Shale oil companies are ready to play chicken with supply and demand again, according to a report by Bloomberg.
Roiled by a year that began with crude at a 12-year low and ended with a surprise OPEC agreement boosting prices, U.S. producers including Continental Resources and Pioneer Natural Resources are promising not to overreact — or overspend.
The temptation will be strong: a recovery in prices has already spurred drilling activity in the U.S. to the highest since January. If oil passes $70 a barrel, the U.S. could start pumping out an extra million barrels a day, offsetting much of the planned cut from OPEC countries, according to a Citigroup analysis. With President-elect Trump promising to ease industry regulations and analysts predicting better earnings for 2017, shale drillers are gearing up for growth.
“There’s a real concern by industry that we could be in for another one of these price adjustments, if we get carried away with development,” Harold Hamm, CEO of Continental, said. “They’re going to be disciplined going forward.”
The U.S. now produces 8.8 million barrels a day, about half from shale. West Texas Intermediate oil, a U.S. benchmark, has averaged almost $52 a barrel since OPEC’s announced cut last month. A climb to $60 could generate a 500,000 barrel surge in U.S. production and $70 would double that, Citigroup wrote in a report this month.
While dozens of shale companies and oilfield servicers went bankrupt in the aftermath of the price collapse, investors have rewarded survivors who emerged leaner and more efficient. Hamm’s Continental, holder of the largest net acreage in North Dakota’s Bakken Shale region, has more than doubled in value this year.
Also buttressing cash flow, U.S. producers have been buying hedging contracts that lock in higher prices for 2017, giving them further financial flexibility to grow, Macquarie Research analysts Vikas Dwivedi and Walt Chancellor noted in a report to clients.
The issue for the global industry now isn’t whether U.S. drillers will expand their operations, but rather “how quickly does shale come on to tap those higher prices, and then how quickly they push them back down,” said Peter Pulikkan, a Bloomberg Intelligence analyst in New York. “2017 is the year where you are going to see shale’s reflexes tested.”
Producers are waiting to see whether OPEC delivers on its promised cuts before increasing their own development budgets, according to Pulikkan. It may be the second quarter before enough market data is in to reach a conclusion, he said.
Pioneer Natural Resources can go from starting a well to producing oil for sale in three to four months, CEO Tim Dove told Bloomberg. The company was already planning to boost production by 15% and add rigs next year in West Texas’ Permian shale basin. It’s taking a wait-and-see approach on any further expansion, he said.
“We’re going to stay on our trajectory regardless of what OPEC does,” Dove said.
Expansion may be steady but slow, said John England, vice-chairman for U.S. energy at Deloitte. He expects just a “modest increase” from shale drillers in 2017.
“We see 2017 as the slow road back,” England said. “Nobody wants to get overextended, nobody wants to get into the debt levels you’ve seen in the past.”
In the meantime, another wild card for oil markets will hit Washington. Trump is considering a tariff on imports, CNN reported, citing unidentified sources, and House Republicans have proposed a “border adjustment” that would tax imported goods but not exports, including oil and gas. Either move could spur U.S. production.
Adam Anderson, CEO of oilfield equipment company Innovex Downhole Solutions remains sceptical he’ll ever see business boom the way it did when almost 2,000 oil and gas rigs were drilling in 2014.
After years of turmoil, “clearly we’re past the worst of it,” Anderson said. “But it is not back, nor do I think it ever will get back, to the heights.”