A capital-disciplined US shale sector is seeing record free cash flow, but while crude prices above $70/bl are reinforcing confidence and activity in the sector, executives see growing investor, financial and regulatory pressures firmly capping prospects for production growth.
Oil and gas executives remained upbeat this quarter as energy prices rebounded, according to the Federal Reserve Bank of Dallas, although concerns are growing over rising costs. The Dallas Fed's energy survey of 152 companies in Texas, southern New Mexico and northern Louisiana on 9-17 June showed that activity has continued to grow strongly in the past three months. Drillers also plan to step up spending. But respondents voiced scepticism about the energy transition and the possibility of a carbon tax, as well as concerns about a less favourable regulatory environment under President Joe Biden. Three-quarters of those polled see a global crude supply gap in the next two to four years.
A lack of new capital for oil and gas investment could hamstring the industry in the future, according to one upstream executive, who says just one institutional investor out of 400 that their company has worked with is willing to provide fresh funding. "This underinvestment coupled with steep shale declines will cause prices to rocket in the next two to three years," the executive said.
Dutch bank ABN Amro said on 24 June that it plans to exit oil and gas lending in North America, after agreeing to sell its $1.5bn portfolio of loans to investment firms Oaktree Capital Management and Sixth Street Partners.
Shale drillers have had a "fairly tempered" response to this year's rebound in oil prices, Hess chief executive John Hess says. Even if the sector's rig count starts to move up quickly, and shale growth accelerates, Hess estimates that it would take around four years for US oil output to get back to pre-Covid levels of 13mn b/d. That drillers are unwilling to sharply increase production "comes from the shale discipline exercised by investors and oil companies alike", Hess told an industry conference this week.
Low investment and oil prices above $70/bl could help the world's publicly traded E&P companies report record free cash flow of $348bn this year, consultancy Rystad Energy says. Shale, which has struggled to generate positive returns in the past, is on track to make close to $60bn in free cash flow this year before hedging, the firm estimates.
Supercycle me
At the same time, oil service firm Schlumberger sees the potential for a demand-led supercycle as the market rebalances faster than previously expected owing to lower investment, and as the economy bounces back and US drillers and Opec+ exercise restraint. These factors set the stage for a "sustained growth cycle", chief executive Olivier Le Peuch says.
But surplus capacity in the shale services sector means that firms cannot yet pass on their rising costs to drillers. "Cost inflation is killing us," one service company executive says. Independent producer EOG Resources says that falling well costs are in line with its 5pc reduction target. "We have been able to lower well costs even in what is potentially turning into a bit of an inflationary environment," president Ezra Yacob says.
Liberty Oilfield Services, which snapped up Schlumberger's US and Canadian hydraulic fracturing (fracking) business last year, says that the number of fracking fleets working in North America has rebounded from a low of 30 last year and is likely to end 2021 in the "mid 200s", as privately held oil companies boost drilling while publicly listed rivals hold back.
