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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Shale Consolidation Could Reverse Output Growth Trend

  • Industry executives predict that consolidation in the U.S. shale oil and gas sector will lead to a decline in production.
  • The integration process has curtailed investment in exploration, potentially causing a temporary reduction in production activities.
  • The decline in production may not be a large one according to shale executives.
Shale rig

Mergers and acquisitions in the U.S. shale oil and gas space could lead to a decline in production, industry executives said in the latest edition of the Dallas Fed Energy Survey.

The decline, according to survey respondents, would not be especially pronounced. Yet it would still be a reversal of a trend that most observers of the U.S. oil industry consider irreversible and consistent over the long term in the absence of constraining policies.

Consolidation by E&P firms has curtailed investment in exploration. “Our hope is that it’s a temporary situation that will work itself out as the integration is completed,” one survey respondent said in comments on the state of the industry.

It may not, however, be temporary. According to another industry executive, “The last few years of mergers and acquisitions have decreased activity in the oil patch. The majors are not going to exhaust reserves to raise domestic production until supply and demand curves meet their goals.”

As many observers of the shale patch have warned since the merger and acquisition wave began following the 2022 oil price rally and the resulting record profits, Big Oil is not constrained by loan repayment pressure and the need to stay in the black. “They do not have to participate in treadmill drilling to keep incomes at a pace to develop reserves and pay back loans,” that industry executive told the Dallas Fed Survey.

Related: U.S. Oil, Gas Drilling Activity Plummets

Indeed, production growth in the shale patch is already slowing down. In April, the Energy Information Administration reported that the number of drilled but uncompleted wells was on the rise—and oil prices were doing quite well in April, closer to $90 than they are now. But when the DUC count rises, the most common reason is that drillers are pacing themselves, waiting for a more lucrative price environment.

As the number of those drillers shrinks amid mergers and acquisitions, there will be fewer people making production decisions, and these decisions will affect a bigger portion of the shale patch, meaning the ultimate impact on the market will be more pronounced with few remaining independents left to pump at will taking advantage of every favorable turn in prices.

Meanwhile, the consolidation continues. After last month ConocoPhillips struck a deal to acquire Marathon Oil and Crescent Energy bought SilverBow Resources for $2.1 billion, Dallas-based Matador Resources agreed to buy Permian assets from EnCap Investments. The deal is worth $1.9 billion and will add 25,500 bpd to Matador’s daily total.

The consolidation continues. The pool of production decision-makers in exploration and production is shrinking. This is affecting production plans, but they are not the only thing it is affecting.

“Industry consolidation is the main driver of change in the industry currently,” one Dallas Fed Energy Survey respondent said, commenting on the oilfield services sector. “Many competitors are extremely consolidated in their work profile and customer base,” he added. “As consolidation occurs, often the acquiring company will not pick up the existing service companies. Once cut loose, these companies are searching for a lifeline and in many instances willing to work for negative margin rates, doing whatever they can to put money toward fixed period costs.”

The consolidation drive in E&P, then, is not exactly a boon for the oilfield service sector and it sounds like things could get quite hard for that sector. Or oilfield service providers could join the consolidation trend to survive. At some point, they may be forced to do just that.

“Too many equipment providers are chasing too few E&P customers,” another survey respondent said. “Without consolidation within service or equipment providers, it will be a race to the bottom for pricing. The continued approval of these mergers by the Federal Trade Commission is surprising and will ultimately harm the Permian Basin.”

What industry executives see in the oilfield is often a subjective picture. There is a margin for bias-based error. Yet, the consolidation in the exploration and production space is anything but subjective. It is a fact, and the most likely consequence of this fact is tighter control of production by the executives of the remaining players. Those executives, as one executive noted in comments for the survey, have zero interest in pursuing production growth at will, and this is the only fact that matters, really.

U.S. shale production may soon move from growth to plateau, and it will not be because drillers have run out of resources. It would much more likely be because those drillers are not happy enough with the price of oil to motivate production growth. Oil production, after all, is a business, not a sacred mission of proving America’s resource might to the world. It would do them well if more analysts—and traders—remember that when they make assumptions about the future direction of global oil prices.

By Irina Slav for Oilprice.com

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