US frackers are expected to lift US oil-field spending by 15% to 20% next year, but their investments are still well below pre-pandemic levels
That’s because Wall Street has pressured US frackers to keep a lid on spending and oil production, analysts and executives said. Before the pandemic, US producers flooded the market with more barrels whenever crude prices climbed higher, but ultimately spent more money than they made.
Investors and banks have now pressured oil companies to live within their means, prompting them to pay off debt and return excess cash to shareholders during the shale boom. They have also pressured companies to rethink future drilling plans and to address their carbon footprints in response to environmental, social and governance, or ESG, concerns. The withdrawal of investors from the region has undermined the US sector’s role as a credible stopgap for global energy markets at a time when participants are concerned that oil supplies will strengthen as demand recovers from the pandemic.
“Too much investment yielded very poor returns. I don’t think there’s a scenario where you go back on drunk sailing expenses,” said Chris Wright, chief executive of hydraulic fracturing company Liberty Oilfield Services LLC.
Many oil producers will still generate additional cash next year, albeit with a jump in spending, given higher prices, Mr. Wright said.
Oil companies cut an estimated $55.8 billion in US spending this year, compared to $60.8 billion last year and $108 billion in 2019, according to investment bank Evercore ISI. US oil-field investment peaked at about $184 billion in 2014.
Next year’s spending is unlikely to increase production significantly, as inflation and labor shortages are driving up drilling costs. This year, shale companies have gone through a slew of dormant wells that they drilled but had not yet completed and brought into production. Analysts said many would have to restart more drilling rigs to keep production flat, which would require contractors to hire more people and drive up costs.
Oil-field service costs have risen between 10% and 50% depending on the type of services. According to consulting firm Rystad Energy, about half of the 20% increase in spending next year will have to cover cost inflation.
According to IHS Markit, many large companies are expected to increase spending by less than 5%. Meanwhile, the companies driving the most spending are small, private producers that increased oil production this year in West Texas and New Mexico’s Permian Basin.
In that region, the most active US oil field, production has nearly reached pre-pandemic levels, while the country as a whole is still about 1.5 million barrels shy of that mark, US data show. Production in other regions has stagnated or dropped this year.
Ken Waits, CEO of Mayborn Oil Co., one of the largest private oil producers in the Permian Basin, said last year during the pandemic his company had disabled 10 of the 12 drilling rigs it operated before the virus hit. Now, it is running 19 rigs, and expects to grow more next year.
Still, the number of rigs actively drilling in the Permian will probably only continue to grind upward slowly, Mr. Waits said. The region’s oil and gas rig count has risen to 266 this year, compared to 418 before the pandemic and its peak in October 2014 of 568.
“I don’t think the rig count is going to go up from here,” he said.
Some private companies don’t expect to put much money into drilling this year. Linhua Guan, CEO of private Texas oil and gas producer Surge Energy, said his company is currently operating three drilling rigs in the Permian Basin, down from its peak of eight in 2017. While higher prices are giving the company more flexibility to speed operations, he said the surge is unlikely to return to that level of drilling in the near future.
Tap Rock Resources LLC, a Colorado-based manufacturer that drills in the Permian, nearly tripled its annual production this year compared to last year, adding five drilling rigs since last October. But the company doesn’t plan to copy that fast trajectory next year, said Tap Rock CEO Ryan London.
“We are not going to chase prices,” said Mr. London. “We know you can’t count on $80 forever, so chasing $80 would be very short-sighted, and unless you [the wells] Flowing, it’s $60.”
Mr London said private companies that would otherwise boost production have been hit by shortages of raw materials, manufactured equipment and labour. Some can’t find enough steel casings to be used in drilling, while others can’t get parts for pumps used to agitate wells, he said.
Many producers would not experience much of a rise in prices because they used hedging contracts to lock in prices for future production when prices fell. And while higher prices help churn out excess cash, the companies will return most of that money to investors, said Tim Dunn, CEO of Crownquest Operating LLC, one of the largest private producers in the Permian. .
That, Mr Dunn said, “is their only clear path to recovery from being an underperforming sector.”
Colin Eaton at [email protected]
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An earlier version of this article incorrectly described a casing used as a cement in drilling. The cover is steel. (corrected October 12, 2021)