Even $100 a barrel of oil isn’t enough to speed up drilling, shale bosses say

The number of operating oil and gas rigs in the United States has fallen by 16 percent in a year. Photo / 123RF

America’s shale pioneers have vowed to curb drilling even if oil prices hit $100 a barrel, citing the need to maintain capital discipline and what they call a “war” on fossil fuels
led by the Joe Biden administration.

The price of Brent crude has risen more than 25 percent since June to $95 a barrel after Saudi Arabia and Russia made coordinated production cuts. That has pushed up gasoline prices and complicated the Federal Reserve’s efforts to curb inflation, posing a political challenge for Biden as he seeks re-election next year.

Last year, as oil prices rose to record highs following Russia’s all-out invasion of Ukraine, the Biden administration urged shale oil drillers to pump more oil. But they have largely ignored these requests. There are few signs that the industry plans to plow the additional profits generated by the recent price increase back into new exploration or production activities.

“I just don’t think producers will be happy about the short-term price and I think we’ll continue like this.” [price] Volatility,” said Rick Muncrief, chief executive of Devon Energy, an Oklahoma City-based company.

He said futures markets showed oil prices would weaken in six months to a year, adding that there were many uncertainties, including whether higher oil prices would plunge economies into recession and destroy demand.

“By nature, most of us just say, ‘Let’s stay disciplined.’ “Let’s keep our production flat,” Muncrief said.

American oil production more than doubled in the 10 years to 2019, reaching a peak of 13 million barrels a day during a shale revolution marked by massive overinvestment and financial losses as oil prices collapsed. Investors paid a high price for their generosity: Deloitte estimated free cash flow for the entire U.S. shale sector from 2010 to 2019 at negative $300 billion.

U.S. production fell during the pandemic as numerous shale oil producers filed for bankruptcy and stopped spending their free cash flow. It is now rising again and analyst forecasts suggest that it could surpass the previous record for US production by the end of the year.

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But the growth rate is much slower than in the last decade and few analysts believe that output from the U.S. shale sector can slow the rise in oil prices driven by Saudi Arabia. Rising costs, labor shortages and a decline in output from new oil wells have increased producers’ reluctance to expand drilling, they say.

Heather Powell, chief executive of Ventana Exploration and Production, an oil and gas company based in Oklahoma City, said the shale crash has left a deep mark on producers and investors who are now hesitant to increase investments because of temporary increases in oil or gas Prices.

“When I first started in the industry in the mid-2000s, many companies did not have fixed budgets and were exploring and exploring opportunities regardless of cost,” she said. “But investors suffered heavy losses, companies had to go through Chapter 11 restructurings, and so capital discipline is now the mantra that companies follow.”

The number of operating rigs in the U.S., a barometer of activity in the industry, fell 16 percent to 502 compared to the same period last year, according to Baker Hughes, an oilfield services company. At the peak of the shale boom in 2014, there were 1,609 drilling rigs operating in the United States.

Recent indicators suggest that shale oil companies are starting to spend a little more money on production, although at a much lower level than at the height of the shale revolution.

U.S. shale oil companies have reinvested about 65 percent of their capital into production this year, up from 46 percent last year, but nowhere near the levels during the height of the shale revolution, according to Rystad Energy, which expects reinvestment rates to improve 50 percent will hover around this level in the next few years.

At an energy conference in Oklahoma City last week organized by billionaire shale magnate Harold Hamm, many companies said the Biden administration’s restrictions on drilling on federal lands and waters, permitting delays and hostile rhetoric were also limiting activity.

“The U.S. is blessed with amazing natural resources, but we are running away from them,” said Chuck Duginski, chief executive of Canvas Energy, a shale drilling company that emerged from Chapter 11 restructuring in 2020.

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“The Biden administration is waging a war on oil that is making it far more difficult to invest in drilling that would increase production and drive down prices,” he said.

Hamm, founder of Continental Resources, claimed the government was more focused on “putting us out of business” than tackling high fuel prices, increasing U.S. energy security or even combating climate change.

“It’s political power. They believe that this is what their base wants. But I’m sorry, a lot of these people want to buy gas at reasonable prices and heat their houses,” Hamm said in an interview.

Continental has warned that oil prices could reach $150 a barrel in the coming years if Washington doesn’t do more to encourage exploration.

But analysts say capital discipline and inventory concerns are the key drivers of corporate strategy at publicly traded shale companies, not the White House.

“The government would view oil and gas as a necessary evil, meaning it would work very hard to shrink the business while encouraging players to grow the business,” said Dan Pickering, chief investment officer of Pickering Energy Partners.

“‘We’re not in love with you in the long term, but we need you in the short term.’ So is this a war? It is [more] a skirmish.”

Written by: Jamie Smyth and Amanda Chu

© Financial Times