US Shale Oil Can’t Replace Russian Oil In The Short Term

As Russian crude oil exports could decrease by 1.5 mbd from next month onwards according to our estimates, we look to what extent US shale production could offset the impact thanks to its business model with high flexibility and reactivity.

First, despite its capacity to bring oil back to the market rapidly, the process of adding new barrels to the market can take up to three months for uncompleted wells (meaning they have already been drilled, known as “ready to produce”). The number of uncompleted wells is currently around 4,400 - that’s nearly half compared to the high of summer 2020 according to EIA, but still enough to start new production.

However, during the Q4-21 earnings releases, Halliburton, the largest US shale oil services company, warned that well completion services in North America are now approaching 90% utilisation, and that the company’s services are sold out as a result.

So, despite some remaining uncompleted wells, it is more a lack of equipment that makes a sharp production ramp up impossible. If there had been no shortage in workers, trucks, sand and completions equipment, the upside for June (three months process) would have been small anyway, at around +130 kbd, or less than 10% of what we expect Russian crude exports could lose next month.

However, based on the latest management updates and the recent oil price increase, we believe US oil production could be higher than we had expected, by +0.25mbd, which is still far from what Russia may lose.

The move would be driven by small players, which have been the most aggressive with more capital allocation toward investment than shareholder returns. In our view, there is no reason for further capital discipline for public companies as any barrels produced above 100$/bbl should deliver strong cash flow. This raises the question of whether players actually have further potential in the medium/long term.

Production in the next 3 years will be linked to current shale oil reserves, oil prices and efficiencies. So far, no estimates indicate shale oil production could rise by more than 3 mbd in the coming three years which is still less than what could be lost from Russia should there be a full oil embargo. 

The only short-term solution (if there is one) could be additional releases from SPR (strategic petroleum reserves) even if we doubt the impact will be significant.