Drillers Remain Cautious Despite Shale Success

February marked the first month since mid-2014 when oil and gas activity in the Permian increased on an annual basis, the latest Texas Permian Basin Petroleum Index has shown. That’s hard evidence that higher prices are indeed driving more drilling and production, in case anyone needs hard evidence after a string of weekly buildups in commercial inventories that the EIA has been reporting for the last three months.

In further evidence that things are looking up for the shale industry, private equity investment in shale oil and gas hit $19.8 billion for the first three months of the year, an almost threefold increase on Q1 2016. According to Reuters, investors are being drawn to the shale patch again thanks to the much-hyped production cost cuts that the industry has managed to achieve since 2014.

Although some industry insiders—especially those from the oilfield service segment—are questioning how much credit producers should take for the production cost cuts, they seem to be incentive enough for private equity and hedge fund investors to return to shale, even though some of them probably still carry scars from the slew of bankruptcies that the oil price rout caused. In fact, they are so enthusiastic that even a $10 decline in international prices would not dissuade them from investing in shale oil.

At first glance, what’s to dissuade them? In the Permian alone—a relevant example since it’s the play where most of these investments are going into—drilling rigs hit 252 in February, up from 151 a year earlier. New drilling permits totaled 564 in the same month, up from 314 issued in February 2016. Finally, output in the Permian added 3.2 percent this February on an annual basis. Related: Alaska Needs Much Higher Oil Prices To Reverse Its Oil Fortunes

At the same time, drillers are becoming more cautious. Well completions were down in February, illustrating a new approach: a move away from the flourish of drilling, completing and hoping for the best drilling, carefully reviewing the potential of each well and only completing it when its commercial viability is confirmed.

This change of approach is probably an additional stimulus for investors. After all, they all saw how the lavish spending turned out when prices tanked below $30 a barrel. Now, prices are close to double on the troughs from last January and February, OPEC is cutting production, and drillers are prioritizing cost efficiency. What’s not to like, from an investor’s perspective?

According to the economist compiling the Texas Permian Basin Petroleum Index, the outlook for production is not too bullish. Drilling rig additions have slowed down across the shale patch, Karr Ingham told the Midland Reporter-Telegram. If prices stay where they are, production growth may also slow down before the year’s end, he believes.

The CEO of Centennial Resource Development, an independent producer in the Permian, begs to differ. Mark Papa, the key figure behind the success of EOG Resources, believes that thanks to fresh investment, shale output will continue to grow at a steady pace, to reach 11.3 million bpd by 2020, up 23 percent from current levels, spurred by growing demand.

As usual, only time will tell who is right, but in light of what happened over the last two years caution seems like the safest way ahead for both investors and drillers.

By Irina Slav for Oilprice.com

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