U.S. oil production will recover, IHS Markit analysts said in a July 7 webinar, but the post-COVID industry will be forced to abandon its perch as driver of the global market.

Expect a profound change in the business model, as well.

“Our view is that the particular characteristics as of the North American shale-dominated system make this a disaster for U.S. oil and gas production,” said Raoul LeBlanc, vice president for North American unconventional oil and gas. 

The nature of the shale revolution—lightning-fast growth—also leaves the industry vulnerable to an extremely high base decline rate of about 37%, LeBlanc said. That’s about four to five times the typical rate of other basins around the world.

“This is a beast that you can’t stop feeding or shouldn’t stop feeding or it falls away very, very quickly,” he said.

Not So Great Expectations

Compounding the challenges for companies in this environment are long-term production forecasts that arrive wrapped in “fragile” stickers. Global economic uncertainty generated by COVID-19 has completely rearranged projections in place at the start of the year, though analysts are confident of one aspect: a significant decline in U.S. output.

Forecasts beginning in 2010 tended to overstate the impact of downcycles, meaning that demand exceeded expectations, said Jim Burkhard, vice president over IHS Markit’s crude oil research, and energy and mobility research units. The exception was in 2005, when forecasts from both the International Energy Agency (IEA) and IHS projected demand to outpace what it turned out to be.

So, it’s possible that contemporary forecasts are similarly cautious and global thirst for crude oil will compel suppliers to boost production to meet 2019 expectations of just shy of 115 million barrels per day (MMbbl/d) by 2030. IHS analysts have their doubts. The degree of uncertainty prevalent today is far greater than in 2008-2009, Burkhard said.

IHS expects a return to the 2019 global demand level of 101 MMbbl/d by 2022 in its base case 2020 forecast. Growth will continue after that but, Burkhard warned, while the upward trajectory will return, the absolute level of oil demand will be lower by 3.5 MMbbl/d to 4 MMbbl/d in the late 2020s.

“That’s because we’ve had lost economic output,” he said. “That’s not going to come back. There’s not going to be more oil consumed in two years’ time to offset what was lost this year.” How much is lost? Burkhard equated the decline in global oil output to the total economic output of Germany, France and The Netherlands in 2019.

That is the base case, or what IHS terms the “rivalry” scenario case, however, which envisions evolutionary change and intense fuel competition. The “discord” scenario involves economic and political fragmentation and a slow energy transition. In that case, 2019 demand does not return until the mid-2020s. The “autonomy” scenario depicts accelerated change to a low-carbon world. In that case, demand rises to levels of the mid-2010s and then plateaus.

Slow Growth to Come

LeBlanc drew a sharp contrast between this downcycle and the one experienced by the industry in 2015-2016. Then, shale producers were able to use a variety of tactics that are not available to them now. 

“In 2015-2016, we were able to avoid a catastrophic fall in production because the industry was able to borrow, beg or steal or issue equity to the tune of $47 billion in 2015 and another $15 billion in 2016,” he said. “Productivity increased from about 17,000 bbl/d for every $1 billion spent to about 49,000 bbl/d for every $1 billion spent over 2015, 2016 and 2017.”

But with debt and equity markets for the most part closed, any substantial borrowing is tough to come by. Improvements in efficiencies have eased, too, and these changes mandate fundamental changes in the business model that were on their way before the crash.

“We think there is a reset here,” LeBlanc said. “Going forward, we believe that the change in business model will mean that the companies are taking free cash out of the system, spending less than they have in cash flow and giving some of that back to shareholders to please the equity holders and make some returns.”

That means that, even when shut-in wells are producing again, the underlying lack of investment due to low cash flows and low activity levels returns and the industry will find itself on a trajectory of slow growth through 2025 due to a harvesting of cash rather than reinvestment, he said.

“All this means, bottom line, that the U.S. as a force that has been constantly guiding the global market, may change,” LeBlanc said. “It may not be willing or able to provide those incremental barrels, and that changes the global pricing dynamic, we think, in the future.”