Shale unlikely to pick up the slack after Opec+ cut

US shale oil, once the bane of Opec+ producers, is in no position to fill the gap left by the group's planned 2mn b/d output cut designed to put a floor under prices.

Shale explorers started the year reluctant to significantly step up drilling, as shareholders demanded they focus on returns. The cash windfall they reaped on the back of higher oil prices from the war in Ukraine supported this stance. And then rising costs — for everything from rigs to workers to drill pipe — became another barrier in the way of lifting output.

Inflationary pressures have not eased in recent months, and 2023 is not shaping up to be much better.

"Investor pressure, infrastructure and supply chain bottlenecks, unprecedented cost inflation — all these factors impose a hard ceiling on US tight oil growth capacity these days," said Artem Abramov, head of global energy systems at Rystad Energy.

The Federal Reserve Bank of Dallas flagged ongoing cost pressures and supply-chain delays as a major source of pessimism among oil and gas producers in its third quarter energy survey.

Costs increased for the seventh quarter in a row, while firms reported it was taking longer to obtain materials and equipment. An employment index measuring the demand for workers was at a record high, while companies reported wages continuing to rise.

"The biggest issue that our company is facing is a shortage of personnel and equipment from our oilfield service vendors," wrote one executive in the anonymous survey. "Another impediment is a shortage of steel tubulars and a corresponding increase in their price."

The head of North Dakota's mineral resources department recently referenced a "steady drumbeat" of drillers complaining about worker shortages.

Companies have said they are "just unable to attract the skilled labor that we need to deploy more drilling rigs and more frac (hydraulic fracturing) crews," said Lynn Helms.

Little appetite to up output

After engaging in damaging price wars in the past with Opec, shale has little appetite to compete for market share these days.

Publicly-traded companies are heeding investor calls for higher payouts after years of profligate spending resulted in heavy losses.

While private drillers have picked up the slack to some degree, they face the same sort of price pressures as their public peers, and their acreage is often of lesser quality.

Coming out of the pandemic, many firms relied on a record inventory of drilled-but-uncompleted (DUC) wells to start up new production, saving them the expense of starting from scratch. They accounted for more than a third of new wells from mid-2020 to mid-2021.

But that backlog has now been largely exhausted. Only 2pc of new capacity came from DUC wells in August, according to the Energy Information Administration (EIA). The upshot is that companies will have to boost spending to keep output going.

After rebounding from the pandemic-induced collapse in drilling, the US rig count, as measured by oilfield services provider Baker Hughes, has also struggled to make further headway. Recent gains have mostly been incremental, and the overall rig count closed out September unchanged at 765 from the end of August.

At the same time, the EIA has scaled back US output growth projections. Although production next year is still expected to surpass the record 12.3mn b/d set in 2019, initial forecasts for hefty gains this year have proved wide of the mark. Output is now seen growing by 540,000 b/d this year to 11.79mn b/d, down from earlier 1mn b/d projections from some analysts.

The White House had largely given up its unsuccessful efforts earlier this year to get producers to increase output, pivoting more recently to getting the energy industry to boost fuel inventories to help lower pump prices. But the severity of the Opec+ production cuts may lead the administration to makes its plea to the shale patch once again.

By Stephen Cunningham