U.S. oil production has ticked up in recent weeks as shale producers drill more wells after going through a massive backlog of drilled but uncompleted wells (DUC).
After DUC inventory has largely returned to normal levels, the shale patch is now drilling more wells to offset legacy declines, Argus estimates show.
Most exploration and production companies, however, are keeping a tight rein on capital expenditure, determined to show investors and Wall Street that they continue to be disciplined and are prioritizing shareholder returns to growing production.
Shale producers slashed activity in the spring of last year when oil demand and oil prices collapsed. As consumption and prices began to recover, so did completion rates and, to a lesser extent, drilling activity.
Well completions were the first to recover, reaching 80 percent of pre-COVID levels by July. Drilled wells reached 50 percent of pre-pandemic levels, according to data from the EIA and Primary Vision compiled by Argus.
The number of DUC wells in the seven shale regions fell by 258 from June to stand at 5,957 in July, EIA data shows.
During the first half of 2021, shale producers have been mostly depleting their DUC inventory wells, and the number of 'live' DUCs slumped to 2,381 wells in June 2021—the lowest level since 2013, a Rystad Energy analysis showed last month. The entire DUC count also includes what Rystad Energy dubs 'dead' DUCs, or wells drilled more than 24 months earlier, which remain uncompleted and are unlikely to be completed.
After the normalization of the number of DUCs likely to be completed—which Rystad Energy expects to occur by the end of September in the Permian and by September-October across other oil regions—shale producers are set to turn to increased drilling activity.
The U.S. rig count is rising at a faster pace than the increase in frac spreads, which is the number of completion crews finishing off previously drilled wells.
The Frac Spread Count provided by Primary Vision shows that the number of fracking crews rose to 240 in the week to August 27, up from 236 in the previous week. This frac count is up by 100 so far this year.
Yet, the expected higher activity will not eat up more expenditure than companies have budgeted for this year, executives say. Shale producers have decreased drill times and achieved operational efficiencies. All of these allow them to do more with less investment, leaving a larger share of record cash flows to return to shareholders.
Supermajor ExxonMobil's frack rates are now around 50 percent faster, which has led to a reduction in drilling and completion costs of more than 40 percent, Jack Williams, Senior Vice President, Overseeing Downstream and Chemical, said on the Q2 earnings call.
Diamondback Energy is decreasing the number of rigs and crews that it needs to execute the 2021 capital plan and reduced its full-year capital guidance by $100 million.
"On the production side, our wells have outperformed expectations this year," Diamondback Energy CEO Travis Stice said on the earnings call.
"As a result, we are slightly increasing our Permian oil production guidance, which should not be taken as a conscious decision to grow," Stice added.
The step-change in Diamondback's drilling times is going to be permanent, CFO Kaes Van't Hof added.
"And basically, we can do what we once had to do with 10 rigs, with eight now in the Midland Basin," Van't Hof noted.
Rick Muncrief, president and CEO at Devon Energy, said on the company's call:
"We have no intention of adding incremental barrels into the market until demand side fundamentals sustainably recover and it becomes evident that OPEC+ spare oil capacity is effectively absorbed by the world markets."
"The bottom line is we are unwavering in our commitment to lead the industry with disciplined capital allocation and higher dividends," Muncrief added.
During ConocoPhillips's earnings call, CEO Ryan Lance summed up the shale patch's current priorities:
"We know investors need to see evidence that sector discipline will hold and returns on and of capital will follow."
By Tsvetana Paraskova for Oilprice.com
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