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Todd Royal

Todd Royal

Todd Royal is an independent strategic consultant, researcher and author on energy matters based in southern California.

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Expect A New Shale Boom This Spring

U.S. shale has now rebounded to a solid financial equilibrium that it makes sense for companies to begin investing in drilling again. The International Energy Agency (IEA) expects U.S. shale drillers to add over 500,000 bpd throughout 2017. Current announcements show the oil price floor, installed by OPEC’s production cuts, have allowed companies such as Hess Corporation and Noble Energy Incorporated to ramp up their budgetary spending by 60%.

Hess in particular is bullish on the Bakken in North Dakota with a $2.25 billion budget for 2017. Noble Energy will spend $2.5 billion – a 67 percent jump from last year’s $1.5 billion budget. On top of this, Noble plans to purchase Clayton Williams Energy based in the West Texas Permian for $2.7 billion, giving Noble another 4,200 prospective wells on 120,000 acres.

In other words the spigot has been opened, and more rigs and workers are being put back to work. Texas is leading the way with companies like RSP Permian Inc., increasing their budget by 97 percent to $600 million. Recently, geologists in Texas discovered the largest shale opportunity in the U.S.: The Midland Basin of the Wolfcamp Shale area.

According to the United State Geological Survey (USGS) this discovery is estimated to have 20 billion barrels of oil, 16 trillion cubic feet of associated natural gas, and 1.6 billion barrels of natural gas liquids. This find is three times larger than the assessed amount of oil in the Bakken formation in North Dakota.

With the imminent approval approval of the Keystone XL and Dakota Access pipelines there is nothing standing in the way of U.S. shale drillers from delivering hundreds of thousands of barrels of new oil and gas to the market. As an example, the Dakota Access pipeline will deliver, “470,000 barrels of oil each day from oil fields in western North Dakota to much of the Upper Midwest en route to Illinois.” Billions in new investments, and larger budgets from world-class shale drillers, are reasons that could possibly negate the effects of the OPEC cuts.

Moreover, oilfield service companies are announcing larger than expected capital budgets. Unheard of is a better way to describe this news, because months ago the OPEC deal had not brought oil prices up to a level where companies could spend money, invest in the future, and hire workers. The 32nd Annual Barclays E&P Spending Survey found:

“Eighty percent of survey respondents said they expect oilfield service (OFS) costs to rise in the supply chain, and the OFS is among the most under-owned sectors in the S&P 500.” Related: Markets Buy The OPEC Cuts, But Fear U.S. Supply

This leaves room to add the above-mentioned firms in your portfolio, but with the risk and rewards that OFS brings this segment of the oil and gas industry.

This predicted surge in spending will also find oil field service providers such as Schlumberger Ltd. spend more as well. Paal Kibsgaard, Chief Executive Officer of Schlumberger believes the global market will take longer to rebound, but witnesses, “many global operators are not as well funded or nimble as American producers.”

This renewed confidence comes on the heels of two years of austere budgets, layoffs that totaled over 150,000 U.S. oil workers and hundreds of bankruptcies. Idle rigs began littering the shale landscape since the 2014 crash, but now that same shale patch is firing them up once again.

The main key to understanding how U.S. shale companies have adapted to the new oil price environment has been the ‘’can-do attitude’’ of petroleum engineers and oilmen from the Bakken to the Marcellus shale formations in combination with favorable financing conditions. These companies, and their ability to withstand the crisis of plunging oil prices has made them more flexible, better funded, leaner and more able to bring oil and gas rigs back online in seemingly no time.

And now with a tsunami of deregulation coming to the U.S, this could unleash investments and even more oil and gas drilling. U.S. shale companies have withstood the Saudi price war aimed at annihilating them, but 2017 could see a convincing comeback.

U.S. shale, unlike many other oil industries in the world has managed to adapt to the new $50 oil reality. Denver based Extract Oil & Gas, CEO, Mark Erickson says, “$45 oil has proven to be a sweet spot for the company, any improvement in price just means stronger returns and more activity are on the way.” This year’s shaping up to be a very good year for U.S. shale.

By Todd Royal for Oilprice.com

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Leave a comment
  • Kr55 on January 25 2017 said:
    No mention of the inevitable and significant increases of service costs that will be associated with shale trying to ramp up? Shale will be hitting a wall at some point this year, and there will be a lot of regrets by producers that they hedges in the low-mid 50's. It's going to be an up and down year for shale and lots of losses will still be lining balance sheets unless oil prices recover significantly from here.
  • david on January 25 2017 said:
    Kr55 is correct. Its amazing to think that if oil hits $60.00, service companies will not charge more for drilling, man power will suddenly appear and the US will have 1000 rigs running the very next day. Bet on the shale play when oil stabilizes over $60-65 for a period of time.
  • Michael on January 25 2017 said:
    Totally ridiculous. Shale is only good for one year then it loses 90% production. Loss of profit.

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