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US shale oil output poised for higher growth

  • Market: Crude oil
  • 24/01/22

US shale oil production looks to be on a stronger growth path as oil prices rebound and more firms plan to boost spending this year.

Oil output is expected to rise by 105,000 b/d, or 1.2pc, from the seven US shale formations covered in the EIA's Drilling Productivity Report (DPR) next month, as new-well production outpaces legacy declines at existing wells by a comfortable margin. Tight oil output growth accelerated in the second half of last year as a strong recovery in the prolific Texas-New Mexico Permian basin was augmented by modest growth in other shale regions (see graph).

Most shale firms plan to boost capital spending this year, the latest survey by the Federal Reserve Bank of Dallas says (see graph). In all, 35pc of upstream company executive respondents expect a significant and 43pc a slight increase in spending, compared with 18pc and 32pc, respectively, a year ago (see graph). Nearly half say their firm's primary goal in 2022 is to boost production, 15pc say it is to maintain production and 13pc say it is to reduce debt.

The Dallas Fed survey highlights divergent strategies between private and publicly owned shale producers. More small firms — those with less than 10,000 b/d of production — than large firms aim to lift output this year. A total of 57pc of small firms say their primary goal is to raise production, compared with 24pc of large firms. Close to 30pc of large firms say their primary goal is to reduce debt, compared with 7pc for small firms. Smaller firms are typically privately owned, while larger companies include big public shale producers.

Private operators accounted for most of the increase in onshore rig counts last year, consultancy Rystad Energy says. The number of horizontal drilling rigs deployed in the US has risen to 544, up by 60pc on a year ago and about three-quarters of pre-pandemic levels (see graph). But half the rigs are operated by private firms, Rystad says, compared with a third a year ago. Private rig counts now exceed pre-pandemic levels. There was a surge in drilling last year by private operators that were inactive for at least six quarters, Rystad says.

New year's resolution

Higher oil prices are also testing the resolve of public firms, which so far have resisted the urge to boost spending and output as prices rebounded last year. With breakeven costs for most big companies at $30-35/bl, shale firms "can generate significant cash flow" with oil prices of more than $80/bl, Diamondback chief executive Travis Stice says. Many public firms are now piling up cash after cutting debt, boosting shareholder returns and making strategic acquisitions or mergers. And it is becoming harder to make the case to restrict shale supplies as Opec+ spare capacity diminishes.

Shale producers could boost output by the summer if market conditions line up to show the need for higher US crude output, EOG Resources chief executive Ezra Yacob says. "Then EOG would be in a position to return to pre-Covid-19 levels of production, which would be about 465,000 b/d, no more than 5pc growth," Yacob says. Other producers may also be tempted to open the taps. "I don't think it would be good for the industry, but if oil was more than $100/bl, then that probably does signal some growth," Stice says.

Big public firms remain the driver of future US shale output growth, despite the surge in spending by private firms looking to capitalise on rising oil prices. "I don't know that the privates will truly move the needle," Devon Energy chief executive Rick Muncrief says, pointing to rising service costs and steel shortages. "The privates cannot get pipe," Stice says. The top 10 producers, accounting for just over half of US shale oil output from only 30pc of wells, are public firms.

US tight oil production

Shale oil production drivers

E&P firm capex expectations

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Trump to impose new tariffs on auto imports


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26/03/25

Trump to impose new tariffs on auto imports

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Brazil's Bolsonaro to face trial for coup attempt


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26/03/25

Brazil's Bolsonaro to face trial for coup attempt

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