US shale oil production growth stalls

Growth remains on hold this year for US shale producers as most firms wait for evidence of stronger market fundamentals before spending more on new wells.

US lower-48 crude output is stalled at around 10.5mn b/d and is not expected to reach 11mn b/d before December, the Energy Information Administration (EIA) says in its Short-Term Energy Outlook. The agency revised down its forecasts, despite higher oil prices this year, as producers say they will not boost spending or output while Opec+ holds "a sword of Damocles" over the industry by withholding substantial spare output capacity.

Activity is picking up again across the shale patch as firms strike a more optimistic note. But the most bullish response comes from oil service firms — which took the biggest hit from last year's output slump — rather than exploration and production (E&P) companies, which do not plan to boost capital spending and production before next year. The Federal Reserve Bank of Dallas' latest energy survey says 71pc of service firms reported a rise in business activity in the first quarter from the previous quarter, compared with 54pc of E&P firms.

Oil rig counts and "frac spreads" — the number of active completion crews — are rising as E&P firms bring new wells on stream to offset legacy declines from existing wells (see chart). Rig counts are up by a quarter since the start of this year, oil service firm Baker Hughes says, and frac spreads have more than doubled, according to industry monitor Prime Vision. But most operators only plan to spend just enough to maintain output this year. Over half of E&P firms in the Dallas Fed survey did not boost capital expenditure (capex) last quarter, and two-thirds saw no increase in oil and gas output.

But the balance between wells drilled and wells completed began to normalise in the first quarter as more rigs were deployed, the EIA says in its Drilling Productivity Report. Operators drew more on their backlog of drilled-but-uncompleted wells in the fourth quarter, completing almost twice as many wells as they drilled. But the ratio of completions to wells drilled fell to 1.4 in the first quarter from 1.8 in the fourth quarter, although completions were disrupted by extreme weather in February. Before last year this ratio was typically at parity.

Operators can easily cover drilling costs with benchmark WTI at around $60/bl. Breakeven costs for new onshore wells reported by E&P companies averaged only $52/bl, the Dallas Fed survey says, with Texas shale formations Eagle Ford and the Permian under $50/bl (see chart). Average operating costs for producing wells ranged from $17/bl at Eagle Ford to $34/bl for non-shale, revealing how profitable shale production is likely to be if oil prices hold at current levels.

Private equity on parade

Yet publicly owned firms are determined to restrain spending and maximise cash returns to shareholders until market fundamentals improve. "We are not going to grow production this year, and we are not going to increase capex — no matter what oil prices do," independent producer EOG Resources' chief executive, Bill Thomas, says. Privately held firms — which account for about a quarter of US oil output — are more bullish and are adding rigs faster than their publicly owned counterparts. In the Permian, private E&P companies have nearly doubled their number of rigs to 99, from 59 in December, consultancy Rystad Energy says (see chart). Public E&P firms have increased their count by a fifth, to 133 from 110.

But the flow of private-equity finance is drying up for the oil sector, with many investors looking for the exit. Independent Pioneer Energy acquired privately held DoublePoint earlier this month, making Pioneer the top Permian producer. Pioneer says it will moderate DoublePoint's previous plans for 30pc output growth in line with Pioneer's 5pc long-term target.

By David Long

US lower-48 oil production

Permian horizontal rig counts

Average breakeven costs (WTI)