Shale Oil: U.S. producers have increased drilling activity

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U.S. oil output from seven major shale formations is expected to rise by about 38,000 barrels per day in July to about 7.8 million bpd, the highest since November, the U.S. Energy Information Administration said. U.S. producers have increased drilling activity as oil prices have rebounded to about $70 a barrel. 

Oil prices are signalling the need for an urgent increase in production from OPEC+ and U.S. shale companies as the global economy and oil demand recover more rapidly than expected from the pandemic. OPEC+ countries are still restricting liquids production by more than 3.0 million barrels per day compared with the pre-epidemic levels to cut inventories and raise prices. And U.S. liquids output is also down by more than 1.5 million bpd, according to estimates by the U.S. Energy Information Administration. U.S. shale producers have so far reacted cautiously to the rise in prices, returning earnings to shareholders and cutting debt rather than increasing drilling and production.
 
Shale producers are adding extra rigs more slowly than in previous recoveries and the total number of active rigs (365) is less than half the number (844-869) the last time WTI prices were at similar levels in 2018. But the continued rise in prices is signalling the urgent need for more production from one or more of OPEC+, Iran once U.S. sanctions are lifted, U.S. shale firms and the non-OPEC non-shale producers, said John Kemp from Reuters.

Oil prices are up at the start of the week on growing demand optimism. “Oil prices really are in a positive June upswing as demand and supply are recovering in an unequal speed,” Rystad’s Louise Dickson said in a statement. The U.S. benchmark hitting a 32-month high and Brent rising above $73 per barrel as the market is growing increasingly bullish on demand while the return of Iranian oil looks more distant than initially thought, Oilprice said.

The biggest increase is set to come from the Permian, the top-producing basin in the country, where output is expected to rise by 56,000 bpd to about 4.66 million bpd, the highest since March 2020. The forecast increase in total output was attributable to the Permian and Appalachia basins, with the other five basins expected to decline, or remain flat, the data showed. The Eagle Ford basin in South Texas and the Bakken basin in North Dakota and Montana are each expected to register declines of 4,000 bpd. Output in the Bakken is expected to slide to about 1.1 million bpd, the lowest since July 2020, Reuters said. 

New Mexico’s oil production hit a record high in March 2021, averaging 1.16 mb/d. The March increases were the largest monthly increases on record (although some of the gains came from restarted wells that shuttered during the February blackouts). In 2020, New Mexico’s oil production rose by 133,000 bpd, or 15%, Oilprice said.

Exxon see US shale oil production decline per well. In 2017, Exxon, which is one of the largest shale oil producers, acquired $6.6 billion of net acres in New Mexico, which doubled the company’s assets in the Permian basin that spans west Texas and New Mexico. Notably, the company intends to boost shale output in the New Mexico portion of the Permian basin to 700,000 barrels per day by 2025. Per data released by the Institute for Energy Economics and Financial Analysis, Exxon’s average liquid output for the first 12 months of a well dropped to 521 bpd in 2019 from an average of 635 bpd in 2018 in its Delaware basin assets of New Mexico. Notably, the company went down to the sixth place from the first on a per-well production basis. Full data for 2020 is currently unavailable but initial findings suggest that the company’s Delaware wells continued to lag. 

However, in March, Exxon reported that its per-well profits in the New Mexico operations remained steady between 2018 and 2020. Moreover, its Permian assets have met or exceeded its volume projections per year for six years. The company, which is also involved in the Midland portion of the Permian basin, ranked 12th out of 20 in 2019, based on an output measure that normalizes for well length. Importantly, its average production over a well’s first 12 months improved between 2018 and 2019. According to the data released by IEEFA, Exxon’s shortfall in production per well came as oil output in the Permian basin grew by an average of about 5%. Although U.S. shale production in the Permian improved significantly last decade, it has slowed in recent years as oil companies focus on profit over output, Yahoo Finance said. https://finance.yahoo.com/news/exxon-xom-sees-us-shale-134001695.html

Royal Dutch Shellis considering a sale of its Permian assets, hoping to rase $10 billion. Shell’s Permian operations produced 193,000 barrels of oil equivalent per day in 2020, or about 6% of the company’s total output. Shell would follow in the footsteps of other producers, including Equinor and Occidental Petroleum that have shed shale assets this year, looking to cut debt and reduce carbon output in the face of investor pressure. US oil output is still roughly 2 million barrels per day below its all-time record production of nearly 13 million bpd hit before the coronavirus pandemic that made it the world’s top producer. Against this backdrop, estimates for Shell’s acreage run from $7 billion to over $10 billion, the latter implying a valuation of almost $40,000 an acre, Reuters said. 

Equinor says it expects to exit Australia, Mexico and Nicaragua while seeking to sell some of its oil and gas assets in the Americas, including its operated onshore position in Louisiana’s Austin Chalk and the Terra Nova project offshore Newfoundland. The plan is part of Equinor’s strategy to exit operation of onshore unconventional oil and gas assets while instead partnering with local companies to “enjoy regional expertise and economies of scale in a way we never could as an onshore operator,” executive VP of international upstream operations Al Cook says. Equinor’s strategy update focuses on accelerating its energy transition, including raising the share of investment in renewable energy and low carbon solutions from 4% in 2020 to 50%-plus by 2030, Seeking Alpha said. 

Investors see green push leaving oil market short on supply. Bets from hedge funds and money managers are becoming more bullish, and analysts say that a growing number of investors see a supply shortage coming as a global push for energy transition leaves the world short on oil supply in the years ahead, said Oilprice. “This is the basis for the next oil crisis,” Leigh Goehring, managing partner at commodities-focused investment firm Goehring & Rozencwajg Associates, told the WSJ. “We’re in uncharted territory.”

But U.S. shale might be needed. OPEC+ may not have enough spare capacity to satiate the market next year. “In the event that the U.S. remains status quo and does not grow next year, global stocks could be nearly 400 million barrels lower, from entry to exit in 2022,” wrote Michael Tran, commodity strategist at RBC Capital Markets. “Put another way, market balances only begin to reach a state of equilibrium if U.S. production grows by 1.2 million bpd next year. Anything short of that and balances will remain tight. And this comes after virtually all of OPEC+ spare capacity has returned to the market.” Crude oil prices have climbed to their highest level for more than two years as U.S. shale producers have added only a limited number of extra rigs and production, opting to push for higher prices and profits instead, Oilprice said.