U.S. shale oil production is ramping back up, with crude prices returning to pre-pandemic levels following recovery of demand, making drilling profitable again for the majority of companies.
The increased activity that surged in March follows a temporary slowdown in February due to freezing weather and comes after drillers shut in a record amount of production in 2020 because travel shutdowns during the pandemic sapped consumption of oil-based fuels.
OIL COMPANIES LOBBY FOR CARBON TAX
The strong rebound shows that some oil producers are refusing to resist the temptation to drill from higher prices, despite the pandemic worsening financial problems that companies faced from taking on debt to pay for growth during the shale fracking boom of the 2010s, without providing sufficient returns.
“The oil industry is still under immense pressure, but reports of the death of shale are exaggerated,” said Mark Finley, a fellow in energy and global oil at Rice University’s Baker Institute. “All of the other factors matter, but not as much as what the price does. The key will be can the industry keep its cost under control as it gets back to work.”
The WTI oil price, the U.S. benchmark, is trading back above $60 per barrel after briefly falling below zero during the depths of the pandemic-fueled price crash last April.
Fracking activity in North America reached its highest level in a year last month, according to the research firm Rystad Energy, with 1,064 wells fracked, the most since March 2020. Much of the increase in fracking occurred in the Permian Basin, which straddles West Texas and New Mexico and was the world’s most productive oil field before the pandemic.
Many of the producers turning on the taps are private companies that are free of scrutiny from investors expecting stronger returns and commitments to reduce greenhouse gas emissions that cause climate change.
“Private companies are better positioned to take advantage of high-commodity prices,” said Tai Liu, senior oil and gas analyst at BloombergNEF.
Still, oil majors such as Chevron and large independent companies like Pioneer Natural Resources are pledging to maintain fiscal restraint until the demand recovery is more certain.
“The issue of capital discipline is paramount,” said Bruce Niemeyer, vice president of strategy and sustainability at Chevron, speaking Wednesday at a summit hosted by BloombergNEF. “Our focus is on high return, lower carbon.”
At the same event, Scott Sheffield, CEO of Pioneer, said its recent purchases of two smaller shale drilling companies, Parsley Energy and DoublePoint Energy, does not mean it will be significantly increasing its production.
He argued that shale production exploded too quickly, providing 80% of world oil growth the last 10 years, provoking OPEC, the cartel of Middle East oil-producing countries, to instigate a price war that led to a market crash in 2014.
“We changed our entire model from a growth company to focus on free cash flow,” Sheffield said.
Public companies also face the prospect of the Biden administration imposing stronger emissions regulations and requiring disclosures of their financial risks to climate change.
“They are wary of the political risk of federal policy moves under Biden,” said Dan Eberhart, CEO of the large oil services company Canary. “But they are also watching market conditions and seeing demand expected to come back and planning how they can fill that.”
Shirin Lakhani, director of global oil service at Rapidan Energy, a research group, said the U.S. shale industry is pursuing a path of “modest growth” because of prices reaching above $60 per barrel.
Rapidan, in a report last month, projected that oil production in the Permian would recover to just 100,000 barrels per day below pre-pandemic highs by the end of 2021. Other shale basins, however, won’t see production growth, with all but the Permian and Bakken in North Dakota poised to decline this year.
Shale production, including all basins, will reach 9.5 million b/d by the end of this year, Rapidan said, up 600,000 b/d from December 2020 but still 900,000 b/d below pre-pandemic highs.
Total U.S. oil output, including offshore, also won’t return to its pre-pandemic high of 13 million barrels per day anytime soon, the Energy Information Administration said this month, projecting an average of 11.4 million b/d by the fourth quarter of this year and 11.9 million b/d in 2022.
“It will be very difficult to get where we were,” Liu said, predicting it won’t happen in the next three to five years. “It would take a ton of investment.”
Oil prices could come under renewed pressure in the next few months, providing a level of uncertainty for producers.
On the supply side, OPEC and its allies, led by Saudi Arabia and Russia, recently agreed to ease a historic output agreement that held back production and played a major role in prices increasing.
“There are a lot of levers the OPEC group can pull, so U.S. producers are at the mercy of that in a sense,” Finley said. “For now, OPEC seems comfortable it can grow production and have relatively well-supported prices without worrying about shale competition.”
Recovery of global oil demand, meanwhile, remains “fragile,” with the number of pandemic cases surging in some major-consuming countries such as India and Brazil, the International Energy Agency warned Wednesday.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
“We have to be cautious about rampant optimism as there will be nooks and crannies ahead,” said Frederick Lawrence, an oil industry economist, who said he hoped producers remained “vigilant” with how quickly they come back.
