U.S. shale sector rebounds in 2021 on higher oil prices and market discipline
Energize Weekly, August 25, 2021
After years of red ink and a string of bankruptcies, the U.S. shale oil sector is staging a rebound, buoyed by higher oil prices and continued financial discipline, according to analyses by industry consultant Rystad Energy.
The world’s publicly traded exploration and production (E&P) companies are forecast to generate record-breaking cash flow in 2021 of $348 billion, 12 percent more than the previous 2008 high.
A big contributor to the record is companies working in shale and other tight formations in the U.S.
“A key reason for the all-time-high FCF [free cash flow] is the turnaround in the U.S. tight oil industry,” Rystad Energy said. “Historically, this industry has struggled to generate positive returns, but this could change in 2021.”
Rystad Energy estimates that “public tight oil companies” will to make close to $60 billion in free cash flow this year, before hedging effects.
In pandemic-ridden 2020, the average spot price of West Texas Intermediate was $39.14 a barrel, with a low of $11.26. In 2021, the price has jumped as high as $75 a barrel and has averaged more than $64 a barrel.
“Oil demand has gradually increased after the initial shock of the COVID-19 pandemic, and OPEC+ continues to hold back volumes from the market,” Espen Erlingsen, head of upstream research at Rystad Energy, said in a statement.
In the past, shale operators chased production in periods of high oil prices, borrowing money to invest in drilling more wells. This time around there has been a slow ramp-up in shale production focused on existing wells.
“In conjunction with the persisting low investment environment, E&Ps are enjoying super-profits,” Erlingsen said.
One of the ways shale operators have increased production but held down expenditures is by going back and fracking drilled but uncompleted wells, so-called DUCs.
The number of recorded “live” DUCs, wells drilled in the last two years but not completed, in the major U.S. onshore oil regions dropped to 2,381 in June 2021, the lowest it has been since 2013, according to a Rystad Energy survey.
“U.S. tight oil operators have for several months been depleting their inventory of drilled but uncompleted wells,” the energy consultant said.
Live DUCs have declined across all major oil basins, except for the Anadarko region, which covers central Oklahoma and the Texas Panhandle.
In the Permian, which stretches from West Texas into New Mexico, about 1,550 horizontal, live DUCs remain as of end of June – a decline of 37 percent from the 2,470 wells in the same month last year.
“As rig activity in the Permian has remained more robust since the start of the COVID-19-induced downturn, the total live DUC inventory count has not returned to the 2013 level, as is the case for all other basins combined” Rystad Energy said.
U.S. crude oil output reached about 11.45 million barrels per day (bpd) in June 2021, according to Rystad Energy data. But even with higher oil prices production is projected to only grow by another 60,000 bpd in July and hold steady in August.
Production is actually expected to drop in September to 11.34 million bpd and 11.41 million bpd in in October, before beginning a “slow growth trajectory.”
Texas and New Mexico are forecast to drive almost all oil production growth from the second half of 2021 through 2023, while the rest of the country remains in a “maintenance mode,” producing around 5.3 million bpd to 5.4 million bpd over the coming years.
“Even if the U.S. shale industry wanted to produce more, the time required from a price signal to a significant production impact is at least nine months, including the time it takes to make an investment decision, the months needed from spud to frac end, plus the last stage from frac end to peak production,” Artem Abramov, head of Shale Research at Rystad Energy, said in a statement.