When rebounding oil demand began pushing benchmarks higher last year, forecasters and traders alike watched the U.S. shale patch with bated breath to see when drillers would start drilling again. Most didn't. The ones that did were the smaller, privately held players.
Public shale companies suffered a serious blow from the pandemic when growing shareholder disgruntlement combined with the unprecedented destruction of demand for oil to pressure them into a rearrangement of priorities, to which these companies appear to have stuck despite the price rise.
Majors such as Pioneer Natural Resources, Devon Energy, and Diamondback Energy have already said they have no plans to boost production in any meaningful way. Instead, they will focus on shareholder returns.
The chief executive of Pioneer Natural Resources put it quite bluntly last month in an interview with Bloomberg. "Whether it's $150 oil, $200 oil, or $100 oil, we're not going to change our growth plans," Scott Sheffield said. "If the president wants us to grow, I just don't think the industry can grow anyway."
Devon Energy's Rick Muncrief, on the other hand, indicated that big public shale drillers are simply wary of any adverse consequences so soon after the pandemic to start boosting production in any major way.
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"In the back of everyone's minds is, 'When is it going to be [production] growth? . . . We have investors saying 'My gosh, if not now, when?' But for everyone saying that there's at least one other if not two others waiting to say, 'Gotcha! We knew that discipline would be shortlived.' We have learned our lesson," he told the Financial Times in February.
So, public shale drillers are still exercising restraint, largely because of investor considerations. After years of burning cash and issuing new stock to make ends meet, the industry is acutely aware that shareholders have run out of patience.
The oil price rally served an important purpose, then, in giving shale companies the means to start returning cash to their owners after the chaos of 2020. It also served an important purpose in boosting trust in the industry and its ability to deliver returns. It is, however, a precarious balance that may not survive over the long term.
Private drillers, on the other hand, have no shareholders to make happy. They do not have the constraints of their public sector players. And they are drilling. The Energy Information Administration said in its last Short-Term Energy Outlook that U.S. crude oil production could hit 12.6 million bpd on average next year: a record high.
With large shale producers sticking to their discipline guns, most of the increase would inevitably have to come from smaller, private players in the shale field. As already noted, they don't have shareholders to answer to. But they have got debts to pay off and cash to generate to insulate themselves from the next market crash.
Rystad Energy this week forecast that the latest price surge could see an additional 300,000 bpd boost to already rising U.S. shale production, Reuters reported. This, the Norwegian energy consultancy said, could bring the total production increase in the U.S. shale patch to 1.2 and 1.3 million bpd.
To compare, the EIA had forecast a production increase this year of less than 1 million bpd, and IHS Markit's Daniel Yergin had predicted U.S. oil production growth at some 900,000 bpd. But all that was before the Ukraine war.
Now, in addition to the supply disruption fears that have pushed both Brent and WTI over $110, fundamentals continue to point towards a tight market, and the planned release of 60 million barrels from strategic reserves announced earlier this week by the International Energy Agency will hardly help matters.
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Once reduced, these strategic reserves would need to be replenished, and it seems this will happen in an environment of higher prices. Private oil drillers in the U.S. shale patch will probably be only too happy to help with that.
By Irina Slav for Oilprice.com
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