The Fuse

U.S. Shale Steps Up Drilling, But Production Rebound Uncertain

by Nick Cunningham | April 08, 2021

Oil prices hit post-pandemic highs in recent weeks, only to fall back amid concerns about the pace of vaccinations and renewed lockdowns in different parts of the world.

But oil prices are still at levels where U.S. companies can restart drilling, according to a variety of analysts. Drilling activity does appear to be increasing, but it remains to be seen if production will follow suit.

Rig count jumps

U.S. oil production remains stuck at about 11 million barrels per day (Mbd), roughly 2 Mbd below pre-pandemic levels.

Across the board, shale executives have promised to exercise “restraint,” reining in previously reckless drilling practices. At the same time, drilling activity has steadily increased for much of this year.

U.S. shale added 13 rigs back into the field last week, the largest increase in over a year.

 The U.S. shale industry added 13 rigs back into the field last week, the largest increase in over a year. “Until this week the rise in activity this year was dominated the by two main sub-basins of the Permian. However, the latest data showed a more widespread pattern of [week-on-week] increases,” Standard Chartered wrote in a note, pointing to rig increases in the Uinta basin, Eagle Ford, and offshore Louisiana.

The rebound does not extend to the Bakken, where the rig count has been stagnant for months. “It is perhaps a measure of the current relative unattractiveness of the Bakken compared to the Delaware Basin that Lea County alone has added as many active rigs in just three weeks as the Bakken’s total rig count,” Standard Chartered wrote, referring to Lea County in the very southeasternmost corner of New Mexico, an area with a heavy drilling presence.

The rig count has increased dramatically thus far in 2021, but remains a fraction of its former self. In fact, the rig count rose to 430 in early April; at the start of the pandemic a little over a year ago, the rig count was nearly twice as high at around 800.

“The worst thing that could happen is that U.S. producers start growing rapidly again.”

Despite the price increase and the noticeable rise in the rig count, executives remain cautious, at least rhetorically. “The worst thing that could happen is that U.S. producers start growing rapidly again,” ConocoPhillips Chief Executive Ryan Lance said at the CERAWeek Conference in March.

But they have very much welcomed the role of OPEC+ in propping them up. “They’ve been brilliant in the way they’ve handled it, the way they’ve been doing it,” Occidental Petroleum CEO Vicki Hollub said at a conference on April 7, referring to OPEC+. “Every U.S. oil and gas company is appreciating their efforts.” Hollub also added that it would require “too much investment” for the U.S. oil industry to ramp production back up to the pre-pandemic level of 13 Mbd.

If OPEC+ keeps prices at current levels or pushes them higher, it is easy to imagine the rate of drilling continuing to climb. But as drilling activity picks up pace, costs also tend to rise. A recent survey of oil executives by the Dallas Federal Reserve found that breakeven costs were up 6 percent compared to last year. The attrition from the 2020 oil bust means that there are fewer oilfield service suppliers, contributing to cost inflation as drilling accelerates.

Consolidation continues

A year ago, Pioneer’s CEO Scott Sheffield went on CNBC at a time when the market was melting down, and criticized ExxonMobil and other majors for standing in the way of coordinated production cuts, alleging that they desired to see independent oil companies go out of business so that they could pick up the shattered pieces. “As you know there are about 74 public independents. There’s only going to be about 10 left at the end of 2021 that have decent balance sheets. The rest will become ghosts or zombies,” Sheffield said.

The wave of consolidation in the shale industry did unfold to a large extent, with dozens of companies declaring bankruptcy in 2020 and larger oil companies buying up smaller ones. As it turned out, Scott Sheffield ended up contributing to that wave.

Pioneer Natural Resources made headlines just last week when it announced the $6.4 billion acquisition of privately-held DoublePoint Energy. That purchase came just a few months after Pioneer spent $4.5 billion to take over Parsley Energy. The DoublePoint purchase is the largest acquisition in the industry thus far in 2021, and is one of a half-dozen or so big mergers since the pandemic began. Pioneer is now one of the most important shale drillers along with a handful of oil majors.

The industry now has fewer – but larger – companies.

But it remains to be seen what that means for production. The largest companies – namely, ExxonMobil and Chevron – have taken on an increasingly important role in U.S. shale due to the successive waves of bankruptcies and consolidation. The industry now has fewer (but larger) companies, as Sheffield predicted.

However, for the time being, the oil majors appear to be taking it slow. According to Rystad Energy and Reuters, the share of drilling activity attributable to ExxonMobil and Chevron in the Permian declined to less than 5 percent in March, down from 28 percent in the spring of 2020. “We essentially hit a pause button,” Chevron Chief Financial Officer Pierre Breber told Reuters in March. “When the world was oversupplied we didn’t see the virtue in putting more capital to add barrels.”

ExxonMobil recently slashed its medium-term Permian outlook as it seeks to trim its debt load. Exxon now sees its Permian production rising to 700,000 barrels per day (b/d) by 2025, down from around 1 million barrels per day (Mbd) previously. On the other hand, Chevron recently reiterated its goal of hitting 1 Mbd by that date, not backing down despite global market headwinds.

Still, Chevron will not begin that aggressive drilling campaign immediately – the company’s Permian spending will double from $2 billion now to $4 billion annually “over the course of the next several years,” Chevron executive Pierre Breber told Reuters. The company had 20 rigs in the Permian last year; that figure is now down to five.

OPEC+ has helped revive the fortunes of U.S. shale, but they are betting that production doesn’t return to pre-pandemic levels. For now, despite the rig count increases, that may work out for OPEC+, at least in short run. “[T]he cartel’s assessment of US production appears correct – despite the very high price, it is likely to recover only slowly,” Commerzbank wrote in a note on April 8, noting that the EIA recently slashed its outlook for U.S. oil production by 100,000 to 200,000 b/d.

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