OPEC to meet Sunday unafraid of a U.S. shale response
Inflation, less productive wells blunt future output
Ambitions crimped by higher costs, tight-fisted investors
NEW YORK/DENVER/HOUSTON, Dec 2 (Reuters) - U.S. shale
oil drillers turned from scrappy wildcatters into
multi-millionaires over the past two decades, propelling the
United States to become the world's largest producer, but now
they are running out of runway.
Oil output gains are slowing and executives from some of the
largest firms are warning of future declines from overworked
oilfields and less productive wells.
On Sunday, the Organization of the Petroleum Exporting
Countries (OPEC) meets to decide whether to hold the line or cut
its output, no longer afraid that their policy decisions might
provoke a surge in shale production in the way they did in the
years before the pandemic.
The sidelining of U.S. shale means consumers around the
world may face a winter of higher fuel prices. Russia has
threatened to block oil sales to countries supporting a European
Union price cap, and the United States is winding down releases
from emergency oil stockpiles that helped cool energy inflation.
U.S. shale production costs are soaring and there is no sign
that tight-fisted investors will change their demands for
returns rather than investment in expanding drilling.
During a decade of stunning growth, shale consistently
defied production forecasts, and opposition from
environmentalists, as technology broke open more and more shale
plays and revolutionized the global energy industry.
But there appears to be no new industry-transforming
technologies in the works or cost-savings that could change the
picture this time around. Inflation has pushed up costs by up to
20%, and less productive wells are crimping the industry's
ability to produce more.
Research and engineering spending at top oilfield firm SLB
this year dropped to 2.3% of revenue through September,
from 2.4% in the same period a year ago. At Helmerich & Payne
, one of the largest drilling contractors, its R&D budget
will rise only $1 million, from 2022's $27 million.
Industry spending on new oil projects, said analysts last
week at Morgan Stanley, "is modest at best and the absolute
level of investment is still historically low."
Shale has proven naysayers wrong in the past. After the
2014-2016 OPEC price war put hundreds of oil companies into
bankruptcy, shale innovated with less expensive ways of
operating. Their subsequent gains gave the United States by 2018
the title of world's largest crude producer, a distinction it
Investors have put dividends and share buybacks ahead of
more production gains in the past few years, said executives.
That has changed the ability of shale producers to react to
spikes in international oil prices, said Bryan Sheffield, who
sold producer Parsley Energy and now runs an energy-focused
private equity fund.
"Shale can't come back to become a swing producer,"
Sheffield said, because of the investors' unwillingness to
finance growth. The demand for payouts and repeated price busts
have forced oil producers and service companies "to cut back on
science projects" that fed past production breakthroughs, he
Technology development that led to innovations such as
multi-stage hydraulic fracturing "will slow down and has slowed
down," said Richard Spears, a vice president at researcher
Spears & Associates. "If you want to advance how far you can
drill out and how fast, that now becomes a problem."
The industry also has less time to regain its former
leadership, said Hess Corp CEO John Hess. He estimates
rivals have about a decade of running room before they fizzle
out. Shale is "no longer in the driver's seat" with OPEC
regaining control over the market, said Hess.
The U.S. government expects overall oil production to reach
a new peak next year, but it has several times this year cut its
forecasts. It recently slashed 2023 production growth outlook by
21%, to a gain of about 480,000 barrels per day (bpd), to 12.31
million bpd. That could mean less growth compared to the mere
500,000 bpd gain this year - which is already well short of
lofty expectations of an about 900,000 bpd gain this spring.
SHALE'S WANING INFLUENCE
Shale's waning influence is clear in North Dakota. Once the
vanguard of the U.S. shale oil industry, poor well productivity
in the state's Bakken region and labor shortages have left it
far from its boom days.
About 4% of its shale drilling inventory remains high
producing, or Tier 1, locations, down from 9% at the start of
2020, according to production technology firm Novi Labs, which
focuses on oil and gas well returns.
As the number of prime drilling locations decline across all
shale fields, the outlook is grim. Shale production declines
rapidly after peaking compared to conventional oil wells,
falling about 50% after the first year.
"It's kind of a canary in the coal mine for what's going to
happen in the other unconventional oil plays," said Ted Cross,
director of product management Novi Labs and a former oil
company geologist, referring to North Dakota.
The Permian Basin of west Texas and New Mexico, the largest
and most important U.S. oilfield, is the only U.S. shale region
to exceed its pre-COVID-19 pandemic oil production levels,
according to U.S. Energy Information Administration data.
Even that field is showing signs of stress.
"There are a bunch of underlying causes, but frac sand is so
expensive now, tight labor markets make last-mile logistics
difficult, and public producers are generally more willing to
miss on production than on capex," said Matt Hagerty, a senior
analyst for FactSet's BTU Analytics.
Initial production rates on a new well in the Central
Midland basin section of the Permian averages about 790 barrels
per day of oil, according to researcher BTU, down from 830 bpd
just six months ago. Its outlook for initial output in another
shale field, the eastern Eagle Ford, is down to 778 bpd from 828
PERSISTENT LABOR SHORTAGES
"We're going to go into 2023 with a serious workforce
shortage," said North Dakota Department of Mineral Resources
Director Lynn Helms. The northern state has historically had
difficulty attracting workers, and the tight labor market has
worsened the problem.
Attracting laborers for crews needed to run frac fleets and
rigs has been stubbornly difficult, Helms said, adding that more
drilling rigs have moved south to the Permian.
The number of oil and gas extraction workers in North Dakota
fell by 12% between 2019 and 2021, the most recent annual Bureau
of Labor Statistics data show, compared to New Mexico's 9.6%
Lower production rates are "a longer-term prospect," said
Mike Oestmann, chief executive of shale producer Tall City
Exploration. Other issues depressing potential shale gains: a
lack of regulatory clarity and the U.S. government's desire to
shift away from fossil fuels, he said.
With producers determined to put limited resources into the
best drilling prospects, "we won't be able to keep this up
forever," said Kaes Van't Hof, finance chief at Diamondback
Energy, in a recent earnings call.
(Reporting by Laila Kearney, Liz Hampton and Arathy Somasekhar;
editing by Gary McWilliams and Claudia Parsons)