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Felicity Bradstock

Felicity Bradstock

Felicity Bradstock is a freelance writer specialising in Energy and Finance. She has a Master’s in International Development from the University of Birmingham, UK.

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Dwindling Rig Count May Finally Lead To Lower Shale Oil Output

  • Following record levels in 2021, U.S. oil production is anticipated to drop in 2023, partly due to strategic changes among producers favoring returns to shareholders over operational expenditure.
  • Declining oil prices and rising break-even costs are leading some oil companies to put drilling operations on hold, waiting for optimal conditions to resume production.
  • In addition to strategic changes, the reduction in oil rig count has been attributed to private companies downsizing their rig fleets, contributing to an anticipated decrease in U.S. shale production.

Despite record U.S. oil production last year, output this year is set to decline, with the oil rig count dropping over the last three months. The U.S. saw increased activity in its oil and gas fields last year following the Russian invasion of Ukraine and low OPEC oil output, which led President Biden to plead with domestic producers to boost their output, to tackle shortages and rising prices. However, many private companies could not maintain this level of output, and others are now biding their time until oil prices rise again, driving down U.S. production in shale regions. 

Biden urged oil and gas producers in the U.S. to boost production levels last year following the Russian invasion of Ukraine and subsequent energy shortages, which drove the price of energy sky-high. This was essentially to counter the OPEC decision to limit global oil production, with quotas still in place from the pandemic, pushing prices up even further. Thanks to efforts to increase U.S. oil output over the last year, production levels are expected to hit 12.61 million bpd, compared to the previous record of 12.32 million bpd in 2019, and much higher than last year’s 11.89 million bpd. U.S. crude output has increased 9 percent year on year, countering OPEC’s efforts to drive oil prices up.

Despite this positive trend, the growth of the U.S. shale industry is set to slow in August. It hit record highs in June and July, but shale oil production could fall to around 9.4 million bpd in August due to lower output in the Permian Basin, according to a government report. This lower production level could contribute to a global deficit by the end of the year. Oil producers have recently been favouring an increase in returns to shareholders above spending on operations, which marks a distinct shift in strategy, having previously pursued higher production at any cost.  Related: Saudi Aramco Closes In On Walmart As World’s Top Firm By Revenue

Several of the most lucrative oil basins have been leased by firms that are following this strategy, biding their time, and waiting for the optimal moment to increase production. This also reflects the volatility of oil prices, which have fallen significantly since last year’s post-Covid, post-invasion peak. Further, several wells have been drilled but are yet to be operational. Nevertheless, mid-term output in the Permian basin is expected to rise, by around 40 percent by 2030, as it peaks before starting to decline. 

In recent months, the number of shale rigs in U.S. waters has been declining at the fastest rate since the pandemic. This is due to a variety of reasons, including the number of private companies cutting their rig fleets. Private drillers are thought to have contributed around 70 percent of the decrease in rig numbers. Many small firms went full throttle in their drilling operations last year, following the Russian conflict with Ukraine, Biden’s plea to domestic producers to ramp up production, and extraordinarily high oil prices. But, as oil prices fall, many of these firms’ oil resources are drying up, a trend that is expected to continue for the rest of the year. 

Many larger companies are taking a break from drilling, with the number of rigs drilling for oil and gas falling from around 800 at the start of the year to just 670 in July. And more prominent public companies are focusing on maintenance rather than growth when it comes to drilling. With many sitting on potentially lucrative wells, that they plan to tap into on their own timeline. Several oil firms have stated the importance of higher oil prices for their operations. For example, Element Petroleum’s CEO, Taylor Sell, explained that the break-even price of drilling operations had risen substantially in recent months, due to higher material costs, to reach between $55 and $60 a barrel. The price of components such as steel pipes has increased by around 40 percent in the last year and a half, making the fall in oil prices deter many operators from drilling. This led Element to pull out its only active rig in December, having decided to put drilling on hold until the price of oil picked up. 

And it’s not only Element feeling the pinch, with inflation and less-productive wells pushing up the break-even price for several companies. In the Delaware region of the Permian, this figure has increased by over 34 percent, to $43 a barrel. And in the Midland area, the average break-even price rose by over 39 percent to $47 a barrel. While an average U.S. oil price of $75 a barrel could bring a profit, low natural gas prices have harmed cash flows. In addition, the limited pipeline capacity of several firms means they are having to rely on gas flaring, a practice that many in the Permian region hoped to cut in line with decarbonisation aims. 

Following a year of record-high oil production in the U.S., output is likely to drop in the coming months due to wells drying up, a change in strategy, and low oil prices deterring immediate drilling activities. While U.S. shale patches will continue to provide oil resources for several years yet, many companies are pausing operations to ensure they use their remaining reserves wisely, when the time and price are right.   

By Felicity Bradstock for Oilprice.com


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