This year’s oil price rally brings back a question that is too familiar for the oil market and the OPEC + group: Will the American shale return sooner than expected to destroy the alliance’s efforts to manage supply?
Most listed US shale firms continue to promise strict capital discipline. They promise that any excess cash flow will go to additional payments to shareholders, who have seen years of poor returns while the shale patch was tracking drilling and production records.
However, there is a group of shale producers that could again ruin OPEC + plans for oil market management, producing more than the market currently expects and forecasters.
This is the group of the smallest private oil companies that benefit from higher oil prices, because their main way to generate cash is to increase production. Those producers also benefit greatly from the fact that they are not punished by the stock market or investors for their choice to intensify drilling, while large listed companies reduce the reduction of capital expenditures and idling platforms.
Signs have begun to emerge that some private shale operators that have boosted production over the past year will continue to do so in the coming months.
More-than-expected US production on the market could derail current US oil supply forecasts and undermine OPEC + ‘s efforts to control much of the global oil supply, while demand is recovering from the pandemic shock.
For example, the private company DoublePoint Energy aims to increase its production to over 100,000 barrels per day (bpd) in the coming months, after production has doubled to 80,000 bpd in the last year.
“The public is under a lot of pressure to be disciplined with the capital they spend,” DoublePoint Energy co-executive Cody Campbell told Bloomberg in a recent interview.
“They don’t have the freedom to go back as we can,” Campbell added. Related: Is it the next big oil region in the world?
If more of the “younger boys” decide to take advantage of higher oil prices and boost production to generate more yields, it could raise expectations about the amount of oil the US would pump this year.
Currently, OPEC itself sees US crude oil production for 2021 at 11.2 million bpd, slightly lower than estimated production at 11.28 million bpd for 2020. In the latest monthly oil market report (MOMR) for In February, the cartel effectively revised its 2021 forecast for US oil production by 210,000 bpd and now expects an annual decrease of 70,000 bpd by 2020, as continued discipline of capital spending is “expected to influence production prospects in 2021”.
Larger US producers are worried that some boreholes would break promises to restrict production.
“They will be bad actors [who pursue] growth for the sake of growth, “Matthew Gallagher, director of Pioneer Natural Resources, told the Financial Times in January.
Pioneer Natural Resources itself will seek to limit production growth to an average of 5% in the long run, CEO Scott Sheffield said in a Q4 earnings call last week. Moreover, Pioneer expects to return to shareholders up to 75 percent of its free annual cash flow after paying the basic dividend, Sheffield said. It will be returned in the form of variable dividends paid quarterly next year, the executive said. Related: Is it the next big oil region in the world?
While Pioneer and other major shale market players appear to be taking into account investor demands for higher shareholder returns, the smaller operators they hold promise nothing more than to pursue higher returns on their investment, which is generated by a higher oil production.
U.S. shale production as a whole is unlikely to return to pre-pandemic levels, Western CEO Vicki Hollub told IHS Markit’s CERAWeek on Tuesday.
“The severe decline in activity in the US, coupled with high shale decline rates and pressure from the investment community to maintain discipline instead of growth means, in my opinion, that shale will not return to where it was in the US.” said Hollub. , as reported by Reuters.
Shale production may never return to pre-COVID levels, but private drilling could surprise major growing forecasters, the oil market and even OPEC.
By Tsvetana Paraskova for Oilprice.com
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