Shale producers downbeat on US oil output growth

US crude output growth risks falling short of expectations this year on cost and supply chain concerns, and 2023 may not be much better, according to leading US shale producers.

The warning comes as global supplies have become strained by the war in Ukraine, and follows a production cut agreed by the Opec+ group earlier this month. Domestic producers have flagged persistent inflation and supply-chain woes, which have left them unable to pick up the slack.

Leading Permian basin producer Pioneer Natural Resources chief executive Scott Sheffield said forecasts earlier this year for US production to accelerate by up to 1mn b/d in 2022 now look wide of the mark. "You've got the inflation factor, you've got service constraints going on in the industry — all that's working against us," he told the Barclays CEO Energy-Power Conference this month.

Some companies are also using up their best acreage, while additional constraints include a lack of takeaway capacity for associated natural gas output, with new pipelines not expected to be in place until next year. "That's going to keep people from drilling too much in the Permian," Sheffield predicted.

Coming out of the pandemic, shale activity has been concentrated in the Permian basin of west Texas and southeastern New Mexico, with other regions lagging behind. Sheffield had viewed US output growth of 500,000-600,000 b/d as being more realistic for this year, but now thinks that the lower end of that range is more likely. "It could be lower going into 2023," he added.

US producer EOG Resources said its forecasts for overall US output growth at the start of the year were on the low side compared with others. Chief executive Ezra Yacob anticipates that production will increase by 700,000-800,000 b/d this year. "Heading into 2023, we'd be a bit lower also," Yacob said at the same conference.

Sheffield and Yacob spoke as US government agency the EIA trimmed its 2023 domestic crude production forecast for a third straight month. Production will average 12.6mn b/d in 2023, down slightly from last month's forecast of 12.7mn b/d, according to the EIA's latest Short-Term Energy Outlook (STEO). Overall output next year is still poised to surpass a record 12.3mn b/d set in 2019. But the EIA expects production this year to average 11.8mn b/d, down from 11.9mn b/d a month ago.

Private view

Permian growth is being led by private-sector drillers, while the publicly listed independents are sitting on the sidelines for the most part, focused instead on boosting shareholder returns. A return to the rapid growth rates seen in the past runs the risk that "we'll run out of inventory quicker", Sheffield said. Pioneer sees inflation running at about 10pc going into next year. "A big factor that's unknown is the price of diesel, which we're still using a lot," he added.

Capital discipline among publicly listed drillers is holding firm for the time being, and companies are being rewarded for their efforts to keep a lid on spending. "Companies, ourselves included, that have emerged from the pandemic in much stronger shape are re-evaluating the old business model and how much they want to lean in to an inflationary environment," Yacob said.

While the biggest explorers have been able to navigate supply-chain challenges for the most part, private-sector drillers have fared less well. And that has led to an increase in the number of drilled but uncompleted wells. "While the rigs are being dominated, especially in the Permian, by a lot of private operators, it will be interesting to see how much of that really translates into US growth in the next couple of years," Yacob said. Given that some of the smaller private-sector companies hold less productive acreage, they may be unable to contribute to volume growth in a meaningful way.

By Stephen Cunningham