U.S. shale oil pioneers have vowed to curb drilling even if oil prices hit $100 a barrel, citing the need to maintain capital discipline and claiming it is the Biden administration’s “war” on fossil fuels.
Since June, Brent crude oil prices have surged more than 25% to $95 a barrel after Saudi Arabia and Russia coordinated production cuts. That has pushed up gasoline prices and complicated the Federal Reserve’s efforts to control inflation, posing a political challenge for President Joe Biden as he seeks re-election next year.
The Biden administration has urged shale drillers to pump more oil as oil prices soared to record highs last year following Russia’s full-scale invasion of Ukraine. But they largely ignored those requests. There is little sign that the industry plans to plow the extra profits generated by recent price increases into new exploration or production.
“I just don’t think producers are excited about prices in the near term, I think we’re going to see continued (price) volatility,” said Rick Muncrief, chief executive of Oklahoma City company Devon Energy. )express.
Futures markets suggest oil prices will slow in six months to a year, he said, adding that there are many uncertainties, including whether rising oil prices will cause a recession and destroy demand.
“Essentially, most of us just say, ‘Let’s stay disciplined. Let’s keep our output the same,'” Muncrief said.
During the shale revolution, which saw U.S. oil production more than double in the 10 years to 2019 to a high of 13 million barrels per day, it was characterized by massive overinvestment and financial losses as oil prices plummeted. Investors paid a high price for their largesse, with Deloitte estimating that the entire U.S. shale oil industry had negative free cash flow of $300 billion between 2010 and 2019.
During the epidemic, U.S. production fell as dozens of shale oil producers declared bankruptcy and reduced free cash flow expenditures. Now it’s rising again, with analysts predicting it could surpass previous records for U.S. production by the end of the year.
But the pace of growth is much slower than in the previous decade, and few analysts believe the output of the U.S. shale industry can limit the rise in oil prices driven by Saudi Arabia. Rising costs, labor shortages and lower production from new wells are adding to producers’ caution in expanding drilling, they said.
Heather Powell, chief executive of Oklahoma City-based oil and gas company Ventana Exploration and Production, said the shale gas collapse has left deep scars on producers and investors as oil or gas output temporarily increase, they are now unwilling to increase investment prices.
“When I first started in the industry in the mid-2000s, many companies had no set budgets and would chase opportunities and drill regardless of cost,” she said. “But investors were severely harmed and the company had to reorganize under Chapter 11, so now capital discipline is the mantra companies follow.”
The number of operating oil rigs in the United States, a barometer of activity in the industry, fell 16% to 502 compared with the same period last year, according to data from oilfield services company Baker Hughes. At the height of the shale oil boom in 2014, there were 1,609 oil rigs operating in the United States.
Recent indicators suggest that shale oil companies are starting to invest more in production, albeit at much lower levels than at the height of the shale revolution.
U.S. shale oil companies have reinvested about 65% of capital in production so far this year, up from 46% last year but well below levels at the height of the shale revolution, and reinvestment rates are expected to hover, Rystad Energy data shows. About 50% in the next few years.
Billionaire shale tycoon Harold Hamm spoke at an energy conference in Oklahoma City last week, where many companies said the Biden administration’s restrictions on drilling on federal lands and waters, permitting delays and hostile rhetoric also Restricted activities.
“The United States has amazing natural resources, but we are moving away from them,” said Chuck Duginski, chief executive of Canvas Energy, a shale driller that reorganized under Chapter 11 of the U.S. Bankruptcy Code in 2020.
“The Biden administration is waging a war on oil, making it harder to invest in drilling to boost production and drive down prices,” he said.
Ham, the founder of Continental Resources, claimed that the government is more concerned about “bankrupting us” than solving the problem of high oil prices, promoting U.S. energy security, or even solving climate change.
“This is political power. They believe that’s what their base wants. But, I’m sorry, a lot of people want to be able to buy gas at a reasonable price and heat their homes,” Hamm said in an interview.
Continental has warned that oil prices could hit $150 a barrel in the next few years unless Washington does more to encourage exploration.
However, analysts say capital discipline and inventory concerns are the main drivers of corporate strategy for publicly traded shale oil companies, not the White House.
“Governments view oil and gas as a necessary evil, which means they are trying to shrink the business while encouraging participants to grow their businesses,” said Dan Pickering, chief investment officer at Pickering Energy Partners.
“‘We don’t love you long-term, but we need you short-term.’ So is this a war? This is (more) a skirmish.”
Svlook
