US shale producers weigh cash against growth

US shale oil producers are raking in cash as oil prices surge to crisis levels in a tight market. But different types of firm are pursuing very different strategies.

Oil majors — ExxonMobil and Chevron — are latecomers to the shale game, operating just 8pc of US shale output, but they have bold plans to boost production as they pivot upstream investment to shorter-cycle projects (see table). "We grew our Permian production from 2020 to 2021 by over 25pc," ExxonMobil chief executive Darren Woods says. "Our expectation, as we go into 2022, is to grow another 25pc." Chevron chief executive Mike Wirth expects around 10pc growth in Permian output this year and the firm is planning a 50pc rise in well start-ups.

International exploration and production (E&P) firms — ConocoPhillips and Occidental — are doubling down on their positions in the Permian basin with strategic acquisitions. Occidental's 2019 merger with Anadarko and ConocoPhillips' 2021 purchase of Concho Resources followed by Shell's Permian interests more than doubled their share of shale oil output to 13pc. "Companies like ours and other large companies think more of a sustainable growth rate because that is really where you get your efficiency — a disciplined kind of growth," ConocoPhillips executive vice-president Tim Leach says. ConocoPhillips plans "a growth rate for our Permian in the high single digits", chief executive Ryan Lance says.

The big public US shale firms are still resolutely focused on making money for shareholders rather than chasing output growth. Six of the top 10 shale producers accounting for nearly a third of output are publicly owned and assert that they will not be tempted by high prices. "Diamondback's team and board believe that we have no reason to put growth before returns," chief executive Travis Stice says. "Long term, we are still in that 0pc to 5pc," Pioneer Resources chief executive Scott Sheffield says. "We are not going to change, as I said, at $100/bl oil, $150/bl oil, we are not going to change our growth rate. We think it is important to return cash back to the shareholders."

Capacity constraints

Most of the growth in activity is coming from smaller private firms that have no shareholders to answer to, yet they face constraints that may limit their potential. "The private independents, a few of them, as we all know, are growing — they have announced growth rates in the 15-25pc/yr range," Sheffield says. But "a lot of the privates are experiencing labour issues, cost issues, cannot get equipment, so that is going to prevent the rig ramp-up." Most private firms are smaller than the top 10 producers, with less access to high-quality resources.

Oil output in the seven shale formations in the EIA's Drilling Productivity Report (DPR) is expected to rise by close to 110,000 b/d or 1.3pc next month. Just over 900 new wells were completed in January, 23pc more than a year earlier and only 13pc down on January 2020, before the pandemic struck (see graph). Around a fifth of well completions were previously drilled-but-uncompleted (DUC) wells — down from 43pc in January 2021, as a backlog of DUC wells is used up. The DUC well inventory fell rapidly last year, as firms took advantage of lower start-up costs for new wells, with completions outpacing drilling. But drilling is rising faster than completions as more rigs are deployed.

US tight oil output ended last year 510,000 b/d higher than a year earlier, but average 2021 output was 120,000 b/d down on the year. Strong growth is expected this year if output rises at the current rate of around 100,000 b/d each month. The Permian is the fastest-growing shale region with output expected to increase by 71,000 b/d next month. But output is also starting to rebound in the other shale regions (see graph).

By David Long

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US tight oil production