President Donald Trump's quest to see higher US crude output as part of his "energy dominance" agenda is set to get off to a rocky start as shale firms get ready to unveil budgets that are likely to be flat or lower compared with 2024.
Trump may be keen to encourage companies to ramp up production from already record levels, but separating the reality from the rhetoric suggests this may be a tall order. Promises to slash red tape, speed up permitting and open up more federal land to drilling — all of which were included in a barrage of executive orders issued in Trump's first week back in office — certainly feature high on the industry's wish list. But the general mood has shifted since Trump was last in the White House, and growth is no longer the main objective of operators.
"Deregulation provides an option, not an obligation, to produce," is how consulting group ClearView Energy Partners managing director Kevin Book puts it. Given US crude output has increased to 13.5mn b/d from 11mn b/d at the start of former president Joe Biden's administration, it is hard to make the case that the previous government held back the sector to any serious degree. And a layer of ambiguity surrounds a target of boosting output by 3mn b/d of oil equivalent between now and the end of Trump's second term, as cited in Treasury secretary Scott Bessent's "3-3-3" economic strategy.
There is also an inherent contradiction in Trump's call to bring down oil prices at the same time, hardly an incentive for companies to go flat-out in terms of drilling even if they wanted to. Energy firms recently surveyed by the Federal Reserve Bank of Kansas City said an oil price of $84/bl would be needed before a substantial increase in drilling could occur. The US benchmark currently trades at around $73/bl.
For the most part, shareholders want the focus in company boardrooms to be about returns above all else, translating into a relentless focus on cutting costs and raising dividends and share buy-backs. "Supply growth is not being restrained, for the most part, by government," says Clay Seigle, senior fellow at think-tank CSIS. "It's being restrained by Wall Street. It's being restrained by the capital markets that have different objectives for their investments."
Now is not the time to be growing into an oversupplied market, warned Occidental chief executive Vicki Hollub at the World Economic Forum (WEF) in Davos, Switzerland, last week. "We are still in an oversupplied market," she added. "We have got to let some of the spare capacity get worked off. At that point, we can look at growing our production again meaningfully."
Biden permitting
Moreover, the length of time it takes to secure permits has not been a major obstacle in the past few years, according to Rystad Energy. The fourth quarter saw the third-highest number of permits issued on land with federal mineral rights, with output reaching a record high, the consultancy says.
All in all, there is likely to be little appetite to get production growth going again in the near term, especially as the top Permian basin gets even more crowded in light of a recent wave of consolidation, and attention turns to prolonging the life span of existing inventory as the best acreage gets used up. The quality of newly acquired inventory is declining, averaging a $50/bl breakeven price in 2024, up from $45/bl in 2022-23, according to consultancy Enverus.
"We're in a return of capital phase that doesn't leave a lot of room for the sort of heady days of the ‘shale gale'" almost a decade ago, Book says. And so shale executives may be best advised to keep their heads down to avoid provoking Trump for as long as Wall Street calls the shots.
