This year’s rise in oil prices brings back an all too familiar demand for the oil market and the OPEC + group: Will the American shale return faster than expected to destroy the alliance’s efforts to manage supply?
Most U.S. publicly traded shale businesses adhere to strict capital discipline. They promise that any excess cash flow will go to additional payouts to shareholders, who have seen years of meager returns while the shale spot chases drilling and production records.
However, there is a group of shale producers who could spoil the OPEC + plans for oil market management and deliver more than the market and forecasters currently expect.
It is the group of smaller privately owned oil companies that benefit from higher oil prices as their production is increased by their primary way of generating cash. The well-maintained producers also benefit from the fact that they are not penalized by the stock market or investors for their choice to sharpen drilling activities, while large listed companies reduce capital spending and diapers.
Signs have emerged that some private shale operators that have given a boost in the past year will do the same in the coming months.
More than expected U.S. production entering the market could derail current forecasts for U.S. oil supplies and undermine the OPEC + alliance’s efforts to control much of the global oil supply while demand recovers from the pandemic shock.
For example, DoublePoint Energy wants to increase production to more than 100,000 barrels per day (bpd) in the coming months, after doubling production to 80,000 bpd in the past year.
“The public is under a lot of pressure to be disciplined with the capital they spend,” Cody Campbell, co-CEO of DoublePoint Energy, told Bloomberg in a recent interview.
“They do not have the freedom to go back as we can,” Campbell added. Related: is this the world’s next major foreign oil region?
If more of the ‘smaller guys’ decide to take advantage of the higher oil prices and increase production to generate more returns, they could raise expectations of how much oil the US will pump this year.
At present, OPEC itself sees crude oil production in the US for 2021 at 11.2 million bpd, slightly lower than an estimated production of 11.28 million bpd for 2020. In its latest monthly oil market report (MOMR) for February the cartel has its 2021 estimate for US oil production by 210,000 bpd and now expects an annual decline of 70,000 bpd from 2020, as the continued capital spending discipline ‘is expected to weigh on the production outlook in 2021.’
Larger listed U.S. producers are worried that some drillers will violate the promises of production control.
‘There will be bad actors [who pursue] growth for the sake of growth, ”Matthew Gallagher, a manager at Pioneer Natural Resources, told the Financial Times in January.
Pioneer Natural Resources itself will try to limit long-term production growth to an average of 5 percent, CEO Scott Sheffield said last week at the rate of return for the fourth quarter. In addition, Pioneer expects to return up to 75 percent of its annual free cash flow to shareholders after the base dividend is paid, Sheffield noted. It will be returned in the form of variable dividends paid out quarterly next year, the executive said. Related: is this the world’s next major foreign oil region?
While Pioneer and other major listed shale players seem to be responding to investors’ calls for higher returns to shareholders, the smaller firms promise nothing more than to chase the higher returns on their investment, which are produced by more oil production.
U.S. shale production as a whole is unlikely to return to pre-pandemic levels, Occidental CEO Vicki Hollub told IHS Markit’s CERA Week on Tuesday.
“The sharp decline in activity in the US, coupled with the high decline in shale and the 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,” he said. Hollub said. , as carried by Reuters.
Shale production may never return to pre-COVID levels, but privately owned drilling rigs may surprise the big forecasters, the oil market and even OPEC.
By Tsvetana Paraskova for Oilprice.com
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