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As Donald Trump prepares to become America’s 47th president on January 20, the potential resurgence of United States’ shale oil industry will reopen the 2014 scars for Nigeria and some of the biggest oil producers in the world as they seek to support prices and reduce oversupply.
The resurging shale oil production will be scary for Nigeria and most OPEC countries who went into recession after Shale caused a supply glut that sent oil prices crashing to a historic low in mid-2014, making the US the largest commodity producer.
Unlike in 2014, US shale is growing again. But the growth is not for the sake of production alone, it is also for consistent shareholder returns, positive free cash flow, and a smaller environmental footprint.
Global data surveyed by BusinessDay showed the US shale patch is drilling, but it is drilling because it wants to distribute more profits to shareholders.
“It has made huge progress in capital discipline and efficiency gains and is getting more bang for its buck. Priorities are now returns to investors and financial frames capable of withstanding oil price volatility,” said Sarah Sheffield, an International energy analyst familiar with the US market.
This relentless drilling for higher production has been the shale industry’s modus operandi for a decade before COVID and the demand and market crash.
Until 2020, many smaller producers sought to maximise output and price realisations whenever oil was heading higher.
But as the industry matured and balance sheets and market valuations strengthened after the record-high earnings of 2022, a wave of consolidation began in 2023. The big companies, which now control a much larger part of the US shale patch, are looking to become bigger by adding premier assets of the takeover targets to their portfolios.
“Shale has redrawn the map of world oil in a way most people don’t seem to understand,” said Daniel Yergin, vice-chair of S&P Global and a Pulitzer Prize-winning energy historian. “It has changed not only the supply-demand balance but it has changed the geopolitical balance and the psychological balance.”
Two decades ago, the US produced about 7 million barrels a day (bpd) of petroleum and consumed 21 million. Gulf countries like Saudi Arabia and Kuwait, which send oil through the Strait of Hormuz, were among the US’s most important foreign suppliers. Now the US produces almost 20 million bpd of petroleum, roughly on par with consumption.
Imports from the Gulf have plummeted, and the US became a net oil exporter for the first time in 2019. The prolific Permian Basin shale of Texas and New Mexico pump more oil than Kuwait, Iraq or the UAE, three of the Organisation of Petroleum Producing Countries (OPEC) powerhouses.
Rising shale supplies also helped keep the lights on in Europe following Moscow’s full-scale invasion of Ukraine in 2022, with shipments of US’s liquefied natural gas, previously labelled “molecules of US freedom” by the previous Trump administration helping to wean the continent off Russian piped supplies.
Trump has repeatedly vowed that he’ll push shale producers to ramp up output, even if it means operators “drill themselves out of business” in his new administration kicking off on January 20.
For most producers, “drill, baby, drill” will depend on the oil price signals, drilling economics, and market fundamentals of supply and demand.
Chevron expects its upstream spending next year to be about $13 billion, of which roughly two-thirds will go to develop its US portfolio.
“Permian Basin spend is lower than the 2024 budget and anticipated to be between $4.5 and $5.0 billion as production growth is reduced in favor of free cash flow,” Chevron said.
A global industry survey showed public companies operating in the Permian have boosted productivity and efficiency and are doing more with less after years of perfecting operations and expertise in drilling.
Despite a decline in active drilling rigs over the past two years, “increased rates of production from new completions are offsetting existing wells’ production declines and leading to higher crude oil and natural gas output,” the U.S. Energy Information Administration (EIA) said.
“These productivity increases indicate significant efficiency gains and technological advancements in the drilling and completion process.”
Bearish oil market expected
With more crude oil expected from shale, most analysts and investment banks say the oil market will see a surplus next year even if OPEC+ begins to unwind its production cuts in April 2025 as planned.
“For now, we expect the oil market to be in surplus next year – although much will depend on OPEC+ production policy,” ING commodities strategists, Warren Patterson and Ewa Manthey, wrote in a recent note.
Oil demand growth will stay “fairly modest” in 2025 due to both cyclical and structural factors, the strategists said.
The International Energy Agency (IEA) has long been predicting a large surplus in 2025.
Even if OPEC+ keeps its oil production as it is for the whole of 2025, there would still be a surplus in supply of 950,000 bpd next year, the IEA said in its monthly report last week.
If OPEC+ does begin unwinding the voluntary cuts from the end of March 2025, this glut will swell to 1.4 million bpd, according to the agency.
Global oil demand is set to rise by 1.1 million bpd next year, but it wouldn’t be able to absorb all the non-OPEC+ growth in supply coming mainly from the United States, Brazil, and Guyana, the IEA said.
“In addition, we see another year of strong non-OPEC supply growth while OPEC still sits on a significant amount of spare production capacity, which should continue to provide comfort to the market,” it added.
Implications for Nigeria
The shale boom has upended the global market, turning the United States from a keen buyer of Nigerian oil to an aggressive competitor.
If the shale boom or revolution grounds to a halt, it will increase supply in the global oil market, a development that will automatically lead to lower oil prices, which would hurt Nigeria’s economy.
Prolonged low oil prices could impact Nigeria’s budget stability and government spending, with knock-on effects on inflation and economic growth, as Nigeria heavily relies on oil exports for government revenue and foreign exchange.
President Bola Tinubu is proposing an N47.9 trillion 2025 budget with at least 60 percent going to recurrent expenditure (N14.2 trillion) and debt services (N15.3 trillion), even as government spending continues to outpace revenue.
The federal government dreams of raising N19.60 trillion or 56 percent of its revenues from the oil sector and N15.22 trillion or 43 percent of total revenues from non-oil sources.
This indicates that it has to earn more money. Oil is a major source of income for Nigeria. In the budget, the government has planned with the anticipation that oil will sell above $75 per barrel and Nigeria would produce at least 2.06 million barrels per day (bpd).
“Reduced oil revenue could lead to a chain reaction impacting not only the government’s budget but also other industries and households reliant on oil-sector jobs,” Aisha Mohammed, an energy analyst at the Lagos-based Centre for Development Studies, said.
