U.S. shale patch resists temptation for new drilling rush

The US shale patch is holding back sharp increases in production despite windfall profits and soaring crude prices, as executives seek to avoid being punished again for reacting with quick investments.

Although U.S. crude prices have doubled in the past 12 months, the number of operating oil rigs – just 373 last week, according to Baker Hugues – remains well below the levels of recent years. US oil production is stagnating nearly 15% below last year’s record of nearly 13 million barrels per day.

Industry watchers and insiders expected a rapid recovery in the US shale industry. Now, lukewarm spending and sluggish activity in the oilfields could reduce supply as demand picks up.

“We are under-investing as an industry around the world,” said Rick Muncrief, managing director of Devon Energy, one of America’s largest shale producers.

Devon has nonetheless pledged to keep production at a stable level this year and to cap any growth in 2022 at just 5% – less than half the annual rate across the shale area in the three-year increase in the production of bumpers before the pandemic.

After years of overspending, Devon is among the shale groups that have pledged to use the profits from rising prices to strengthen their balance sheets and return capital to investors through dividends or share buybacks.

“The days when you had to grow up [production] at double-digit rates, it’s behind us, ”Muncrief told the Financial Times. “The industry has too often overcooked. ”

The spectacular success of shale production in recent years has made the United States the world’s largest oil producer, but has begged many of its investors. The sector has burned hundreds of billions of outside capital and still has failed to generate profits.

But the stock market is starting to reward companies willing to repay capital and ignore the urge to start another drilling rush. Shares of shale producer Diamondback Energy have doubled this year, and Devon’s are up nearly 90%.

The S&P 500 energy sector, dominated by US oil companies, has outperformed all others this year as the market embraced the new mantra of low growth.

“If there had ever been a time to drill tight [shale] Now is the right time for oil, ”said Robert Clarke, vice president of upstream research at consulting firm Wood Mackenzie. “But why would you change the recipe?” Not drilling is in their favor.

Line graph of index growth since inception (%) showing energy stocks have outperformed the market this year

The reluctance of listed companies to risk these equity gains by increasing spending means that it was the private equity-backed operators – which do not come under the same scrutiny as state-owned companies – that have accounted for the major part. part of the modest increase in oilfield activity this year, according to a consulting firm. Rystad Energy.

Some executives believe the stock of high-quality – and highly profitable – shale rock in the United States is shrinking, hampering the recovery. While activity has picked up in the prolific Permian Basin of New Mexico and Texas, it has been slower in other areas, such as the Bakken oil field in North Dakota, where the best acreage was drilled. .

Growing investor doubts about the long-term future of oil are also a factor, said Bradley Williams, managing director of Elephant Oil & Gas, a private driller focused on Wyoming.

“It’s a real headwind now,” he said. “To drill a bunch of wells, what do we drill into? Is this a constructive commodity price environment or will we see a rapid oil and gas transition that will lead to poor commodity prices and ultimately poor returns? “

Even companies like ExxonMobil, which have been investing since times of turmoil in the oil markets, have been forced by shareholders to limit planned spending up front. In the Permian Basin alone, Exxon planned in 2019 to increase production to 1 million barrels per day by 2024. This year, it has reduced the target to 750,000 bpd.

“Now we’ve gone up $ 15 a barrel and those plans have been massively squeezed, with no sign of a comeback,” Clarke said.

Rystad said shale production could rise to another 1 million barrels per day next year if prices remain at current levels – less than the 1.2 million barrels per day seen in 2019, when prices of oil were lower.

At less than 1% of global demand, this increase in supply should not disrupt the OPEC cartel, which is meeting this week to decide whether or not to lift its own production after more than a year of reduction. the offer to support the prices.

“They are happy to push the prices up because there is no more fear of a shale reaction,” Williams said.

The Devon chief agreed the cartel would be comfortable with shale’s “measured” response to the latest oil rally.

“I think they will have a collective sigh of relief,” Muncrief said.

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