This year’s rise in oil prices again raises a question that is too familiar for the oil market and for the OPEC + group: Will the American shale return faster than expected to ruin the alliance’s efforts to manage supply?
Most publicly traded American shale companies continue to promise strict capital discipline. They promise that the excess cash flow will be spent on additional payments to shareholders, who have seen years of poor returns while the shale patch was chasing drilling and production records.
However, there is a group of shale producers who could once again ruin OPEC + plans for oil market management, producing more than the market and forecasts currently expect.
This is the group of small private oil companies that benefit from higher oil prices, as their main way to generate cash is to increase production. Those local producers also benefit from the fact that they are not punished by the stock market or investors for their choice to increase drilling activity while large listed companies reduce capital spending and idle platforms.
Signs have begun to appear indicating that some private shale operators who have boosted production over the past year will continue to do so in the coming months.
More than expected U.S. production to hit the market could derail current forecasts of U.S. oil supplies and undermine OPEC + alliance efforts to control much of the world’s oil supply while demand recovers from pandemic shock.
For example, privately owned DoublePoint Energy aims to increase production to more than 100,000 barrels a day (bpd) in the coming months, having doubled production to 80,000 bpd in the last year.
“Audiences are under a lot of pressure to be disciplined with the capital they spend,” DoublePoint Energy co-executive Cody Campbell told Bloomberg in a recent interview.
“They don’t have the freedom to go after coming back as we can,” Campbell added. Related: Is it the next big offshore oil region in the world?
If more of the “younger guys” decide to take advantage of higher oil prices and increase production to generate more yields, they could exceed expectations of how much oil the U.S. would pump this year.
Currently, OPEC itself sees US crude production in 2021 at 11.2 million barrels per day, slightly lower than the estimated production of 11.28 million barrels per day by 2020. In its latest monthly oil market report (MOMR) of February, the cartel revised its forecast for 2021 US oil production is 210,000 bpd and now expects an annual decrease of 70,000 bpd from 2020, as “it is expects continued discipline of capital spending to weigh on production prospects in 2021 ”.
Larger U.S. producers are concerned that some drillers are breaking promises of restricting production.
“There will be bad actors [who pursue] growth for the sake of growth, “Matthew Gallagher, an executive at Pioneer Natural Resources, told the Financial Times in January.
Pioneering natural resources will try to limit production growth to a 5% long-term average, CEO Scott Sheffield said in the fourth-quarter earnings call last week. In addition, Pioneer expects to return up to 75 percent of its free annual cash flow to shareholders after paying the base dividend, Sheffield noted. This will be returned in the form of variable dividends paid quarterly the following year, the executive said. Related: Is it the next big offshore oil region in the world?
While Pioneer and other major listed shale players appear to be paying attention to investors ’calls for higher returns to shareholders, smaller operators promise nothing more than to pursue higher returns on their investment, which is generating with more oil production.
U.S. slate production as a whole is unlikely to return to pre-pandemic levels, Western CEO Vicki Hollub told CERAWeek on Tuesday for IHS Markit.
“The sharp drop in activity in the United States coupled with high rates of shale decline and pressure from the investment community to maintain discipline rather than growth means, in my view, that shale will not return to being in the United States, ”Hollub said. , according to Reuters.
Slate production will never return to pre-COVID levels, but private drills could surprise major rising forecasts, the oil market and even OPEC.
By Tsvetana Paraskova for Oilprice.com
More highlights from Oilprice.com: