Three or four years from now. Fracking peak oil could be just around the corner. The industry that revolutionized oil is shutting down due to business and investment decisions and the insecurity of the future regulatory framework, according to Bank of America Merril Lynch (BofA) analysts, reported by El Economista in a recent study. Said analysts believe that shale oil production will stabilize and begin to decline little by little in the coming years.

The theory of peak oil tried to predict when world oil production would peak and begin to decline. The theory was that there would come a time when drilling for oil would start to become more expensive, as profitable crude found closer to the surface became scarcer, and oil deeper lodged became difficult and expensive to pump. However, the appearance of peak oil could occur for other reasons, even before the end of this decade, because other technologies appear to replace crude oil as an energy source, or because these new technologies are cleaner or cheaper and more profitable.

Fracking peak oil

In this framework, the fracking and shale oil industry in the United States could be about to face the beginning of its own peak oil due to business and investment decisions. Shale oil took off with great strength a few years ago, which allowed for greater geographical diversification of oil extraction. It benefited the global economy, generating a counterweight against the OPEC oligopoly. However, analysts at Bank of America (formerly Bank of America Merrill Lynch), which provides global perspective reports, are now talking about a series of factors that have led this industry to mature early in a way that, in their opinion, shale oil production will stabilize before starting to decline in the next few years.

The extraction of shale oil through the fracking technique transformed oil production. From 2016 to 2020 it went from producing five million barrels of crude oil per day in the United States to close to 10 million barrels. Its profitability has always been in question, as there have always been doubts about its profitability, because the break-even point has always been higher than that of the Middle Eastern producers. Thus, with the fall in the price of crude oil in 2020 due to the covid pandemic, shale oil production also fell, although it has now risen thanks to the spectacular rise in oil prices, motivated by the war in Ukraine.

Shale oil production in the US

BofA analysts believe that this industry has peaked. “We don’t expect a big change in the US shale oil supply as happened since the 2010s. In the last three years, US exploration and production companies have stopped chasing growth, prioritizing the discipline of capital, deleveraging and profitability for shareholders”, say the analysts. This trend adds to the strong volatility of oil in recent years.

On the other hand, they state: “the industry faces challenges in the medium term. As an example, productivity and efficiency gains appear to have peaked.

In addition, the oil services sector (fracking) has also increased its discipline, which gives them pricing power while driving inflation, which will discourage any plan to accelerate activity.” They clarify that the increase in prices of materials used in the exploration and drilling of wells, together with the sharp increase in labor costs, would be preventing the industry as a whole from growing and they believe that it is easier and cheaper to take advantage of operational wells and oil fields, with lower production costs.

So the companies in the sector are not willing to drill more or invest in the exploration of new oil wells, both because of these factors mentioned and because of the insecurity generated by possible changes in the regulatory framework that seems inclined to favor renewable energies. “These factors lead us to conclude that fracking peak oil could reach its peak or maximum production in the next three to four years,” the BofA experts conclude.

Fracking no longer wants to grow 

The point at which it becomes profitable to extract a barrel of crude from American shale oil has been greatly reduced since oil prices plunged in the mid-2010s, a date when many shale wells needed to log between $70-100 per barrel of oil to break even. Efficiency and productivity improvements and cost declines in the oilfield services sector have helped narrow this shale cost curve so that most shale assets now break even at $40.

However, times have changed and producers are more disciplined now, as evidenced by not many rigs being added in the last year, despite oil prices soaring above $100 a barrel.

In the last decade, the cash flow of a large part of the sector has been null or even negative. This development changed last year when oil prices soared, but producers remained cautious and disciplined and did not invest in new production. This shows that E&P companies have stopped looking for supply growth and have opted for manageable expenses that allow ample spaces for deleveraging, share buybacks, and dividends.

With this view, BofA economists note that the US shale oil industry has already gone through two cycles, recovering from each to generate significant production growth in subsequent years. Now everything seems to indicate that only the Permian Basin will maintain notable growth in the short term (before peak oil arrives), with much less progress in Eagle Ford, Niobrara and Bakken. “Over the medium term, we believe Permian Basin growth will slow and other basins will stagnate or even start to see reduced productipn”.

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