The US shale sector is holding back large production increases despite bumper profits and high crude oil prices, as executives seek to avoid being penalized again for responding with quick investments.
Although US crude prices have doubled in the past 12 months, the number of oil rigs operating – just 373 last week, according to Baker Hughes It is still well below the levels of recent years. US oil production is falling nearly 15 percent below last year’s record high of near 13 million barrels per day.
Industry watchers and insiders have predicted a rapid recovery from the US shale oil industry. Now lukewarm spending and stagnant oilfield activity could cause supply shortages as demand recovers.
“We are investing too little as an industry around the world,” said Rick Moncrieff, CEO of Devon Energy, one of the largest producers of shale oil in the United States.
However, Devon has pledged to keep production flat this year and to cap any growth in 2022 at just 5 percent — less than half the annual pace across the shale patch in the three years that saw production spikes before the pandemic.
After years of offshore spending, Devon is among shale groups that have vowed to use windfall gains from higher prices to strengthen their balance sheets and return capital to investors through dividends or share buybacks.
“Days of need for growth [production] “At double-digit rates, that’s behind us,” Mincrief told the Financial Times. “The industry has been overstretched many times.”
The astonishing success in shale production in recent years has made the United States the largest oil producer in the world, but it is the begging of many of its investors. The sector has burnt off hundreds of billions of outside capital and has consistently failed to turn a profit.
But the stock market has begun to reward companies willing to return capital and ignore the desire to launch another rush of exploration. Shares of shale producer Diamondback Energy have doubled this year and Devon shares are up nearly 90 percent.
The energy sector of the S&P 500, dominated by US oil companies, has outperformed all other sectors this year, as the market endorsed the new low growth mantra.
“If there is time to dig hard [shale] Now oil is a great time, said Robert Clark, vice president of upstream research at consultancy Wood Mackenzie. “But why change the recipe? Not digging works in their favour.”
The reluctance of listed companies to risk these equity gains through increased spending means that it is private equity-backed operators – who do not face the same scrutiny as public companies – that have accounted for most of the modest increase in oilfield activity this year, according to the consultancy. Rystad Energy.
Some executives believe that the high-quality – and highly profitable – rock stock in the United States is stock waning, impeding recovery. While activity rebounded in the prolific Permian Basin of New Mexico and Texas, it was slower in other areas, such as the Bakken oil field in North Dakota, where the best acre was drilled.
Bradley Williams, CEO of Elephant Oil & Gas, a Wyoming-focused drilling company, said investors’ growing skepticism about oil’s long-term future is also a factor.
“It’s a real headwind now,” he said. “To drill a bunch of wells – what are we drilling in? Is it a constructive commodity price environment or are we going to see a rapid shift away from oil and gas that will lead to lower commodity prices and ultimately poor returns?”
Even companies like ExxonMobil, which have a history of investing during periods of oil market turmoil, have been forced by shareholders to rein in planned initial spending. In the Permian Basin alone, Exxon planned in 2019 to increase production to 1 million barrels per day by 2024. This year it lowered the target to 750,000 barrels per day.
“We are now $15 a barrel higher, and those plans have been squeezed significantly, with no signs of coming back,” Clark said.
Rystad said shale production could grow by up to 1 million barrels per day next year if prices remain at current levels — below the 1.2 million barrels per day seen in 2019, when oil prices were low.
At less than 1 percent of global demand, that oversupply is unlikely to bother OPEC, which meets this week to decide whether to raise output after more than a year of supply cuts to prop up prices.
“They are happy to push prices higher because there is no longer any fear of a shale reaction,” Williams said.
The Devon chief agreed that the cartel would be comfortable with shale’s “calculated” response to the latest oil rally.
“I think they will have a collective sigh of relief,” said Mincrief.