US shale producers have behaved exemplary over the past year. It wasn’t something the industry wanted to do. It was something it was forced to do by the pandemic and by its shareholders, who, after years of waiting for windfalls, took a foothold and demanded higher returns.
But maybe it’s time for a change.
US shale must be used to the price shocks by now. Still, the pandemic-induced destruction of crude oil demand must have hurt. On top of that pain, the big public shale producers had many unfortunate shareholders to deal with. They’ve addressed them by cutting spending, cutting production and focusing on generating cash flow.
They did it largely with some help from OPEC+, which cut an unprecedented 7.7 million barrels per day from combined production, and some non-OPEC producers who took some of the burden. Since then, demand has recovered, as have prices. All eyes have been on US shale for months now, with drillers expected to significantly ramp up drilling. So far, the industry has exceeded expectations. But it looks like this won’t last long.
U.S. crude oil production will rise by 800,000 barrels per day next year, Financial Times says reported this week. This isn’t surprising given that US oil prices are now around $70 a barrel, bringing most shale resources back to profitability, the report notes. But there is one interesting thing that is different this time. According to an IHS Markit analyst, it would be privately owned independent drillers that will take the lead this time around.
As interesting as this prediction is, it is not surprising. Even before the pandemic hit, disgruntled shareholders were the talk of the town in shale oil. Burning money for years to ramp up production so the United States could become the largest oil producer in the world never made sense with shareholders buying Pioneer Natural Resources, Devon Energy and Continental Resources. They bought these companies and their public counterparts for the dividends.
So when these dividends didn’t come in the size shareholders expected, the discontent grew. It also coincided with the growing popularity of the energy transition story, leading to concerns that shale oil betting was becoming increasingly unsafe in a changing energy world. So the public shale drillers had only one option left: start supplying.
They’ve been doing this for a while. As Reuters recently reported, the major shale players have increased dividends and added things like variable payouts and share buybacks to keep shareholders on board, while also taking active steps to reduce their debt burden – a major concern among shale investors.
So, public shale-drilling rigs have pampered shareholders after years of disappointment and even now still face the risk of backlash if they drill more. However, they will have to do this quickly as the stock of drilled but unfinished wells shrinks amid the return of demand. Shale drillers would therefore have to increase their expenditure to keep their production at current levels.
Meanwhile, small privately owned drills clung to the skin of their teeth until the worst of the pandemic crisis was over. Now that this is over, their hands are loosened to ramp up production as much as they want. Private drillers have no shareholders to report to. Their only concern is the market. If there is enough demand to push prices to profitable levels, these companies will drill and pump more oil. And the outlook for demand is quite rosy.
No wonder, according to Raoul LeBlanc of IHS Markit, those private shale oil-independent companies will account for more than half of the projected increase in U.S. crude oil production next year. That’s 20 percent more than in any other year, the FT quoted LeBlanc as saying.
“The soldiers are not on board with this whole capital discipline thing. For them, this is their window,” the IHS Markit analyst told the FT. “They think: here’s my chance and I’m going to take it,” because they see it as maybe their last, best chance.”
In January, when prices were recovering and WTI traded around $50, a Wood Mac analyst called it a siren song – the price recovery expected to revive US shale producers and put pressure on prices. This did not happen because of the majors’ newfound capital discipline. Still, small producers are much more flexible because they don’t have shareholders to keep happy. And they may soon become a downside risk to prices.
Much shale oil became profitable at prices around $50. At over $20, most shale oil is profitable. No one can blame private independents for seizing the opportunity to monetize their oil assets, not with the long-term predictions – although these are wishes rather than predictions – about the end of the oil age.
By Irina Slav from Oilprice.com
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