Personal Finance

Shale drillers can spend more. But don’t expect a bonanza, even at $ 80 of oil


Shale companies are on their way to spending a little more money pumping oil next year, but most are not turning on the taps, even as prices exceed $ 80 a barrel.

Capital investments in US oil parcels this year are projected to hit the lowest levels since 2004, years before the fracking boom made the United States the world’s leading oil producer. Next year, oil companies will increase domestic spending by 15-20%, analysts said. However, that will still be less than what they invested in drilling before the pandemic, and far less than the last time US crude prices reached their current levels in 2014.

That’s because the pressure Wall Street is putting on US frackers to control oil spending and production is still in place, analysts and executives said. Before the pandemic, whenever crude prices rose to high levels, American producers flooded the market with more barrels, but ultimately spent more money than they made.

Investors and banks have now pressured oil companies to live within their means, pushing them to pay off debts accumulated during the shale boom and return extra money to shareholders. That has eliminated a reliable interim solution for global energy markets at a time when participants are concerned that oil supplies will shrink as demand recovers from the pandemic.

“Too much investment resulted in too low returns. I don’t think there is any scenario where he will ever spend himself like a drunken sailor, ”said Chris Wright, CEO of hydraulic fracturing company Liberty Oilfield Services LLC.

Many oil producers will continue to make extra money next year even with increased spending, given higher prices, Wright said.

Oil companies had cut US spending to an estimated $ 55.8 billion this year, compared with $ 60.8 billion last year and $ 108 billion in 2019, according to investment bank Evercore ISI. American investments in oil fields peaked at around $ 184 billion in 2014.

Next year’s spending isn’t likely to lead to significant increases in production, in part because inflation and a labor shortage are driving up drilling costs. This year, shale companies have gone through a large portion of the idle wells that they had drilled but have not yet been completed and put into production. Many will have to restart more drilling rigs just to keep production flat, which will require contractors to hire more people and drive up costs, analysts said.

The shale companies that will increase spending the most are the smaller private producers that sustained the growth of oil production in the Permian Basin.


Photo:

nick oxford / Reuters

The costs of oilfield services have increased between 10% and 50%, depending on the type of services. Almost half of the 20% increase in spending next year will have to cover cost inflation, according to consultancy Rystad Energy.

Many of the largest companies are likely to increase spending by less than 5%, according to IHS Markit. Meanwhile, the companies that will increase spending the most are the smaller private producers that sustained oil production growth in the Permian Basin of West Texas and New Mexico this year.

In that region, the U.S.’s busiest oil field, production has nearly reached pre-pandemic levels, while the country as a whole is still about 1.5 million barrels below that mark, data shows. Production in other regions has stagnated or declined this year.

Ken Waits, CEO of Mewbourne Oil Co., one of the Permian Basin’s largest private oil producers, said that during last year’s pandemic his company stopped 10 of the 12 drilling rigs it had in operation prior to for the virus to arrive. Now, it has 19 rigs and hopes to shore up more next year.

Still, the number of rigs actively drilling in the Permian will likely continue to creep upward, Waits said. The region’s oil and gas rig count this year has risen to 266, up from 418 before the pandemic and its peak of 568 in October 2014.

“I don’t think the number of platforms is going to take off from here,” he said.

Some private companies don’t expect to spend much more money on drilling than this year. Linhua Guan, chief executive officer of Texas private oil and gas producer Surge Energy, said his company is currently running three drilling rigs in the Permian Basin, down from its peak of eight in 2017. While higher prices will bring him they give the company more flexibility to accelerate operations. The surge is not likely to return to that level of drilling in the foreseeable future, he said.

Tap Rock Resources LLC, a Colorado-based producer drilling in the Permian, nearly tripled its annual production this year compared to last year, adding five drilling rigs since last October. But the company does not plan to duplicate that steep trajectory next year, said Ryan London, CEO of Tap Rock.

“We are not going to chase prices,” London said. “We know you can’t count on $ 80 forever, so it would be pretty shortsighted to go after $ 80, and by the time you get [the wells] flowing, it’s $ 60 “.

London said private companies that would otherwise boost production have been hampered by shortages of raw materials, manufactured equipment and labor. Some can’t get enough cement liner for drilling, while others can’t get parts for pumps that are used to stimulate wells, he said.

Many producers will not feel much of the price increase because they used hedging contracts to price future production when prices were lower. And to the extent that higher prices help make extra money, companies will return most of that money to investors, said Tim Dunn, chief executive of CrownQuest Operating LLC, one of the largest private producers in the Permian.

That, Dunn said, “is its only apparent path to overcome being an underperforming industry.”

Write to Collin Eaton at [email protected]

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