U.S. shale producers could take more time to bring higher volumes of crude oil to the market than previously expected as most public companies continue to keep capital discipline and go through their backlog of drilled but uncompleted wells (DUCs). The drilling of new wells needs more capital expenditure and hiring rig crews and services providers that are currently in short supply amid bottlenecks in the shale patch. As a result, U.S. tight oil production is not rising as fast as in previous upcycles, and surely not as quick as the Biden Administration wants as it looks to lower the highest gasoline prices in America in eight years. All forecasts point to U.S. oil production rising this year compared to 2021, but growth will likely happen at a slower pace than expected a few months ago.
Since the COVID-inflicted slump in the industry, many producers have relied on their DUC inventory to take advantage of the highest international crude oil prices since 2014.
So, the number of DUCs fell to 4,273 in March 2022, the Energy Information Administration (EIA) said in its latest monthly Drilling Productivity Report this week. The number of DUCs in the seven key shale regions is now down by 42 percent since the beginning of 2021. In the Permian alone, the number of DUCs dropped by 71 from February to stand at 1,309 in March—that's the lowest figure since early 2017.
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The lowest number of DUCs in the Permian in half a decade suggests that now U.S. producers will have to spend more money on drilling new wells from the very start compared to the lower-cost DUC inventory where the well is already drilled.
That's easier said than done.
Private producers have boosted production and drilling, but they—as well as the entire shale patch—face supply chain bottlenecks and cost inflation in everything from labor, frac sand, steel prices, and services provider rates. Even those who want to grow production more than the others will have to contend with the economics of finding and paying a skilled workforce or procure frac sand at high prices, for example.
The EIA tempered its shale growth expectations in the Drilling Productivity Report. April production is now seen at 8.517 million barrels per day (bpd), down from 8.708 million bpd production for April expected in last month's report. In March, the EIA expected oil output in the Permian to grow to 5.208 million bpd in April. But in the latest report this month, the estimate is now revised down to 5.055 million bpd, with May output expected to rise by 82,000 bpd to 5.137 million bpd.
All in all, the U.S. oil industry seeks a longer-term commitment to the sector from the Administration and says that despite all pleas and calls, it simply cannot raise production too fast, too soon. Capex discipline from the largest shale firms and supply chain bottlenecks will cap U.S. oil production growth, industry executives say.
Even if ConocoPhillips decided to pump more oil today, the first drop of new oil would come within eight to 12 months, CEO Ryan Lance told CNBC last month.
Occidental Petroleum CEO Vicki Hollub said at the CERAWeek conference in early March: "We've never faced a scenario where we need to grow production, when actually supply chains not only in our industry but every industry in the world [are] being impacted by the pandemic."
Not even $200 oil would incentivize shale giant Pioneer Natural Resources to drill beyond what it has planned for, according to chief executive Scott Sheffield.
"Whether it's $150 oil, $200 oil, or $100 oil, we're not going to change our growth plans," Sheffield told Bloomberg Television in an interview just before Russia invaded Ukraine. "If the president wants us to grow, I just don't think the industry can grow anyway," Sheffield added.
At public shale firms, capital budgets for 2022 are now up by an average of 23 percent over 2021, RBN Energy says.
"That increase seems substantial, but about two-thirds (15%) results from oilfield service inflation," the commodity analysts said.
"There is less than meets the eye in producers' planned 23% capex increase and 8% boost in production," RBN Energy noted earlier this month.
Producers' "plans do not represent a strategic shift from the maintenance-level investments they've been making the past few years."
By Tsvetana Paraskova for Oilprice.com
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"Whether it's $150 oil, $200 oil, or $100 oil, we're not going to change our growth plans," Shale oil wise veteran Scot Sheffield told Bloomberg Television. I just don't think the industry can grow anyway. There you have it.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London