- U.S. shale production is finally ready to grow again, with output set to climb next year due to increased spending in the Permian basin
- The rise in output will be lower than 2018 and 2019 due to the newfound capital discipline of shale companies
- Inflation and labor costs are the two major problems U.S. companies will have to deal with going forward
U.S. shale production is back to growth mode as producers continue to add rigs onshore. Output will continue to climb over the next year as some large oil firms plan to raise spending in the Permian, which has been—and will continue to be—the key driver of America’s tight oil production growth.
Still, the rise in shale output will be slower than in the boom years of 2018 and 2019, as most operators continue to stick to capital discipline, while surging costs and labor shortages are major headwinds to significant production growth.
Next month, total U.S. shale production from the major tight oil plays is set to return to March 2020 levels, which was before companies slashed drilling activity in response to the plunge in prices and demand with the start of the pandemic. Shale output is set to rise 8.68 million barrels per day (bpd) in December, driven by an increase in Permian production, according to estimates from Rystad Energy quoted by Bloomberg. In November, Permian shale production is projected to hit 5.043 million bpd.
All projections expect U.S. shale production to grow in the coming months and lead to a 600,000 bpd-800,000 bpd increase in total American crude oil production in 2022 compared to 2021.
Capital discipline is still key for the shale patch, but some majors signaled in the Q3 earnings calls that they could add more rigs in their Permian operations.
ExxonMobil (NYSE:XOM), for example, said its Permian production in Q3 averaged around 500,000 oil-equivalent barrels per day, up by 30 percent from the third quarter of 2020.
“We may see a couple of more rigs come on here as we go forward” with a focus on efficiencies, Exxon’s CEO Darren Woods said.
Chevron (NYSE:CVX), for its part, will add two more rigs and completion crews in the Permian this quarter, CFO Pierre Breber said on the earnings call.
BP’s U.S. shale unit BPX plans to raise capital spending in the Permian to $1.5 billion in 2022 from $1 billion this year, BP’s chief financial officer Murray Auchincloss said on the company’s call.
ConocoPhillips (NYSE:COP) will also boost activity in the Permian, but as with the majors, it will be a measured approach to raising drilling operations.
“I wouldn’t call it a ramp. I would call it slow steady growth because I think that will build the most efficiency in our operations,” Tim Leach, Executive Vice President, Lower 48, said earlier this month, referring to ConocoPhillips’s plans for Permian growth.
Yet, other shale operators signal more discipline and unwillingness to increase production. Diamondback (NASDAQ:FANG) Energy, for example, has said it will not increase its crude oil production next year despite the surge in prices.
Annual U.S. crude oil production will average 11.1 million bpd in 2021, increasing to 11.9 million bpd in 2022, largely as a result of onshore operators increasing rig counts, which will offset production decline rates, the EIA said in this month’s Short-Term Energy Outlook (STEO).
In its Monthly Oil Market Report (MOMR) released last week, OPEC forecast U.S. shale production to grow by 610,000 bpd annually—an average of 7.85 million bpd in 2022.
“With the current pace of drilling and well completion in oil fields, production of crude oil is forecast to grow by 0.6 mb/d y-o-y, to average 11.66 mb/d, and to exit 2022 at 12.1 mb/d. This forecast assumes ongoing capital discipline, limited active drilling rigs, completion crews and labour shortages,” said the cartel about overall American crude oil production.
But the oil industry in Texas sees cost inflation and skilled labor supply as the main headwinds to production growth going forward.
Costs rose sharply for a second quarter in a row, the Q3 Dallas Fed Energy Survey showed at the end of September.
“The greatest headwind is skilled labor supply and access to expanding credit on our reserve base loan,” an E&P firm executive wrote in comments in the survey. An executive at an oil and gas support service firm noted that:
“Labor continues to be a struggle, and wages are at an all-time high because of inflation and printing too much money with all of the free giveaways. We are all going to have to pay for this sooner or later.”
Overall, U.S. shale is returning to growth after the COVID crisis, but the pace of this growth would be much slower than pre-pandemic rates due to capital discipline, labor shortages, and surging costs.