America is now the world’s top oil producer, but too much production comes at a cost

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MIDLAND, Texas — By any measure, America’s rapid expansion to a record 12 million barrels of oil output a day has been a global game-changer.

In less than a decade, a boom in the country’s shale patch added a record 8 million barrels day and made the United States the No. 1 oil producer in the world.

A large chunk of credit must go to the producers in the Permian Basin, a vast expanse of 86,000 square miles that borders west Texas and southeastern New Mexico. That region is responsible for about a third of America’s crude output.

At a recent visit to downtown Midland, Texas, often referred to as the capital of shale country, an electronic sign updated the active drilling count to 864, with nearly half of the at work in the Permian.

Scott Sheffield, CEO of Pioneer Natural Resources, embraced the shale revolution early on. After nearly two decades of running, the company has accumulated 680,000 acres of oil and gas territory.

“We’re at 80 billion barrels recoverable in the Midland basin, and probably the same in the Delaware basin, which is pretty close to what the numbers are in some Middle Eastern countries,” said Sheffield, referring to the two biggest fields in the Permian.

According to OPEC’s World Oil Outlook, released this week, the shale boom will continue, taking US daily production to a whopping 20 million barrels per day in five years.

The US still imports about nine million barrels a day of oil, but it is far less dependent on foreign supplies.

Not only has the shale expansion allowed for growing US energy independence. It’s created jobs in America’s oil and gas belt and allowed Trump to tout how lower prices at the gas pump have helped extend the country’s economic expansion.

While many have focused their attention on America’s rise to the world’s number one oil producer, unseating traditional heavyweights like Saudi Arabia, the prolific expansion of shale gas has also allowed the US to stand toe-to-toe with energy giants such as Qatar and Russia.

Cheniere Energy’s shiny new liquid natural gas terminal sits at the Sabine Pass on the border of Texas and Louisiana. The group spent $12 billion to build the facility after legislation signed into law by President Barack Obama lifted a ban on energy exports in 2015.

“If you’ll recall, not long ago people were talking about peak oil and gas and the U S was going to become a major importer of natural gas,” said Robert Fee, vice president of international affairs at Cheniere. “You’ve heard estimates of a hundred years of natural gas…that number keeps getting higher and higher” because of technological innovation.

Cheniere now exports liquid natural gas to more than 30 countries in Asia, Europe and South America.

Too much production comes at a cost

Cracks are beginning to emerge in America’s fracking model, as Wall Street enforces financial discipline on the shale patch.

There have been nearly 200 bankruptcies of shale producers in the last four years, with small- and medium-sized producers collapsing under more than $100 billion in debt.

Pioneer’s Sheffield, for example, postponed his retirement plans to return as CEO in order to cut $100 million in overhead and lay off 530 workers, or a quarter of his workforce. And he is pushing an internal target of a 15% return on capital deployed after receiving feedback from Wall Street.

“Now they are saying ‘slow down, you’re producing way too much. You’ve got too much supply in the US. It’s affecting world oil prices and start returning capital back to us,'” said Sheffield.

The market capitalization of energy companies in the S&P 500 has been cut in half over the last four years, as institutional investors move out of the oil and gas sector due to squeezed margins and the threat to the industry posed by climate change.

Although some believe this is a healthy shakeout to extend America’s oil and gas boom, three basic options have quickly emerged in shale country: to remain independent by slashing costs and enforcing production discipline, put up the “for sale” sign, or go bankrupt.

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