(3)The Shale Bubble: An Investment Opportunity of a Century

The big picture

It’s very amusing to see how fast the sentiment shifts for the general masses. Goldman Sachs oil price forecast has for instance gone from $200 to $20 in just a few years. Below is video highlighting how emotional the public becomes in a downturn. The video is produced by Bloomberg and was published right at the date when oil prices bottomed.

The general masses tend to forget that oil demand is not the problem, its excess supply that is depressing prices. What people fail to see is the larger picture. In essence the world is producing ~95 Mbbls/d. Each of these producing wells have an associated decline rate. If you add up the normal decline rates that wells have throughout the world you end up with  ~3 Mbbls/d of decline each year. Thus, over the next 5 years their going to be 15 Mbbls/d of decline from existing wells. On top of that we have roughly 1 Mbbls/d of incremental demand each year. This means that over the next five years we have to find and produce 20 Mbbls/d, which is equivalent of two Saudi Arabia. Both OPEC and Russia are roughly capped out, which leaves the U.S. as the main player to fill up this additional demand.

U.S. Shale is currently producing 5Mbbls/d in total and was at its peak growing with around 1Mbbls/d per year. Let’s give the U.S. the benefit of the doubt and say that they can ramp up production to a growth of 1.5Mbbls/d per year. This means that over the next 5 years U.S. can grow their production by roughly 7Mbbls/d. That still leaves around 13Mbbls/d of new oil that we have not found yet.

 

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