Can U.S. shale players accelerate activity in North America to help meet global oil demand amid a supply crunch as energy prices surge?
That’s the question James West, senior managing director and partner at Evercore ISI, is being asked often lately. Activity in shale plays continues to rebound from its pandemic woes, led by the Permian Basin where the U.S. Energy Information Administration (EIA) forecasts oil production will rise by 70,000 bbl/d to about 5.2 MMbbl/d in April. However, other challenges could make it difficult for U.S. producers to replace Russian barrels and fill gaps left by some OPEC member countries.
“It already is growing, but it’s a mature market,” West said of North American shale during Evercore’s webcast this week. “It’s growing at probably the pace that it can grow. So, we do not see an accelerated supply response. We think there’ll be continued capital discipline from the customer base of the E&Ps. Labor is exceptionally tight.”
Other obstacles that make an accelerated North American oil supply response unlikely in the near term include equipment and materials tightness. Inflation and supply chain constraints are driving up costs. The challenges arise as oil prices continue to climb with WTI trading March 23 at about $115/bbl and Brent, $121/bbl.
He called the frac spread environment “difficult.”
“We don’t have sand. We don’t have drillpipe. We don’t have casing,” West said. “We’re running out of high-spec land rigs, frac spreads. You name it. We don’t have it. And while we do think capital/money solves for a lot of these problems—it will over time, it’s going to be a challenge to really ramp up in North America.”
Though frac spreads have emerged from the bottom seen in the 2020-21 downturn, it is still in recovery mode. Data show U.S. frac supply dropped from 24-25 million HHP to about 14-15 million today as the DUC count sank to its lowest level—around 4,340 based on EIA data—since early 2014.
“They’re talking about 12 to 18 months for a new frac spread. … Then, of course, the pricing for all of this equipment—it’s mostly made of steel—is going up and going up rapidly,” West said.
Rising Rates, Costs
As the U.S. land rig count continues to move higher, roughly at 660, so are the day rates. “Day rates were in the high teens. They’re now in the mid-20s and they’re approaching $30,000 a day when you include packages and technology,” West said.
Costs are also up for oil country tubular goods and frac sand, which has shot up by as much as 185% to between $40 and $45 per ton, Axios reported this week, citing Rystad Energy analyst Ryan Hassler.
Producers, including in the Permian Basin, are adjusting.
“We can’t get enough sand. We’re running less than the number of [fracking] stages we could pump in a day because we’ve run out of sand every day,” said Michael Oestmann, CEO of private equity-backed Tall City Exploration, said in a Reuters article. “Ultimately it will slow everyone down if it doesn’t resolve itself.”
Based on conversations with oilfield service (OFS) companies, West said E&Ps will likely see costs rise between 10% and 15%, possibly higher, this year as D&C equipment and services further tighten. That, he added, should “bode well” for OFS firms.
However, he cautioned that management teams are underscoring continued supply chain challenges. “We do not think that the E&P companies are appropriately forecasting what their cost inflation is going to be, nor are the oil service companies,” West said. “So, I’ll blame the whole industry on this because inflation is rampant and it’s going to impact the entire industry.”
Global market indicators suggest tight balances continue to tighten, according to Steve Richardson, a research analyst for Evercore. He pointed out forecasts showing crude oil demand exceeding supply in 2022-23 and persistent inventory draws as the market tries to solve for a potential 3-4 MMbbl/d deficit.
“We’ve got dwindling inventories, OPEC unable to make numbers, OPEC looking unwilling to increase production for a host of reasons,” Richardson said. “Then also the fact that we’re going to have as this conflict gets worse … some barrels won’t be clearing the market.”
Another big question, he said, is where is Russian production 6, 12, 18 months from now. Still, it’s not just headlines out of Russia impacting the oil market; force majeures and outages in places such as Nigeria and Angola put the market at further deficit, he said.
“We really don’t have a quick fix. There’s been a lot of conversation about the U.S. … U.S. production is growing. Part of the narrative you shouldn’t believe is the dialogue from two or three independents that are saying no growth,” Richardson said. “The market is growing. It’s going to take a little while to go.”
He anticipates U.S. oil supply growth surpassing the 750,000 to 800,000 bbl range as the year progresses.
“It wouldn’t be crazy to think that number is a million,” Richardson said, but don’t expect to see the more than 1.5 million-barrel type growth seen before COVID.
E&P spending is accelerating, West added. E&P spending in North America is expected to grow 23%, while international spending could rise by 15%.
“I suspect both those numbers will trend higher now that we’re working with a higher oil price because we were using much lower oil prices to forecast budgets going into this year and the market, of course, as you know, is fairly dynamic,” he said. “Most of the barrels near term will come from short-cycle land plays,” including in the Middle East and North America.
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