Cash is flowing faster than oil in the US shale patch as the threat of Opec's spare capacity continues to cap investment to boost production.
Surging oil prices are fuelling an unexpected bonanza for investors in the US shale sector. Output remains stalled in the lower 48 US states this year but benchmark WTI is up by two-thirds at over $70/bl. The shale industry is expected to earn record revenues this year before taking hedging into account, consultancy Rystad Energy says. Yet firms are unwilling to spend more to boost output until oil market fundamentals tighten — especially the overhang of shut-in capacity held by Opec+ producers, estimated at 5.5mn-8mn b/d.
Shale producers are determined to shake off the image of their profligate past, when they spent more than they earned while chasing rapid output growth. They are now focusing on rewarding shareholders and paying down debt, despite the doubling of prices since last year. "It is not the price of oil that is going to trigger whether we are growing or not growing," EOG Resources chief executive Bill Thomas says. And this view is echoed across the industry.
Most shale firms are just spending enough to keep output flat and using excess cash to accelerate debt repayments and increase shareholder dividends. Breakeven prices have fallen sharply as operators continue to improve well productivity and cut development costs. EOG says it needs WTI at $50/bl for a 10pc return on capital employed, down from $57/bl last year and $81/bl in 2016. The firm says it aims to bring this down to $40/bl in the future.
US oil production is expected to rebound in the second half of this year as shale drilling and completion activity picks up onshore in the lower 48 states, the EIA's Short-Term Energy Outlook (STEO) says. Output will be down by 2pc for 2021 as a whole, thanks to deep spending cuts brought on by the pandemic. But year-on-year growth will rise to 4pc for the remainder of 2021 and to 7pc in 2022, STEO projections show (see graph). It will still take until late 2023 to regain pre-pandemic output, even at these higher growth rates.
Oil production is projected to rise modestly in June-July from the seven major shale formations covered by the EIA's Drilling Productivity Report (DPR). Output from new wells exceeds legacy declines from existing wells — estimated at 425,000 b/d. About 50pc more wells are being completed each month than drilled as operators draw on their large backlog of drilled-but-uncompleted (DUC) wells. These cost 40pc less to bring on line than drilling and completing a well. Operators completed 779 wells last month, of which 247 were DUC wells (see graph).
Firms are still adamant that they will not succumb to the temptation to boost spending and output in response to rising oil prices as they did in the past. "We are not ever going back into the double-digit growth rates," EOG's Thomas says. "Value not volume" is now the mantra for companies such as EOG, with growth fuelled by higher well productivity and lower costs. Securing the highest-quality acreage has become a key objective for companies, either through exploration or mergers and acquisitions. And synergy was the main driver behind the recent spate of mergers in the shale industry.
The future of the shale industry looks very different from its past as investors come to terms with the energy transition. Shale firms are keen to show that they can now offer higher rates of return than many other investments. But the oil majors are shedding upstream assets as they diversify away from hydrocarbons. And about $17bn in private equity money has announced an exit from the shale sector so far this year, with more expected to follow.
