Pioneering oilman Mark Papa warns that US shale oil forecasts are too optimistic

Key Points
  • Shale oil pioneer Mark Papa warns that forecasts for U.S. production growth are overly optimistic.
  • Papa says drillers in two major shale regions have burned through their best assets, and shareholders are pressuring companies to spend less money.
  • The burden of meeting growing oil demand will fall on the Permian Basin in Texas and New Mexico, and Papa is not sure the region is up to the task.
Mark Papa, chairman and CEO of Centennial Resource Development, offers his insight on US shale production at the 2018 CERAWeek by IHS Markit conference in Houston
F. Carter Smith | Bloomberg | Getty Images

Mark Papa, a pioneer in the U.S. shale oil revolution, is warning that forecasts for booming U.S. production growth will leave industry watchers disappointed in the coming years as drillers burn through their best wells and tighten their purse strings.

"The impression of U.S. shale as the big bad wolf is perhaps a bit overstated," Papa told an audience at this year's CERAWeek by IHS Markit in Houston.

Papa's comments on Tuesday were a stark contrast to the tone of cautious optimism at the conference, where many executives claimed that data analytics and technology, like machine learning, will improve efficiency in the oil patch and fuel further gains.

His remarks also come on the heels of an International Energy Agency report on Monday that said the United States will account for most of the world's growth in oil supply in the coming years. American output has exceeded expectations, rising to an all-time high above 10 million barrels a day in November, and is seen potentially topping 11 million barrels a day this year.

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Papa, CEO of Centennial Resource Development, is a closely followed figure in the U.S. shale drilling world, where producers rely on advanced techniques to coax oil and gas from tight rock formations. Under his leadership, EOG Resources developed a reputation as an innovator in drilling processes and technology in that nation's premier shale fields.

But now Papa said the the best days are behind some of those fields after a period of low oil prices prompted drillers to train their rigs on their best acreage and deplete the most cost-efficient production.

While the industry can clear bottlenecks for services and continue to access capital, it may not be able to improve drilling technology enough to surmount the looming geological challenges it faces, according to Papa.

"There are good geological spots in shale plays and weaker geological spots, and a lot of the good geological spots have already been drilled," he said during the panel.

"My theory is that you've got basically resource exhaustion that is beginning to take place. It's no secret that you've only got three shale oil plays in the U.S. of any consequence," Papa said. "The rest of them don't amount to a hill of beans."

About 80 percent of the roughly 6.7 million barrels per day produced by America's shale regions comes from three areas: the Permian Basin in Texas and New Mexico, the Eagle Ford in southern Texas and North Dakota's Bakken Shale.

Drillers in the Eagle Ford and the Bakken will soon have to start plumbing lower-quality acreage, in Papa's view. That will leave the burden of meeting growing global demand on the Permian.

While the prospects there are much better, said Papa, recent earnings have shown some companies missing targets. Papa believes Permian production will not be able to satisfy the world's growing appetite for oil, and he warns the underinvestment in new oil projects could lead to undersupply.

This is coming at a time when shareholders are demanding financial discipline and a better return on investment from shale drillers, another development that Papa believes will hold back production growth.

Shareholders were once more lenient as drillers put capital to work to raise production, allowing drillers to destroy capital by pursuing growth for growth's sake, Papa said.

"Now when I talk to those same investors, they basically say if you outspend cash flow on stupid investments and destroy capital, I'm not just going to be mad at you, I will punish you and I will destroy your equity valuation, and I will never ever own your stock again," he said.

"They are coming back and sending that message with a vengeance now."