The US oil rig count continues to drop, falling by 3 to 710 for the week ending October 4, according to Baker Hughes data. It is now 18 percent down on the same week last year, a loss of 151 rigs, reflecting weaker oil prices, a steady deterioration in the global economic outlook and consequent downward revisions to forecast oil demand.

However, US shale will enter a period of dormancy rather than defeat. Shale oil’s most enduring legacy has been the introduction of a large element of price-responsive oil production. Shale producers retreat in the face of weaker market sentiment so that production responds to price changes, both up and down, over a period of about six to 12 months. Shale drillers also have a unique storage option in the form of drilled-but-uncompleted wells, which allows production capacity to remain in the wings ready to be brought on-stream if demand rises.

Automatic cost adjustment

Moreover, a pull-back in shale drilling has an immediate impact on the US oil services sector. Less drilling results in spare capacity pushing down the price of everything from fracking sand and chemicals to on-site power generation and drilling rig day rates. Inefficient rigs are laid up and less prolific shale plays are temporarily abandoned.

Just as production volumes react to lower oil prices, the cost of producing shale also falls. US shale goes into a period of dormancy from which it retains the capacity to emerge as strong as ever. The longer the period of dormancy the longer the recovery takes, but US shale is resilient even in retreat.

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This will be an enduring problem for OPEC, particularly if, gradually, shale oil production internationalizes, for example emerging at scale in Argentina, Canada and Russia post-2025.

Long-cycle oil investment costs

However, long-cycle oil production has by no means disappeared although it has taken longer to adjust to the crash in oil prices from mid-2015. The difference to US shale is that it does not respond to short-term movements in the oil price.

The first of the new breed is Norway’s giant 2.7 billion barrel Johan Sverdrup oil field, which came on-stream in early October. Production is expected to ramp up to 440,000 b/d by summer next year and eventually hit 660,000 b/d at the end of 2022 when the second phase of the project is completed.

What is remarkable about the development is not just its size, but the $2/b operating costs claimed by developer Norwegian state oil company Equinor. Some $4.4 billion of capital expenditure was wiped off the field’s initial development plan.

This reflected major oil companies pushing back hard on the offshore oil services sector, but also rethinking their field designs and incorporating digital technologies into almost every aspect of development to replicate the cost reductions and efficiency gains achieved on the US shale oil patch.

South America re-emerges

Next in line is Guyana, which will also reap the benefits of offshore project rationalization and emerge as a new source of oil supply in 2020. Again, like Johan Sverdrup, these fields will be long-life assets producing regardless of short-term pricing signals.

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ExxonMobil’s first Floating Production, Storage and Offloading vessel, the Liza Destiny, arrived off the coast of Guyana at the end of August. Liza Phase 1 is expected to start up in early 2020. The US company has gradually ramped up expectations for the oil basin based on further exploration success. The company now believes it will be producing 750,000 b/d of Guyanese oil by 2025.

With some larger caveats, given years of missed targets, Brazilian oil production also now appears to be on a steady upward trend finding ready markets in China and the US, where refiners remain short of heavier grades as a result of the collapse of Venezuelan oil production and sanctions.

With further auctions for new licenses scheduled for this year, interest is likely to be high. The ramp-up of existing FPSOs and new ones being deployed suggest Brazilian oil production could jump by almost a quarter to 3.2 million b/d by 2022. This is all being led by the country’s giant pre-salt fields, while output from other Brazilian production centers are expected to decline.

Maintaining a supportive and inviting investment environment remains critical to long-term progress, but there is little question about the prolific and giant nature of Brazil’s pre-salt discoveries.

Output up as demand falls

As a result, 2020 will see more non-OPEC oil production coming on stream, the key difference being that it will not be the result of US shale, but a result of the readjustment and rejuvenation of long-cycle non-OPEC offshore production.

This might mean little if demand were roaring ahead, but it isn’t.

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Demand forecasts for oil demand this year and next remain on a downward curve. Much hangs on the outcome of renewed trade talks between the US and China and on the debacle represented by Brexit, which looks likely to come to a head by the end of October. The world economy already appears to be flirting with recession, but it and oil demand will take further body blows, if US-China trade antagonism becomes entrenched and Brexit proves hard rather than soft.