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US shale oil output poised for higher growth

  • Market: Crude oil
  • 24/01/22

US shale oil production looks to be on a stronger growth path as oil prices rebound and more firms plan to boost spending this year.

Oil output is expected to rise by 105,000 b/d, or 1.2pc, from the seven US shale formations covered in the EIA's Drilling Productivity Report (DPR) next month, as new-well production outpaces legacy declines at existing wells by a comfortable margin. Tight oil output growth accelerated in the second half of last year as a strong recovery in the prolific Texas-New Mexico Permian basin was augmented by modest growth in other shale regions (see graph).

Most shale firms plan to boost capital spending this year, the latest survey by the Federal Reserve Bank of Dallas says (see graph). In all, 35pc of upstream company executive respondents expect a significant and 43pc a slight increase in spending, compared with 18pc and 32pc, respectively, a year ago (see graph). Nearly half say their firm's primary goal in 2022 is to boost production, 15pc say it is to maintain production and 13pc say it is to reduce debt.

The Dallas Fed survey highlights divergent strategies between private and publicly owned shale producers. More small firms — those with less than 10,000 b/d of production — than large firms aim to lift output this year. A total of 57pc of small firms say their primary goal is to raise production, compared with 24pc of large firms. Close to 30pc of large firms say their primary goal is to reduce debt, compared with 7pc for small firms. Smaller firms are typically privately owned, while larger companies include big public shale producers.

Private operators accounted for most of the increase in onshore rig counts last year, consultancy Rystad Energy says. The number of horizontal drilling rigs deployed in the US has risen to 544, up by 60pc on a year ago and about three-quarters of pre-pandemic levels (see graph). But half the rigs are operated by private firms, Rystad says, compared with a third a year ago. Private rig counts now exceed pre-pandemic levels. There was a surge in drilling last year by private operators that were inactive for at least six quarters, Rystad says.

New year's resolution

Higher oil prices are also testing the resolve of public firms, which so far have resisted the urge to boost spending and output as prices rebounded last year. With breakeven costs for most big companies at $30-35/bl, shale firms "can generate significant cash flow" with oil prices of more than $80/bl, Diamondback chief executive Travis Stice says. Many public firms are now piling up cash after cutting debt, boosting shareholder returns and making strategic acquisitions or mergers. And it is becoming harder to make the case to restrict shale supplies as Opec+ spare capacity diminishes.

Shale producers could boost output by the summer if market conditions line up to show the need for higher US crude output, EOG Resources chief executive Ezra Yacob says. "Then EOG would be in a position to return to pre-Covid-19 levels of production, which would be about 465,000 b/d, no more than 5pc growth," Yacob says. Other producers may also be tempted to open the taps. "I don't think it would be good for the industry, but if oil was more than $100/bl, then that probably does signal some growth," Stice says.

Big public firms remain the driver of future US shale output growth, despite the surge in spending by private firms looking to capitalise on rising oil prices. "I don't know that the privates will truly move the needle," Devon Energy chief executive Rick Muncrief says, pointing to rising service costs and steel shortages. "The privates cannot get pipe," Stice says. The top 10 producers, accounting for just over half of US shale oil output from only 30pc of wells, are public firms.

US tight oil production

Shale oil production drivers

E&P firm capex expectations

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Millions without power in Houston post-Beryl: Update 2

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Hurricane Beryl passes Houston, heads inland: Update

Houston, 8 July (Argus) — Hurricane Beryl swept through the Houston area this morning with heavy rains and wind gusts near 90mph, bringing local flooding and cutting power to more than 2mn customers. Beryl, which has been downgraded to a tropical storm, was about 30 miles north-northwest of Houston according to a 12pm ET bulletin from the National Hurricane Center (NHC). The storm is expected to turn towards the northeast and increase speed tonight and into Tuesday. On its current forecast track, the center of Beryl will pass over eastern Texas today and into the lower Mississippi and Ohio valleys Tuesday and Wednesday. Beryl made landfall earlier today as a Category 1 hurricane near Matagorda, Texas, after regaining strength as it crossed the Gulf of Mexico from an earlier landfall on the Yucatan Peninsula. A weather station in Freeport, Texas, directly south of Houston on the Gulf of Mexico reported a wind gust of 94mph earlier today while a station at the entrance to Galveston Bay and the Houston Ship Channel recorded a gust of 82mph. Nearly 2mn Houston residents are without power as of 11:30am ET according to outages tracked by CenterPoint Energy. Heavy rainfall of 5-10 inches, with 15 inches in some spots, was recorded across the upper Texas coast and eastern Texas, with considerable flash and urban flooding expected to continue, NHC said in its bulletin. Water levels at the Interstate 610 bridge on the Houston Ship Channel -- home to several refineries and petrochemical plants –- were observed at 10 feet above mean low water levels at 11am ET, well into the "major flooding" range, according to data from the National Oceanic and Atmospheric Administration (NOAA). Several petrochemical plants pre-emptively shut down or experienced electrical surges over the weekend before Beryl hit the Texas coast today. US Gulf coast refiners appear to have robust fuel inventories for this time of year should the storm lead to operational issues. The four-week average of Gulf coast gasoline inventories in the week ended 28 June was up by over 4pc from the same period in 2023 and up by 6pc from 2022, after hitting a near six-month high in the penultimate week of June. The second named storm of the 2024 Atlantic hurricane season, Beryl followed tropical storm Alberto, which came ashore in northeastern Mexico late last month. This year's Atlantic hurricane season is expected to be more active than normal, according to the US National Oceanic and Atmospheric Administration, with 4-7 major hurricanes that pack sustained winds of 111mph or higher possible By Nathan Risser Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

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US shale deals pivot to lesser-known basins


08/07/24
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08/07/24

US shale deals pivot to lesser-known basins

New York, 8 July (Argus) — After a burst of deal-making activity that has sent Permian valuations skyrocketing and seen the best drilling locations already swap hands, buyers' attention is turning to less prominent shale basins that have been overlooked up until now. Such was the case when US independent SM Energy splashed out $2bn for 80pc of the assets of privately held XCL Resources to gain a foothold in the Uinta basin of northeast Utah, best known for its waxy crude that is popular with refiners. The transaction marks a departure from the vast majority of deals in the past year, which have targeted the increasingly consolidated Permian basin of west Texas and New Mexico. It also represents a shift in strategy, given SM Energy is expanding beyond its core operations in the Midland basin and south Texas. Other takeovers have seen companies combine acreage in existing basins to squeeze out savings. Chief executive Herb Vogel told analysts he had looked at other deal options, but his priority was to keep a strong balance sheet and "maintain discipline so that we wouldn't overpay for something". About $41bn of non-Permian merger and acquisition opportunities are on the market, according to consultancy Rystad Energy. With premium acreage becoming increasingly scarce in the top-performing shale play, far-flung regions are poised totake centre stage. Another potential draw for SM Energy may have been that it sawless risk of its transaction being singled out for attention from anti-trust regulators, as several deals involving in-basin consolidation have attracted unwelcome scrutiny. But entry into a new play, as well as concerns over its legacy assets, spooked investors and contributed to a 10pc decline in SM Energy's share price on the day the deal was announced. "It could take a couple of quarters of performance for investors to digest this activity shift and to evaluate the Uinta's potential," analysts at RBC Capital Markets say. Producers are likely to continue the hunt for deals in lesser-known basins as they seek to scale up their inventory at reasonable prices. "A key driver of the deal, like most other transactions seen over the last few years, is adding inventory, particularly at the low end of the cost curve," consultancy Enverus principal analyst Andrew Dittmar says. The Uinta basin offers some of the highest rates of oil recovery per lateral foot in the Lower 48, according to Dittmar. Lubricating the transaction Parts of the basin could achieve oil production performance similar to that of the Permian, according to a recent report by data analyst Novi Labs. "The waxy nature is in high demand by refiners and upper-end lubricant markets," Vogel says. The latest acquisition hands SM Energy around 37,200 net acres, boosting its core net acreage by 14pc. It adds 43,000 b/d of oil equivalent (boe/d), increasing the company's overall production next year to 195,000 boe/d, with oil now making up more than 50pc of the mix. SM Energy also gets 390 drilling locations with breakevens of $43-57/bl, boosting the operator's inventory life by two years. As part of the same deal, US independent Northern Oil and Gas is purchasing 20pc of the XCL assets, helping to offset the total cost for SM Energy. XCL is backed by EnCap Investments and the Rice Investment Group. It was the second exit involving an EnCap-backed company in recent weeks after independent Matador Resources acquired a unit of private equity-backed Ameredev II for $1.9bn to expand in the Permian's Delaware basin. Private equity investors, which have mainly been sellers in recent years, look set to step up their search for undervalued assets as they seek to refill their portfolios. "Combined, those forces should drive a robust market for assets and see valuations rise outside the Permian, although not fully to Permian levels," Dittmar says. By Stephen Cunningham Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

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Beryl menaces eastern Texas with storm surge, rain


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Opec+ crude production falls in June


08/07/24
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08/07/24

Opec+ crude production falls in June

London, 8 July (Argus) — Opec+ crude output by members subject to cuts fell for a third straight month in June, as lower Russian production offset rises from some serial overproducers. Output fell by 90,000 b/d to 33.98mn b/d in June, according to Argus estimates, the lowest in three years. But it could have been lower, with the alliance overshooting its target for the month by 130,000 b/d (see table). Lower Opec+ production has played a key role in tightening oil markets in recent weeks. The $7-8/bl rise in oil prices over the past month will have come as a relief to Opec+, which initially saw prices slide after key members signalled their intention to start unwinding some of their production cuts from October . The nine Opec members subject to cuts were 150,000 b/d above target in June, but this was partially offset by the nine non-Opec members of the group, which produced 20,000 b/d below. 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Iraq was again the alliance's largest overproducer last month, with output rising by 40,000 b/d to 4.2mn b/d — around 200,000 b/d above target. Like Kazakhstan, Iraq has failed to meet its target in any month this year, despite also outlining a plan to compensate for producing above quota. Rising summer temperatures boosted crude burn for power generation last month, but most of its overproduction is down to Baghdad's unwillingness to acknowledge surging production from the semi-autonomous Kurdish region. Iraq and Kazakhstan's combined overproduction has averaged 290,000 b/d this year, making their task of compensating much harder in the coming months. Disruption and decline In contrast, an emerging number of Opec+ members have been unable to hit their production targets in recent months. Grappling with natural decline and upstream challenges, Azerbaijan produced 80,000 b/d below its target of 550,000 b/d in the first six months. Malaysia also underproduced, by an average of 40,000 b/d in the same period. War-torn Sudan's production has fallen to just 20,000 b/d from pre-conflict levels of around 70,000 b/d. And South Sudan, which is entirely reliant on Sudan for its exports, has seen its production more than halve owing to the continued shutdown of a key pipeline in Sudan . Production was relatively uneventful in the Mideast Gulf Opec+ contingent. Saudi Arabia's output fell by 10,000 b/d to 8.95mn b/d, the UAE shed 10,000 b/d to 2.94mn b/d and Kuwait dropped by 20,000 b/d to 2.4mn b/d. Production from the three members exempt from production targets edged up in June. Sanctions-hit Iran continued its upward trajectory, adding 20,000 b/d to 3.31mn b/d — the highest since September 2018. Libya added 40,000 b/d to reach 1.22mn b/d on recent upstream work and Venezuela edged higher by 20,000 b/d despite the return of US sanctions in April. By Aydin Calik Opec+ crude production mn b/d Jun May* Jun target† ± target Opec 9 21.38 21.44 21.23 +0.15 Non-Opec 9 12.60 12.63 12.62 -0.02 Total 33.98 34.07 33.85 +0.13 *revised †includes additional cuts where applicable Opec wellhead production mn b/d Jun May Jun target† ± target Saudi Arabia 8.95 8.96 8.98 -0.03 Iraq 4.20 4.16 4.00 +0.20 Kuwait 2.40 2.42 2.41 -0.01 UAE 2.94 2.95 2.91 +0.03 Algeria 0.91 0.90 0.91 0.00 Nigeria 1.44 1.48 1.50 -0.06 Congo (Brazzaville) 0.26 0.26 0.28 -0.02 Gabon 0.23 0.25 0.17 +0.06 Equatorial Guinea 0.05 0.06 0.07 -0.02 Opec 9 21.38 21.44 21.23 +0.15 Iran 3.31 3.29 na na Libya 1.22 1.18 na na Venezuela 0.86 0.84 na na Total Opec 12^ 26.77 26.75 na na †includes additional cuts where applicable ^Iran, Libya and Venezuela are exempt from production targets Non-Opec crude production mn b/d Jun May* Jun target† ± target Russia 9.14 9.26 8.98 +0.16 Oman 0.76 0.76 0.76 +0.00 Azerbaijan 0.47 0.46 0.55 -0.08 Kazakhstan 1.56 1.48 1.47 +0.09 Malaysia 0.35 0.36 0.40 -0.05 Bahrain 0.18 0.18 0.20 -0.02 Brunei 0.05 0.05 0.08 -0.03 Sudan 0.02 0.02 0.06 -0.04 South Sudan 0.07 0.06 0.12 -0.05 Total non-Opec 12.60 12.63 12.62 -0.02 *revised †includes additional cuts where applicable Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

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