Spotlight: Will US shale oil operators forget the discipline of capital and produce much more oil next year as oil prices peak in seven years?


A version of this S&P Global Platts Analytics Spotlight was first published on October 21.

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Despite high oil prices, capital discipline has held back drilling and completion activity as most public operators have focused on paying down debt and returning money to shareholders instead of increase shale oil production.

As WTI, which currently trades near $ 85 / b (a seven-year high), continues to rise, capital discipline should be eased mainly by large and mid caps while the majors should maintain the cap.

Besides capital discipline, production growth next year is constrained by how quickly operators can physically scale up platforms as they continue to have difficulty hiring qualified personnel.

Production growth in 2022 under a $ 100 / bbl scenario could be 1.2 million b / d higher than our baseline scenario, but likely reduced to around 0.8 million b / d due to the discipline of capital.

As demand picked up, resulting in higher and sustained oil prices, investment also increased, but significantly less than in previous years. This year, despite a 70% increase in oil prices, operators are only increasing their investments by 9% and are expected to experience a similar increase next year. Average oil prices in 2021 are higher than in 2018, but capital spending is only 65% ​​of what was spent in 2018. The main reason is capital discipline, which slows down activity despite high oil prices. Another factor is the well efficiency achieved by operators since 2018. Despite high oil prices, rigs are 22% below pre-Covid-19 levels and fracking crews 10% below.

The discipline of capital is practiced by all public operators, the majors being the strictest. As for drilling activity, they are 67% lower than pre-Covid-19 levels while large / mid / small caps are around 40% lower. On the other hand, small operators / private operators are 15% above pre-Covid-19 platform levels. Many small operators / private operators are supported by private capital, which is not motivated by capital discipline but rather by increasing production and then converting assets. The risk of uncontrolled production growth of small private operators is somewhat offset by lower productivity of wells compared to public operators, as they focus more on conventional areas and have a relatively smaller surface area in oil areas. shale.

We did an analysis to try to quantify the additional oil production that could come from the US shale under various price scenarios. Our baseline scenario assumes an average WTI of around $ 60 / bbl for 2022-2025 and continued capital discipline. Ignoring the discipline of capital, growth in 2022 is constrained by how quickly operators can scale up platforms given that it is difficult to find qualified personnel and that many platforms that went inactive when Covid -19 hit the oil field in early 2020 is not available or requires major repairs to become available. We assume that as oil prices rise above $ 60 / bbl, capital discipline will begin to weaken. For illustration purposes, our benchmark case assumes 0.7 million bpd YY growth in 2022, requiring 101 additional rigs. At $ 100 / bbl, without any capital discipline, we could experience additional production growth of 1.2 million bbl / d, requiring 270 more rigs year over year. However, traders are unlikely to completely reject the discipline. As such, we’re more likely to see around 0.8 million bpd, which would require 215 more rigs on top of our benchmark case.

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