Shale companies are ready to spend a little more money on oil production next year, but most do not increase drilling, even when prices are above $80 per barrel.
According to forecasts, investments in American oil fields this year will reach the lowest level since 2004, when the shale boom, which turned America into the largest oil producer in the world, was still a few years away. On the other hand, according to analysts, oil companies intend to increase domestic spending by 15-20% next year. However, this is still less than before the pandemic and much less than when US oil prices last reached similar heights in 2014.
According to analysts and company executives, this is due to the pressure exerted by Wall Street on American shale producers to limit spending and oil production. As a result, before the pandemic, every time oil prices rose too high levels, American producers flooded the market with large volumes of oil, but in the end, they spent more than they earned.
Investors and banks are pushing oil companies to repay the debts accumulated during the shale boom and return the additional money received to shareholders. They have also forced companies to rethink drilling plans and reduce their carbon footprint as part of environmental, social, and governance aspects, or ESG.
The withdrawal of investors from this industry has undermined the role of the American sector as a reliable intermediary in global energy markets at a time when market participants fear a reduction in oil supplies as demand recovers after the pandemic.
Wright added that many oil producers would generate additional cash next year, even though spending increases given higher prices.
According to investment bank Evercore ISI, US oil companies have cut costs to about $55.8 billion this year, compared with $60.8 billion last year and $108 billion in 2019. Investments in American oil fields peaked at about $184 billion in 2014.
Spending next year is unlikely to lead to a significant increase in production, partly because drilling costs are increasing due to inflation and labor shortages.
This year, shale companies remembered the inactive wells they drilled but have not yet completed and put into operation. As a result, according to analysts, many will have to restart additional drilling rigs to keep productivity at the same level. Contractors will have to hire more people and increase costs.
Depending on the services, oil field maintenance costs increased by 10-50%. But, according to the consulting firm Rystad Energy, almost half of the 20% increase in prices next year will cover cost inflation.
According to IHS Markit, many large companies are likely to raise costs by less than 5%. At the same time, small private producers intend to increase spending more than others, which have increased oil production this year in the Permian basin of West Texas and New Mexico.
In this most active oil-producing region, production has almost reached the pre-pandemic level, while the country as a whole still lags behind this mark by about 1.5 million barrels. Moreover, production in other regions has stopped at the same level or decreased this year.
Ken Waits, CEO of Mewbourne Oil Co., one of the largest private oil producers in the Permian Basin, said that during the pandemic last year, his company stopped 10 of the 12 drilling rigs operating before the outbreak of the virus. The company currently uses 19 drilling rigs and plans to increase their number next year.
However, according to Waits, the number of active drilling rigs in the Perm region will likely grow quite slowly. The number of oil and gas drilling rigs has grown this year to 266, compared to 418 pandemic and a peak of 568 in October 2014.
Next year, American shale producers will increase spending on oil fields in the United States by 15-20%, but investments are still significantly below the pre-coronavirus level.
Shale companies are ready to spend a little more money on oil production next year, but most do not increase drilling, even when prices are above $80 per barrel.
According to forecasts, investments in American oil fields this year will reach the lowest level since 2004, when the shale boom, which turned America into the largest oil producer in the world, was still a few years away. Nevertheless, according to analysts, oil companies intend to increase domestic spending by 15-20% next year. However, this is still less than before the pandemic and much less than when US oil prices last reached similar heights in 2014.
According to analysts and company executives, this is due to the pressure exerted by Wall Street on American shale producers to limit spending and oil production. As a result, before the pandemic, every time oil prices rose too high levels, American producers flooded the market with large volumes of oil, but in the end, they spent more than they earned.
Investors and banks are pushing oil companies to repay debts accumulated during the shale boom and return the additional money received to shareholders. They have also forced companies to rethink drilling plans and reduce their carbon footprint as part of environmental, social, and governance aspects, or ESG.
The withdrawal of investors from this industry has undermined the role of the American sector as a reliable intermediary in global energy markets at a time when market participants fear a reduction in oil supplies as demand recovers after the pandemic.
Too much investment has led to too low profit. I don’t think there is a scenario in which a return to spendthrift is possible, said Chris Wright, director of the shale company Liberty Oilfield Services LLC.
Wright added that many oil producers would generate additional cash next year, even though spending increases given higher prices.
According to investment bank Evercore ISI, US oil companies have cut costs to about $55.8 billion this year, compared with $60.8 billion last year and $108 billion in 2019. Investments in American oil fields peaked at about $184 billion in 2014.
Spending next year is unlikely to lead to a significant increase in production, partly because drilling costs are increasing due to inflation and labor shortages.
This year, shale companies remembered the inactive wells they drilled, but they have not yet completed and put into operation. As a result, according to analysts, many will have to restart additional drilling rigs to keep productivity at the same level. Contractors will have to hire more people and increase costs.
Depending on the services, oil field maintenance costs increased by 10-50%. But, according to the consulting firm Rystad Energy, almost half of the 20% increase in prices next year will cover cost inflation.
According to IHS Markit, many large companies are likely to raise costs by less than 5%. At the same time, small private producers intend to increase spending more than others, which have increased oil production this year in the Permian basin of West Texas and New Mexico.
In this most active oil-producing region, production has almost reached the pre-pandemic level, while the country as a whole still lags behind this mark by about 1.5 million barrels. Moreover, production in other regions has stopped at the same level or decreased this year.
Ken Waits, CEO of Mewbourne Oil Co., one of the largest private oil producers in the Permian Basin, said that during the pandemic last year, his company stopped 10 of the 12 drilling rigs operating before the outbreak of the virus. The company currently uses 19 drilling rigs and plans to increase their number next year.
Some private companies do not plan to invest much more in drilling than this year. For example, Linhua Guan, CEO of privately held Texas oil and gas producer Surge Energy, said his company currently operates three drilling rigs in the Permian Basin, up from a peak of eight in 2017. While higher prices allow the company to accelerate operations, it is unlikely that Surge will return to this level of drilling in the foreseeable future.
Colorado-based producer Tap Rock Resources LLC, which produces oil in the Perm Region, has almost tripled its annual production this year compared to last year, installing five more drilling rigs since October last year. However, according to its director Ryan London, they do not plan to repeat this steep trajectory next year.
According to him, private companies would otherwise increase production with a shortage of raw materials, industrial equipment, and labor. For example, some cannot obtain a sufficient number of cemented casing strings used in drilling, while others cannot get parts for pumps used to increase the productivity of wells.
Many producers will not feel a significant increase in prices, as they have entered into hedging contracts to fix prices for products in the future when prices are lower. And although higher prices will help to get additional cash, companies will have to return most of this money to investors, said Tim Dunn, CEO of CrownQuest Operating LLC, one of the largest private producers in the Permian Basin.
