Thread by @cm_energyintel

There is a lot of confusion out there about US oil supply and whether/how it could respond to the current crisis.

Let’s try to set the record straight 🧵

#OOTT

US shale is about the shortest cycle (I.e. fastest turnaround) new oil production out there. But it is NOT a switch that can be flipped. The industry is not sitting on tons of completed wells that can just be ‘turned on.’

Very few (Saudis, UAE) have this kind of spare capacity — and even then, the definition is output that takes <6 MONTHS to bring online. Also, the US ran through much of its inventory of drilled but uncompleted wells to survive and recover from 2020, extending the turnaround time.

What does this mean? A true shift toward strategic growth in the US would show itself mostly in its ability to ramp next year. Mobilization of rigs, crews, sand, pipe, etc at wider scale will take months.

This mobilization will likely take longer than you think — and that the industry has delivered in the past. Supply chain bottlenecks and labor constraints are very real. If McD is struggling hiring/keeping workers, try finding, training and keeping oilfield crews.

What does this mean? Shifting to strategic growth involves a longer-term commitment. Starting that process can be significantly expedited with shifts in the political and investor narrative.

First, investors. Let’s be real — this ramp up will introduce inefficiencies due to the labor/supply chain constraints mentioned above. It will involve stepping out development. It will involve a lot more capex per boe because of the need to drill, not just complete wells.

Producers can still offer robust shareholder returns and growth at these prices but capex efficiency will fall. Companies need to clearly guide these constraints and stop suggesting cost inflation isn’t a thing. Better to be honest and transparent than underdeliver.

Now, politicians. The Biden admin is doing next to nothing to practically inhibit near-term oil production. But false price gouging narratives etc are a huge disservice and raise perceived political risk for the industry.

Shifting to an ‘and’ energy strategy that supports oil/gas medium term even if renewables investment is accelerated would clear uncertainty and help producers and investors buy in.

This is what we’re starting to see in Europe, although it’s largely about import diversification given mature, declining regional supplies. The US has a different opportunity as a major oil and gas producer — and growing exports would support Europe’s diversification aims.

Remember: the world consumes 100 million b/d of oil (~42mm gallons if that’s easier to picture). Replacing that will be an unprecedented feat. Covid didn’t usher in peak demand — and even if it had, the industry still has to invest billions to meet declining output.

(As an aside, the US does genuinely produce lower-carbon oil, esp from the Gulf of Mexico, so something to consider…)

So, all this is to say that US production will move higher than it was going to at $70, $80 oil. It will move on the margins. But strategic growth will require a step-change … and time. (End).

Important correction to this: should read 4.2 billion gallons per day.