WTI crude has risen above $51 this week, even as oil prices rise, US shale industry CEOs are promising restraint and not desperation to increase production.
Rick Muncrief, Devon Energy Corp. ‘s new chief executive, has joined the chorus calling for limits on shale oil drilling, saying he won’t join the effort to increase production just because oil prices are rising.
He said in an interview:
“If we really think about 2021, we would keep production flat. I don’t see the need for U.S. shale producers to return to double-digit growth rates in the next few years.”
Muncrief’s comments echoed those of Scott Sheffield, head of Pioneer Natural Resources Co., and Vicki Hollub, head of Occidental Petroleum Corp.
Saudi Arabia’s surprise announcement of a recent production cut sent oil prices soaring. All three called for caution, arguing that years of unbridled production growth had cost the U.S. shale industry so much money, sapped so much cash, and left no room for profit growth even before the outbreak.
Muncrief said Devon’s shale oil production is scheduled to remain at the same level as in the fourth quarter. Hollub stuck to its original production growth target of 5% and focused on reducing debt.
Doug Suttles, CEO of Ovintiv Inc., another drilling company, said Thursday:
“The company is not going to increase production at the moment. We need to see global markets recover and our industry needs to show self-discipline.”
U.S. crude oil production is hovering around 11 million barrels a day, about 12 percent of global demand last year and about 2 million barrels below its peak in early 2020. The financial position of shale oil producers is weak, and production losses — equivalent to the entire production of the U.S. Gulf of Mexico — will not recover anytime soon.
But the rise in oil prices, driven by Saudi production cuts, presents an opportunity for U.S. shale producers to ramp up production dramatically and return to the high-growth model of the past. Unlike conventional fields, which can take years to come on stream, shale oil producers can drill, complete and start pumping in weeks, allowing them to quickly increase or decrease production, putting pressure on OPEC and its Allies.
Rystad Energy said on Thursday that U.S. shale oil and gas production would surge this year, driven by a rebound in oil prices in the second half of last year and Saudi production cuts.
Espen Erlingsen, head of upstream research at Rystad, said: “The increase in US crude production activity has already started to show, with shale drilling activity up 60 per cent since the low reached last August.”
The financial situation of oil producers is still not optimistic
Shale oil producers can shore up their finances through acquisitions. Last year saw a wave of acquisitions by independent drillers, with both Devon and Pioneer making acquisitions of smaller players in the industry in the final months of 2020. But this is not going to improve the oil companies’ debt situation in the long run.
Despite the sharp rise in oil prices, shale oil remains expensive to extract. For Devon, the company will need to drill and fracture new Wells to keep production steady, with maintenance costs of about $1.7 billion for that alone, Muncrief said. Devon is still finalising its plans for 2021 and intends to update its forecasts in the coming weeks.
The benchmark U.S. crude oil price broke above $50 a barrel for the first time since February last year, Muncrief said.
“If crude oil prices stay in this range or strengthen further, corporate cash flow could strengthen. But it will not change our plans for crude oil production activities.”
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