The next big problem for US shale

U.S. oil producers are ramping up capital spending and activity this year, but they face runaway inflation as cost pressures mount.

As oil production growth accelerated in the fourth quarter, costs jumped sharply for a third straight quarter to reach a record high among oil service companies “suggesting significant cost pressures,” according to the report. Dallas Fed energy survey for the fourth quarter.

In 2022, part of the rise in capital spending in the US oil industry will be due to cost inflation. It won’t be the largest share of the spending increase, but it will contribute to an overall increase in capital spending this year compared to the previous two years of lean spending.

As many Drilled But Uncompleted (DUC) wells were depleted throughout 2021 when companies largely refrained from drilling new wells until they went through DUC inventory, the industry will have to spend more for drilling in 2022.

“Add rapid cost inflation into the mix, and capital spending could rise nearly 20% just to keep production at the same level as last year,” the oil and gas analyst warned. Institute for Energy Economics and Financial Analysis (IEEFA) Trey Cowan, and energy financial analyst Clark Williams-Derry.

Cost pressures

“These cost increases will first affect oil service companies, which may not be able to pass the costs on to producers,” Cowan and Williams-Derry noted.

According to the Dallas Fed survey, 72.1% of oil and gas support services companies reported an increase in input costs in the fourth quarter, compared to only 2.3% who reported a decrease in input costs. inputs. At the same time, the prices received for services remained unchanged for 65.1% of the oil service companies in the survey.

Service companies could bear a disproportionate share of cost increases, IEEFA analysts said.

“The general E&P consensus for well cost inflation in 2022 appears to be between 5 and 15%, with many caveats across the board depending on operator orientation and the vendor landscape. services available,” Rystad Energy said in an analysis in November.

“Among the various operators, steel, labor and fuel were all flagged as areas of particular concern in 2022 that would contribute the most to rising well costs,” the research firm said. energy.

However, many E&P companies pointed to continued efficiencies as potential offsets to rising costs.

“We continue to manage our costs, we believe, very well in the Permian and across our portfolio. Our capital budget, which we announced in December, included a modest single-digit increase in COGS. And what we might see a bit more than that in the Permian is very manageable and we think we can offset that with efficiencies,” Chevron chief financial officer Pierre Breber said during the talk. the earnings call last week. On the call, CEO Mike Wirth noted that Chevron’s production in the Permian will increase about 10% this year compared to 2021.

Capex and increase in production

ExxonMobil, for its part, has increased its Permian production from 2020 to 2021 by more than 25%, CEO Darren Woods said this week, adding that “our expectation, as we approach 2022, is to grow another 25% “.

Exxon’s 2021 production in the Permian has increased by nearly 100,000 barrels of oil equivalent per day to around 460,000 boepd.

It’s not just Exxon and Chevron that are planning higher production in their core assets in the US shale patch.

According to the Dallas Fed survey, 44% of executives said they expect a slight increase in capital spending, while another 31% expect a significant increase in investment this year compared to 2021.

A total of 49% of the 88 E&P companies surveyed in the December survey listed “production growth” as their primary goal in 2022.

However, smaller companies – those that produce less than 10,000 bpd – are more inclined to increase production, while this goal was only cited as the main goal by 24% of large E&P companies. The most chosen answer among small businesses was “increase production,” while the most chosen answer among large businesses was “reduce debt,” according to the survey.

Top oil service providers bullish amid cost pressures

Despite cost inflation, the biggest oil service companies are optimistic about the start of a multi-year bull cycle in the industry.

Halliburton, for example – the leading service provider in the shale play in the United States – saw its completions and production division end 2021 with an operating margin of 15%, “driven by improved activity despite inflationary pressures,” said Chairman and CEO Jeff Miller.

“I am excited about the acceleration of the multi-year bull cycle. I expect the macro-industrial environment to remain supportive and international and North American markets to continue their concurrent growth,” Miller said last month.

Inflation is sharper and more pronounced in parts of certain basins, but it’s a market condition and “something we always deal with,” Schlumberger CEO Olivier Le Peuch said during the briefing. call for results in January.

“Looking to 2022 specifically, we expect capital spending to increase by at least 20% in North America, impacting both onshore and offshore markets, while internationally, spending in capital should increase among teenagers, building momentum after a very strong exit in the second half of 2021,” added Le Peuch.

As the shale play increases capital expenditure and production, it faces rising costs which, if not offset by efficiencies, could erode 2022 profit margins for producers who enjoyed record cash flow in 2021.

By Tsvetana Paraskova for

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