With Brent crude at $120 per barrel and WTI close behind it, the fundamentals picture of crude oil globally is not a sight of comfort. It is a sight of worry. Many relied on the U.S. shale patch to alleviate this worry by ramping up production. Yet U.S. shale is not budging. This time, the swing producer is not swinging. "The US oil and gas supply system remains very potent, but at any given price, growth will be smaller and slower," Raoul LeBlanc, S&P Global vice president for North American upstream oil and gas, told Bloomberg last week. "Without the subsidy that shale shareholders provided, consumers can expect to pay higher prices."
That's because U.S. shale drillers have placed a priority on returns to shareholders after years of burning through their cash. Rystad Energy estimated earlier this month that the industry will pocket some $180 billion in free cash flow this year at current oil prices. That will go a long way towards fixing their previously loss-heavy balance sheets, but it won't change priorities.
"What's different today than the past . . . is that we are allocating capital in a way that maximises returns to shareholders, rather than maximising [production] growth," the chief executive of Chesapeake Energy, Nick Dell'Osso, told the Financial Times.
"The industry was built on [oil and gas production] growth expectations, and company stocks were valued on growth expectations. That all had to get broken down," he added, echoing comments made earlier this year by fellow energy executives such as Devon Energy's Rick Muncrief.
"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," Muncrief told the FT in February before Russia invaded Ukraine.
Pioneer Natural Resources' Scott Sheffield said, also in February, "Whether it's $150 oil, $200 oil, or $100 oil, we're not going to change our growth plans. If the president wants us to grow, I just don't think the industry can grow anyway."
The sentiment appears to have remained unchanged despite the change in circumstances that has pushed oil prices significantly higher than they were in February, hypothetically motivating a burst of new drilling; only hypothetically, however, even in the star shale play—the Permian.
Forecasts of production growth in the Permian boosting the total to a record have not been infrequent, suggesting that U.S. shale is in top shape and ready to grow again. Yet some of these forecasts note that although strong, production growth in the Permian would be slower than it would have been under normal circumstances and that it is not about to speed up even if prices rise further, which some are already forecasting.
The average of five U.S. oil production forecasts is for 900,000 bpd in additional output this year, per Bloomberg. This would compare to 1.9 million bpd in production growth in 2018 when prices were a lot lower. Yet costs were lower, too, and companies were returning so much cash. In fact, because of this re-prioritization of shale drillers, their breakeven levels have risen, according to Bloomberg, as cash returned to shareholders gets factored into the mix.
According to JP Morgan, U.S. retail gasoline prices could hit $6.20 per gallon by August. The reason: the mismatch between demand and supply. Diesel prices are already above $6 per gallon in the Northeast and are likely to continue up. The situation at the pump is so dire that the Biden administration has mentioned a ban on exports of crude oil as one of the options on their table of tools for fighting fuel price inflation.
Shale oil production is going to increase this year, that's for sure. Yet it is becoming abundantly clear that it will not increase as much as the White House or the average driver would like it to increase. The circumstances are quite unfortunate, really. The industry is still recovering from the pandemic, suffering the lingering effects of lockdown-related supply chain breakdowns that have now created shortages and pushed prices higher.
As one Permian independent put it to Bloomberg, "It's just more difficult to get some of the key products that we need, whether that's pipe or sand. 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," Travis Thompson, chief executive of FireBird Energy said.
The focus on shareholder returns is also unlikely to change anytime soon. Oil and gas might be raking in the cash because of high oil prices, but overall, it remains a pariah industry for many as the energy transition's momentum accelerates amid the struggle to regain some energy security when a sizeable chunk of the world's global oil supply is being targeted by sanctions. What this means is that U.S. shale, like OPEC, is not riding to the rescue. U.S. shale has its own priorities.
By Irina Slav for Oilprice.com
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