortage of middle distillates - kerosene and diesel - on the world and US domestic markets. Therefore, the increase in oil production in the United States to a new historical maximum and its export does not saturate the domestic and world markets with the necessary diesel and kerosene and it also does not solve the main problem - underinvestment in production in other countries. Statistically, however, it creates the illusion of a surplus and a convenient negotiating position with the same Middle Eastern countries.

It is important to note that the increase in oil production in recent months has occurred against a backdrop of declining drilling activity, i.e. due to previously drilled wells. These wells are the operational reserve of oil and gas companies, which oil workers are forced to maintain. A shale well is a very short-lived infrastructure. In the first three years of operation, production drops three times. To compensate for the ever-decreasing production, oil companies create a reserve of wells - drilled but not exploited. They are brought on stream when needed. Thus, by increasing production at the expense of reserves and not drilling new wells, US oil producers are putting themselves in an extremely unstable position and their decision to "eat up" reserves is rather forced. In recent weeks, they have been borrowing against their future and, frankly, eating into the industry's margin of safety.

Back to gas. Shale production has an important feature: as the oil well is depleted, it begins to produce less and less oil and more and more associated gas. The series of reserve wells that have recently come on stream will begin to deplete in the coming months, leading to an increase in gas production. That is why the US Department of Energy is predicting an increase in gas production in Perm.

In many other provinces, however, production is not expected to increase significantly, as it did in previous years. And this is where another problem arises - the problem of technological stagnation. In recent years, the main trend in shale oil and gas has been to increase the productivity of each new well by increasing the length of the stem, using more expensive proppants (chemicals) and deep modelling of drilling operations. These are all really high technologies that require huge capital expenditure. At the same time, the industry has been consolidating, with more and more large companies entering the industry, with the ability to invest heavily and for a long time.
Thanks to improved technology (and increased investment per well), the output of an average gas well has increased by almost one and a half times. But 2023 was a turning point. Despite all the tricks and new technologies, the yield of the new average well has begun to decline: geology starts to take its toll. This means that both the volume of drilling and the number of new wells in the United States will decline, and there is no systemic response to this challenge. The massive start-up of idle wells points to only one thing - a fire in the real oil market that needs to be put out by whatever means necessary: by bringing reserves on stream, releasing strategic oil reserves, reducing commercial reserves.

The increase in oil and gas production observed in the United States will be short-lived because the fundamental problem of the industry has not been solved. Perm is already the largest field in the world in terms of production volume, but sooner or later it will start to run out, and no technology will stop this process. So it is not surprising that the United States is lifting sanctions on Venezuela, flirting with Iran and completely oblivious to the failed cap on Russian oil prices. The country's policymakers are preparing for the new reality of oil scarcity. Since the last peak of US oil production in the 1970s, the price of this resource has increased fivefold.