Shale Binge Has Spoiled US Reserves, Wil VanLoh Warns

A fracking binge in the American shale industry has permanently damaged the country’s oil and gas reserves, threatening hopes for a production recovery and U.S. energy independence, according to one of the sector’s top investors.

Wil VanLoh, CEO of Quantum Energy Partners, a private equity firm that through its portfolio companies is the biggest U.S. driller after Exxon Mobil Corp., said too much fracking had “sterilized a lot of the reservoir in North America.”

“That’s the dirty secret about shale,” VanLoh told the Financial Times, noting wells had often been drilled too closely to one another. “What we’ve done for the last five years is we’ve drilled the heart out of the watermelon.”

Soaring shale production in recent years took U.S. crude output to 13 million bbl/d this year and brought a rise in oil exports, allowing President Donald Trump to proclaim an era of “American energy dominance.”

Total U.S. oil reserves have more than doubled since the start of the century as hydraulic fracturing, or fracking, and horizontal drilling unleashed reserves previously considered out of reach.

But the pandemic-induced crash, which sent U.S. crude prices to less than zero in April, has devastated a shale patch that was already out of favour with Wall Street for its failure to generate profits, even while it made the country the world’s biggest oil and gas producer.

The number of operating rigs has collapsed by more than 60% since the start of the year. U.S. output is now about 11 million bbl/d, according to the U.S. Energy Information Administration, or 15% less than the peak.

“Even if we wanted to, I don’t think we could get much above 13 million” bbl/d, VanLoh said. “I don’t think it’s physically possible, because we’ve messed up so much reservoir. I would argue that what the U.S. was touting three or four years ago, in theoretical deliverability, is nowhere close to what we think it is now.”

He said operators had carried out “massive fracks” that created “artificial, permanent porosity”, inadvertently reducing the pressure in reservoirs and therefore the available oil.

The comments will cause alarm in the shale patch, given the crucial role of investors such as Quantum Energy Partners in financing the onshore American oil business.

The Houston-based investor has assets under management of about $11.2 billion, according to data provider PitchBook, and is one of the few private equity groups still focused on shale.

Private companies account for about 30% of U.S. oil production excluding Alaska and Hawaii, or about 2.7 million bbl/d, according to consultancy Rystad Energy.

Other private equity investors have warned that the shale growth story has ended, despite an oil-price recovery in recent months to about $40/bbl.

“They were making lousy returns at $65 a barrel,” said Adam Waterous, head of Waterous Energy Fund. “You need at least north of $70 before you start achieving a cost-of-capital return in the U.S oil business.”

Production from the Permian, the prolific shale field of West Texas and New Mexico, peaked even before the crash this year, Waterous said. At current prices, only 25% of U.S. shale was economical, he added.

Analysts also say U.S. oil output will struggle to recover its previous heights. Artem Abramov, head of shale research at Rystad, said production would remain between 11.5 million bbl/d and 12 million bbl/d at $40/bbl. S&P Global Platts forecasts a decline to 10 million bbl/d by mid-2021.

Check out our recent ESG roundtable featuring Wil VanLoh.

But the crash could create opportunities for Quantum Energy Partners in the short term, VanLoh said, especially if prices recovered.

While listed producers had mostly sworn off production growth, some Quantum Energy Partners-backed companies, such as DoublePoint Energy—which played host to Trump during the president’s July fundraising visit to Midland, Texas—were increasing drilling activity. It says its Permian acreage can still be profitable at current prices.

Quantum Energy Partners’ portfolio companies would increase output this year by about 25%, to 500,000 bbl/d of oil and gas, VanLoh said.

“The next five years may be the best five years we’ve ever had for hydrocarbon investing,” he said.

But he is also adjusting his company’s strategy to reflect investors’ growing disquiet with fossil fuels. Quantum Energy Partners’ new 10-year fund, VIII, would be launched in early November, he said, with $1 billion of about $5.6 billion of total capital commitment reserved for “energy transition” investments.

The company would soon appoint someone from outside the oil industry to enforce better environment, social and governance performance at Quantum Energy Partners’ companies, VanLoh added.

He said they would have to improve ESG “because ultimately you’re not going to get capital from us if you don’t…And we won’t be able to get capital from our limited partners if you don’t.”

A more efficient U.S. shale sector would re-emerge from the crash, VanLoh said, but it would be smaller and require a reduced workforce. He is now advising his friends’ children not to pursue a career in oil.

“I tell all of them—honestly, it’s a very risky bet and, if I were you, I would not go into it today,” he said.