America’s shale pioneers have vowed to keep a lid on drilling even if oil hits $100 a barrel, citing a need to maintain capital discipline and what they claim is a “war” on fossil fuels waged by the Biden administration.
The price of Brent crude has surged by more than 25 per cent to $95 a barrel since June following co-ordinated cuts in production by Saudi Arabia and Russia. This has pushed up petrol prices and complicated efforts by the US Federal Reserve to rein in inflation, presenting a political challenge to President Joe Biden as he seeks re-election next year.
Last year, when oil prices surged to record highs following Russia’s full-scale invasion of Ukraine, the Biden administration urged shale drillers to pump more oil. But they have largely ignored these pleas. There are few signs the industry plans to plough the extra profits generated by the recent upswing in prices back into new exploration or production.
“I just don’t see producers getting all excited about near-term price and I think we are going to see continued [price] volatility,” said Rick Muncrief, chief executive of Devon Energy, an Oklahoma City-based company.
He said futures markets showed oil prices moderating six months to a year from now, adding that there were many uncertainties, including whether higher oil prices would tip economies into recession and destroy demand.
“By nature, most of us will just say ‘lets stay disciplined. Let’s keep our production flat’,” said Muncrief.
American oil output more than doubled in the 10 years to 2019 to a high of 13mn barrels per day during a shale revolution characterised by massive overinvestment and financial losses when oil prices crashed. Investors paid a high price for their largesse, with Deloitte estimating free cash flow for the entire US shale sector from 2010 to 2019 was minus $300bn.
US production fell during the pandemic when scores of shale producers declared bankruptcy and pulled back on spending their free cash flow. It is now rising again and analysts’ forecasts suggest it could surpass the previous record for US production by the end of the year.
But the rate of growth is much slower than in the previous decade and few analysts believe US shale sector output can put a lid on oil price increases driven by Saudi Arabia. Rising costs, labour shortages and a decline in output from new oil wells have added to producers’ caution in expanding drilling, they say.
Heather Powell, chief executive of Ventana Exploration and Production, an oil and gas company based in Oklahoma City, said the shale crash had left deep scars on producers and investors, who were now reluctant to ratchet up investment because of temporary increases in oil or gas prices.
“When I first started in the industry in the mid-2000s many companies had no set budgets and would chase opportunities and drill regardless of the costs,” she said. “But investors were burnt badly, companies had to go through Chapter 11 restructurings and so now capital discipline is the mantra that companies are following.”
The number of operating oil rigs in the US, a barometer for activity in the industry, has dropped 16 per cent to 502 compared with the same time last year, according to Baker Hughes, an oilfield services company. At the peak of the shale boom in 2014 there were 1,609 oil rigs operating in the US.
Recent indicators suggest shale companies are starting to cough up some more money for production, albeit at much lower levels compared with the height of the shale revolution.
US shale companies reinvested approximately 65 per cent of their capital in production so far this year, up from 46 per cent last year but nowhere close to the levels during the height of the shale revolution, according to Rystad Energy, which expects reinvestment rates to hover at about 50 per cent for the next couple of years.
At an energy conference in Oklahoma City last week organised by billionaire shale tycoon Harold Hamm, many companies said the Biden administration’s restrictions on drilling on federal lands and waters, delays to permitting and hostile rhetoric were also limiting activity.
“The US is blessed with amazing natural resources but we are walking away from them,” said Chuck Duginski, chief executive of Canvas Energy, a shale driller which emerged from Chapter 11 restructuring in 2020.
“The Biden administration is waging a war against oil that makes it far more difficult to invest in drilling that would boost production and bring down prices,” he said.
Hamm, founder of Continental Resources, alleged the government was more focused on “putting us out of business” than tackling high fuel prices, boosting US energy security or even tackling climate change.
“It’s political power. They believe that is what their base wants. But, I’m sorry, a lot of those people want to buy gasoline at decent prices and heat their homes,” said Hamm in an interview.
Continental has warned oil prices could hit $150 a barrel in coming years unless Washington does more to encourage exploration.
Analysts, however, say it is capital discipline and inventory concerns that are the main drivers of the corporate strategy of public shale companies, rather than the White House.
“The administration would view oil and gas as a necessary evil, which means they’re working very hard to shrink the business while at the same time encouraging the players to grow the business,” said Dan Pickering, chief investment officer of Pickering Energy Partners.
“‘We’re not in love with you long term but we need you short term.’ And so is that a war? It’s [more] a skirmish.”