Executive Summary: We believe extrapolation represents a primary flaw to investment forecasting, particularly as it relates to estimated growth in crude oil supply. Expectations based largely on extrapolation of recent years’ efficiency gains and technological improvements in shale oil production have led many analysts to expect U.S. growth of greater than 1 million barrels per annum for the next several years, primarily from the Permian Basin. We agree that a continuation of US shale production growth is likely, assuming oil prices remain at levels that encourage further oil well development and completion. Still, in our view, many oil pundits have not given proper attention to the numerous real-world constraints that could dampen overall shale output. Our recent conversations with both energy executives and specialists in the field have confirmed many of these constraints. They include shortages of pressure pumping fleets, water, labor, and takeaway capacity, as well as supply-limiting factors relating to trucks/logistics, sweet spot exhaustion, parent-child well degradation, execution risks, technology limits, and new-found corporate capital discipline. We expect such constraints to become increasingly evident in upcoming years, acting as governors to U.S. shale production growth and thus key factors in the global intermediate supply/demand picture for crude oil.

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