This year’s rise in oil prices brings back a very familiar issue for the oil market and the OPEC + group: Will U.S. shale return faster than expected to ruin the alliance’s efforts to manage supply?
Most publicly traded American shale companies continue to promise strict capital discipline. They promise that any surplus cash flow will go to additional payments to shareholders, who have seen years of scant returns while the shale area chased drilling and production records.
However, there is a group of shale producers that could ruin OPEC +’s plans for managing the oil market again, producing more than the market and analysts currently expect.
This is the group of smaller private oil companies that benefit from higher oil prices, as their main form of cash generation is increased production. These privately held producers also benefit from the fact that they are not punished by the stock market or investors for their choice to increase drilling activity, while the large listed companies reduce capital spending and paralyze platforms.
Signs have started to emerge that some private shale operators who increased production last year will continue to do so in the coming months.
More than expected, US production hitting the market may cripple current US oil supply forecasts and undermine the efforts of the OPEC + alliance to control a large part of the global oil supply as demand recovers from the pandemic shock. .
For example, the private company DoublePoint Energy plans to increase its production to more than 100,000 barrels per day (bpd) in the coming months, after doubling production to 80,000 bpd last year.
“The public is under a lot of pressure to be disciplined with the capital they spend,” DoublePoint Energy co-chief executive Cody Campbell told Bloomberg in a recent interview.
“They are not at liberty to pursue returns like us,” added Campbell. Related: Is this the next major offshore oil region in the world?
If more of the ‘smaller guys’ decide to take advantage of higher oil prices and increase production to generate more returns, they could raise expectations of how much oil the US would pump this year.
Currently, OPEC itself forecasts US crude oil production for 2021 at 11.2 million bpd, slightly below an estimated production of 11.28 million bpd for 2020. In its latest Monthly Petroleum Market Report (MOMR ) in February, the cartel actually revised its 2021 forecast for US oil production down to 210,000 bpd and now expects an annual decline of 70,000 bpd from 2020, as the continued discipline of capital expenditures “is expected to weigh on the prospects for production in 2021 “.
The largest North American producers listed are concerned that some drillers will break production restriction promises.
“There will be bad actors [who pursue] growth for growth, ”Pioneer Natural Resources executive Matthew Gallagher told the Financial Times in January.
Pioneer Natural Resources itself will try to limit production growth to an average of 5 percent in the long run, said CEO Scott Sheffield in the fourth quarter earnings conference call last week. In addition, Pioneer expects to return up to 75% of its annual free cash flow to shareholders after payment of the basic dividend, Sheffield noted. This will be returned in the form of variable dividends paid quarterly in the following year, said the executive. Related: Is this the next major offshore oil region in the world?
While Pioneer and the other major listed shale players appear to be responding to investors’ calls for greater returns to shareholders, smaller, privately held operators are promising nothing but seeking higher returns on their investments, which are being generated by more production of oil.
U.S. shale production as a whole is unlikely to return to pre-pandemic levels, Occidental CEO Vicki Hollub said at CERAWeek by IHS Markit on Tuesday.
“The sharp drop in activity in the United States, coupled with the high rates of shale decline and pressure from the investment community to maintain discipline rather than grow means, in my opinion, that shale will not be where it was in the past. USA, ”said Hollub, as published by Reuters.
Shale production may never return to pre-COVID levels, but private drillers may positively surprise major analysts, the oil market and even OPEC.
By Tsvetana Paraskova for Oilprice.com
More top readings from Oilprice.com: