Brent recently hit $70 per barrel and WTI surpassed $64.50, and oil executives from the Middle East to Texas no doubt popped some champagne. The big question is whether or not U.S. shale will spoil the party by ramping up production to extraordinary heights, setting off another downturn.
The EIA made headlines a few days ago when it predicted that U.S. oil production would surge this year and next, topping 11 million barrels per day by the end of 2019.
But shale executives repeatedly promised their shareholders that they would be prudent this time around, eschewing a drill-no-matter-what mentality that so often led to higher levels of debt…and ultimately to lower oil prices. Shale executives repeatedly insisted in 2017 that they would not return to an aggressive drilling stance even if oil prices surged.
We will soon find out if oil in the mid-$60s can entice shale drillers to shed their caution and jump back into action in a dramatic way. For its part, Goldman Sachs seems to believe the promises from the shale industry.
The investment bank said that at an industry conference in Miami on January 10-11, shale executives reiterated their strategies of caution. “Shale producers are largely not looking to use $60+ oil in their budgets and spoke more proactively about debt paydown, corporate returns and returning cash to shareholders.” Related: Cold Snap Leads To Biggest U.S. Natural Gas Draw Ever
This newfound restraint would contribute to still more gains in oil prices, the investment bank said. “With Discipline along with Demand and Disruptions (the 3 Ds) key drivers of Energy equity sentiment, we see potential for a grind higher as long as datapoints are favorable,” Goldman wrote. Global oil demand is set to grow at a robust rate this year, and a series of disruptions could keep supply offline in places like Venezuela, Iraq, Iran, Libya and Nigeria.
It remains to be seen if Goldman, along with the rest of us, are being taken for a ride by the shale industry. The investment bank said that guidance announcements in February will be “key” to figuring out if shale drillers will follow through on their promises of restraint for 2018.
But based on a series of comments at the conference, Goldman cited a long list of shale companies that will use extra cash from higher oil prices to either pay down debt or to pay off shareholders rather than using that cash for new drilling. “In particular, E&Ps highlighted debt reduction (SWN, CLR, RRC, DVN, APA, EOG, MRO, RSPP, WPX), dividends (OXY, COG, MRO, EOG) and share repurchases (APC) as potential options for redeploying greater cash ?ow,” Goldman wrote in its report, using the ticker symbols for the companies who spoke at the conference.
There were a few companies that signaled an openness to new drilling if oil prices continued to rise. “FANG, JAG, PDCE and XEC noted higher cash ?ows will allow their ?rms to raise drilling activity over time,” Goldman said, although they voiced caution about the recent run up in prices as evidence that prices will remain elevated. Moreover, any uptick in drilling in response to price increases might not result in production changes before the end of 2018. Related: 3 Million Barrels Per Day Could Go Offline In 2018
Another uncertainty that could blunt the euphoria surrounding the recent oil price rally is the rising cost of production. With drilling on the upswing, oilfield services companies are looking to claw back some of the ground that they felt compelled to cede to producers in the past few years. That means higher prices for the cost of completions, rigs, sand and other services and equipment. Goldman predicts cost inflation from oilfield services on the order of 5 to 15 percent year-on-year.
The investment bank said that the winners will be the “operators that are able to mitigate higher service costs through productivity gains and more ef?cient operations will attract investor interest in 2018.” Goldman singled out Pioneer Natural Resources, EOG Resources and Occidental Petroleum, a few companies that are typically cited as some of the strongest in the shale patch.
So, at least according to the latest comments from shale titans, the industry appears resolved to stick by its word to not drill recklessly. That could lessen production gains from the U.S. over the next year or so…which would provide more upward pressure on prices.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
- 5 Energy Sector Predictions For 2018
- Is The Current Oil Price Rally A “Head Fake?”
- Venezuela’s Parliament Outlaws Maduro’s Cryptocurrency
Still, it makes no difference to the surging oil prices whether US shale oil producers exercise more restraint or not. If they don’t, they sink deeper into debt. If they, however, do concentrate on paying their outstanding debt, they will be better off in the long-term. It is their choice.
The US shale oil industry will never be a profitable industry. US shale oil producers are so deeply in debt that they have become like the saying of “robbing Peter to pay Paul”. They are heavily indebted to Wall Street to the extent that they continue to produce oil even at a loss just to pay some of their outstanding debts.
Because of a very high depletion rate estimated at 70%-90%, US shale producers have to spend billions every year to drill thousands of wells just to maintain production. In so doing they sink deeper and deeper in debt.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
The cost to re-lease the same acreage could cost the driller 50-100x the lease rates paid between 2006-2008 and this forced oil companies to drill holes that otherwise, they may have deferred until another time.
The rig count has remained stable while the oil price is up near 50%.
"The US shale oil industry will never be a profitable industry. US shale oil producers are so deeply in debt that they have become like the saying of “robbing Peter to pay Paul”. They are heavily indebted to Wall Street to the extent that they continue to produce oil even at a loss just to pay some of their outstanding debts.
"Because of a very high depletion rate estimated at 70%-90%, US shale producers have to spend billions every year to drill thousands of wells just to maintain production. In so doing they sink deeper and deeper in debt."