The public portion of the shale industry has long been marked by capital discipline and modest growth to ensure shareholder returns. However, recent developments suggest that this year has already seen a more notable shift in industry attitudes. With inventory becoming a top concern for both investors and operators, it has become evident that the sector is now operating as a mature business. While Rystad Energy still sees production growth in the near term, a more disciplined approach to growth has been sought to help secure the stability of the business in the long run. As large public independents and majors keep reaping the rewards of low activity, elevated productivity, and favorable commodity prices in the second half of 2023, even increased dividends and buybacks are insufficient to exhaust the coffers of larger exploration and production companies (E&Ps). As a result, we expect ongoing consolidation in the form of mergers and acquisitions (M&A), fueled by the excess cash flow, as companies compete for the precious remaining acreage to cement their long-term inventories. 

Operationally, 2023 saw persistent weakness in both drilling and fracking activity. Yet production still grew, and the total US oil yearly average growth pace is on track to exceed 800,000 bpd in 2023, driven largely by private E&Ps. A closer look at the rig data indicates that it is mostly smaller private E&Ps that drove both the increase in rig counts in the second half of 2022 and the persistent decline this year. This also had the side effect of dragging basin-wide productivity lower, as the acreage positions are sub-par compared to larger peers. However, recent data suggests the drop in both drilling and completion is reversing trends, and the current rig count is sufficient to keep production from declining in the US. Our base case calls for an addition of about 70-80 rigs throughout 2024, implying a production growth of over 400,000 barrel per day (bpd) on a year-on-year basis. At the same time, fracking activity did decline during 2023, but not deep enough to prevent key shale basins from continuing on their growth path. Total US production likely exceeded 13.1 million bpd in September 2023, returning and possibly surpassing the historical peak achieved late in 2019. The trend of rising prices and well costs, which had severely impacted profitability in some basins and areas, is finally reversing. This is due to the lack of demand for services in recent months. We anticipate a decline in pricing and well costs in 2024, after two consecutive years of punishing cost escalation.

The shale industry is, therefore, still very much alive and kicking, albeit with less intensity than in previous upcycles. Yet the persistent capital discipline is generating consistently attractive returns for shareholders. Even as political instability in the Middle East reaches alarming proportions, fueling a surge in commodity prices, we see little appetite across the shale patch for increased capital expenditures. In other words, the elasticity of supply in the United States is far lower than it used to be. The main factor that limits output growth is this doubling down on capital austerity, as opposed to inventory or productivity degradation. A side-effect as the industry slowly abandons the high-paced, double-digit growth rates is that it must address the questions of the longevity of the current business model.

These concerns are embodied in the current obsession with inventory; no topic has dominated shale industry talk in 2023 more than the question of remaining drillable locations. These uncertainties have triggered a new consolidation wave. Rystad Energy reiterates its view from December 2022 that current inventory levels do not suggest an imminent decline in tight oil output. That said, the division of the inventory pie between basins and operators is far from equal, and there should be no doubt that current inventory levels support a more mature business model moving forward for public and private E&Ps alike. The Pioneer-Exxon deal, which will reshape the landscape of the onshore Permian Basin, is a prime example of what such mature business models might look like, and we expect further consolidation of this nature well into 2024.