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The rise in oil prices this year brings back a question too familiar to the oil market and the OPEC + group: Will the American shale come back faster than expected to ruin the alliance’s efforts to manage supply?
Most publicly traded US shale companies continue to adhere to strict capital discipline. They promise that any excess cash flow will go to additional payments to shareholders, who have seen years of meager returns as the shale plot sought drilling and production records.
However, there is a group of shale producers who could once again spoil OPEC + plans for managing the oil market, producing more than the market and forecasters are currently expecting.
This is the group of small private oil companies benefiting from rising oil prices because their primary means of generating cash is through increased production. These tightly owned producers also benefit from the fact that they are not being punished by the stock market or investors for their choice to expand the drilling business as large listed companies reduce their capital spending and market platforms to the market. slow motion.
Signs have started to appear that some private shale operators who have increased production over the past year will continue to do so in the months to come.
A larger-than-expected U.S. production that hits the market could derail current U.S. oil supply forecasts and undermine the efforts of the OPEC + alliance to control much of the world’s oil supply as the demand is recovering from pandemic shock.
For example, private company DoublePoint Energy plans to increase production to over 100,000 barrels per day (b / d) in the coming months, after doubling production to 80,000 b / d during the year. elapsed.
“The public is under great pressure to be disciplined with the capital they spend,” DoublePoint Energy co-CEO Cody Campbell told Bloomberg in a recent interview.
“They don’t have the freedom to go after the comebacks as we can,” added Campbell. Related: Is This The World’s Next Big Offshore Oil Region?
If more “little guys” decide to take advantage of rising oil prices and boost production to generate more returns, they could reverse expectations about how much oil the United States would pump out this year.
Currently, OPEC itself sees US crude oil production for 2021 at 11.2 million bpd, down slightly from an estimated production of 11.28 million b / d for 2020. In its last February Monthly Oil Market Report (MOMR), the cartel actually downgraded its forecast for 2021 US oil production by 210,000 b / d and now expects an annual decline of 70,000 b / d j from 2020, because maintaining the discipline of capital spending “should weigh on production prospects in 2021”.
Large listed US producers fear that some drillers will break their promises to limit production.
“There are going to be bad actors [who pursue] growth for growth, ”Matthew Gallagher, an executive at Pioneer Natural Resources, told the Financial Times in January.
Pioneer Natural Resources itself will seek to limit production growth to 5% on average over the long term, CEO Scott Sheffield said during the fourth quarter earnings call last week. Additionally, Pioneer expects to return up to 75% of its annual free cash flow to shareholders after payment of the base dividend, Sheffield noted. That amount will be returned in the form of variable dividends paid quarterly the following year, the executive said. Related: Is This The World’s Next Big Offshore Oil Region?
While Pioneer and other large listed shale players appear to be responding to investor calls for higher returns for shareholders, small, tightly owned operators promise nothing but to seek higher returns on their investment, which is generated by greater oil production.
Overall U.S. shale production is unlikely to return to pre-pandemic levels, Occidental CEO Vicki Hollub said at IHS Markit’s CERAWeek on Tuesday.
“The sharp decline in activity in the United States, along with the high rates of decline of shale and pressure from the investment community to maintain discipline instead of growth means in my opinion that the shale will not return. where he was in the United States, ”Hollub said. , as reported by Reuters.
Shale production may never return to pre-COVID levels, but private drillers could surprise major forecasters, the oil market and even OPEC.
By Tsvetana Paraskova for OilUSD
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