Rising rig counts, record forecast production from the Delaware Basin, and another forecast for record production for the whole Permian from the EIA are just some of the latest news from the star U.S. shale play. And yet this production growth is much slower than it should have been and is likely to remain too slow. What happened?
One reason is shareholders. As Bloomberg noted in a recent report on the state of the Permian, public shale drillers have switched their focus after years of putting everything into production growth and are now prioritizing the return of cash to shareholders. And the switch back appears to be unlikely at this point.
Another reason is rising production costs. International oil prices have been on a strong rise indeed, but so have production costs as the supply chain disruption effects of the last two years linger.
In late April, the Wall Street Journal's Collin Eaton reported that the most prolific shale play in the United States was struggling to find enough steel, frac sand, frac pumps, and workers for wells.
Eaton noted that, unlike the last oil market downturn, the oilfield service industry is not riding on the heels of producers in the recovery. On the contrary, this time, the oilfield service companies are struggling after two years of mothballing equipment fleets because of the sharp contraction in output during the pandemic. They are also being largely shunned by investors, which makes them reluctant to invest in new equipment.
The report quoted industry executives saying that it now took a lot longer between drilling a well and getting it going because of delays in the delivery of essential equipment and materials. The costs of this equipment and materials are also higher.
"It's just more difficult to get some of the key products that we need, whether that's pipe or sand," Travis Thompson, CEO of FireBird Energy, a Midland Basin driller, told Bloomberg. "If we wanted to increase activity, say from three rigs to four or five, we would certainly have to plan on that a lot further out than what you would have had to a year or two back."
"If somebody walked in and put a pile of money on the table and said, 'Drill me a well next week,' it isn't going to happen," Jamie Small, president of private-equity-backed Element Petroleum III, told the WSJ's Eaton in April. "You just can't get the stuff to do it."
Bloomberg reported that the average forecast of five agencies for U.S. oil production growth is some 900,000 bpd. The forecasters include Rystad Energy, BloombergNEF, Enverus, S&P Global, and the Energy Information Administration.
The Permian will account for 80 percent of this growth, which will certainly help it cement its reputation as the star play in the U.S. shale patch. Yet the rate of production growth is quite modest when compared with the rate of oil production growth in 2018, as offered by Bloomberg. In that year, the U.S. added 1.9 million barrels daily.
Rystad Energy on its own, however, forecasts that just the Delaware Basin in the Permian will add some 990,000 bpd to its total production this year, of which more than 400,000 bpd is new production, the Norwegian consultancy said earlier this month. According to it, well economics in the Delaware Basin and high oil prices will motivate the production growth, which will bring the basin's total to a record 5.7 million bpd later this year.
Another record was recently forecast by the Energy Information Administration. The agency said it expected the Permian to add 88,000 bpd in June, reaching a record 5.219 million bpd, accounting for a substantial portion of the overall monthly output increase across the shale patch, which the EIA sees at 142,000 bpd.
By Irina Slav for Oilprice.com
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The excuse is always capital discipline. However, capital discipline has far less to do with stagnating production than the fact that the sweet and lucrative spots in the shale plays have already been exhausted forcing drillers to move to poor and costly-to-produce slots thus causing production costs to rise and production to decline.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London