This time, US shale isn’t coming to the rescue.
Even though oil drillers are flush with cash after record profits last year, US producers are unlikely to accelerate oil growth enough to make up for OPEC+’s surprise cuts, analysts and executives said.
Management teams aren’t showing signs they’ll break a three-year trend of prioritizing dividends and share buybacks over new drilling. And even if they wanted to pump more, a shortage of top-tier well locations, workers and equipment would limit their ability. Taken together, this means US shale is no longer the disruptive force in global oil markets that it was for the decade before Covid-19.
“There’s not a coordinated response that comes out of here,” said Brendan McCracken, chief executive officer of Permian Basin producer Ovintiv Inc. “We’re now into several years of players like us running these businesses for returns and free cash flow, and that’s not going to change in the short term or the long term.”
US production growth is less than half of what it was before 2020, with overall output yet to return to pre-pandemic levels. Major forecasters see growth of just 500,000 barrels a day or so this year from the Permian Basin, the country’s fastest-growing shale field, less than half of the more than 1 million barrels a day of cuts announced by OPEC+ on Sunday.
“OPEC and shale are much more on the same team now, with supply discipline on both sides,” said Joseph Sykora, a Dallas-based fund manager at Aptus Capital Advisors, which has $4.25 billion under management. “It really puts a floor under the price of oil long term.”
It’s a sharp contrast from much of the last decade, when US shale was a thorn in OPEC’s side, using cheap money to revitalize old and thought-to-be tapped-out oil fields with new fracking technologies. The US oil sector’s spectacular growth added more crude to global markets from 2012 to its 2020 peak than the entire current production of Iraq and Iran combined. That growth irked the Organization of Petroleum Exporting Countries and its allies, which saw its market dominance threatened like never before.
But surging US production growth did little for shareholders, who routinely saw executives ratchet up debt as they plowed more money into new wells. The plunge in oil demand during the pandemic sent many smaller drillers into bankruptcy, and those that survived vowed never to repeat the strategy of chasing production growth at any cost.
Last year, when oil prices spiked to more than $100 a barrel after Russia’s invasion of Ukraine, the new discipline was put to the test — and it held. Executives refused to accelerate production plans despite desperate pleas from the Biden administration. They were eventually proved correct, as they made record profits even as prices tumbled in the latter half of the year.
“US producers feel vindicated by their restraint in 2022,” said Raoul LeBlanc, vice president for North American upstream oil and gas at S&P Global. “The clear message from shareholders is to return any incremental cash and be sober when prices move.”
In any case, US shale producers cannot just turn on the taps like OPEC+ even if it wanted to. Cost inflation ripping through the country’s major oil fields is a major obstacle to growth, as is the availability of workers. And making snap budgeting decisions based on short-term swings is unlikely to win investor approval, according to Dan Pickering, founder and chief investment officer of Pickering Energy Partners.
“The last six months we’ve seen oil at $120 and at $64, so I think we’re going to need to see duration of a stronger dynamic before companies would make a meaningful change to their budgeting,” he said. “I don’t think there’s a green light from investors to grow volumes.”
Oilprice