OGV Energy's US Energy Review March 2022

US oil and gas production is rising as prices rally and private shale firms boost capital spending and output. The biggest shale play, the Permian, is seeing record-high crude oil production, while overall US crude output is set to average an all-time high in 2023, the US Energy Information Administration (EIA) says.

However, cost inflation, labour shortages, and the pledge from many large public independent producers not to boost oil production by more than 5 percent annually could spoil the more optimistic estimates of US output growth this year and next.  

US Oil & Gas Production Rising

Chevron’s CEO Mike Wirth said on the Q4 earnings call that the supermajor’s production in the Permian would rise by around 10 percent this year compared to 2021.

ExxonMobil, for its part, raised its production in the shale play from 2020 to 2021 by over 25 percent, chief executive Darren Woods said, adding that “Our expectation, as we go into 2022, is to grow another 25%.”
Exxon’s production in the Permian rose by nearly 100,000 oil-equivalent barrels per day to around 460,000 bpoed in 2021.

Private operators are also boosting production, as they are not constrained by Wall Street to keep spending in line.

“This group – which we refer to as ‘Private Drillers, Inc.’ – controls only 15% of Permian oil production but has been the main growth driver since the 2020 crash,” says Pablo Prudencio, Senior Research Analyst, US Lower 48 Supply, at Wood Mackenzie.

Private operators have grown their production since the initial COVID-induced crash, but the already depleted drilled but uncompleted (DUC) well inventories and rising service costs could moderate the Permian production growth, WoodMac said in a recent report.

As public operators focus on returning more cash to shareholders and heed Wall Street’s concerns, the private producers saw the window of opportunity to grow their production.

“As a result, private operators have grown in scale and now control enough production to influence the trajectory of future Permian supply,” WoodMac’s Prudencio said.

However, private operators alone will not control enough production to have a sizeable impact on oil prices, the consultancy notes.

Low DUC inventories, financing, and potential M&A will be the key factors that would determine the pace of output growth from private operators this year, according to WoodMac.

Large Public US Independents Hold The Line

While private firms drill more, many of the large listed independents, including Pioneer Natural Resources and Continental Resources, say they will not boost spending and production above the already announced targets, even at record-high triple-digit oil prices. 

Pioneer Natural Resources' chief executive Scott Sheffield said on Pioneer's call on 17 February, referring to production growth: “Long term, we're still in that 0% to 5%. It's going to vary. We're not going to change, as I said, at $100 oil, $150 oil, we're not going to change our growth rate. We think it's important to return cash back to the shareholders.”

“In regard to the industry, it's been interesting watching some of the announcements so far, the public independents are staying in line. I'm confident they will continue to stay in line,” Sheffield said.

“People that are growing at 15% to 20% are going to run out of inventory fairly quickly,” the executive added.

Continental Resources CEO Bill Berry said on the Q4 earnings call in mid-February:

“We project generating flat to 5% annual production growth over the next five years as we have previously noted.” 

According to WoodMac’s Pablo Prudencio:

“Public independent operators’ drilling budgets remain stubbornly inelastic to rising oil prices, as all focus has shifted to improving financial health, generating free cash flow and returning cash to investors.”

Production Records

Still, US crude oil production is forecast to rise to an average of 12.0 million bpd in 2022, and to 12.6 million bpd in 2023, which would be record-high production on an annual-average basis. The previous annual average record of 12.3 million bpd was set in 2019, the EIA said in its Short-Term Energy Outlook (STEO) for February.

Natural gas production is set to average 96.1 Bcf/d for all of 2022, driven by natural gas and crude oil price levels that the EIA believes will be sufficient to support enough drilling to sustain production growth. EIA expects production to rise to an average of 98.0 Bcf/d in 2023.  

US liquefied natural gas (LNG) exports are also on a growing trajectory, expected to average a record 11.3 Bcf/d for 2022, up by 16 percent compared to 2021. The forecast reflects EIA’s assumptions that global natural gas demand would remain strong and that expected additional US LNG export capacity would come online.

Natural gas liquids (NGL) output from processing plants in the US hit a new record high in November 2021, reaching 5.84 million barrels per day (bpd) as a result of a recovery in Gulf of Mexico supplies after Hurricane Ida and improved ethane recovery, Rystad Energy said in early February. This surge has helped push total US hydrocarbon liquids output to more than 17.3 million bpd, almost back to pre-Covid-19 levels, the independent energy research company said. 

New well productivity in the Permian will also set a record this year, following a jump in lateral well length, Rystad Energy research showed at the end of January.

New wells are expected to break the 1,000 boepd threshold in 2022 for the first time on record, rising from the 974 boepd achieved in 2021.

“Average daily production levels have steadily climbed since 2010, closely aligned with the horizontal well length, which is expected to reach 9,500 feet in 2022,” Rystad Energy says.

“The Permian is now entering a three-mile lateral era. Such long wells were viewed as inferior for their high finding and development costs in some deeper zones just a few years ago, but modern equipment and completion methods allow extended reach wells to spread across the entire basin,” noted Artem Abramov, head of shale research at Rystad Energy.

Supply Chain Bottlenecks, Cost Inflation Could Slow Growth

If oil prices reach and remain at around $100 a barrel – a possibility that many analysts are now entertaining – US tight oil production could grow by up to 2.2 million bpd, Rystad Energy forecasts.

If oil prices reach and remain around $100 per barrel, total production from the core shale regions – the Permian, Eagle Ford, Niobrara, Bakken, and Anadarko – would hit 9.9 million bpd by the fourth quarter of 2023, marking a 2.2 million bpd surge from the same quarter in 2021, according to Rystad Energy.    

However, supply chain bottlenecks, soaring prices of frac sand, skilled labour and trucker shortages, and cost inflation could slow growth, the energy research firm says.

“Although high prices would in theory trigger a burst in tight oil production, acute supply chain bottlenecks, a lag between price signals and its impact on production, and winter weather-related disruptions will slow growth. Added to this are expectations that spot sand prices will rise to a $50-$70 per ton range – a level unheard of in the industry’s modern history – which will hit operators’ wallets,” Rystad Energy’s Abramov noted.

US oil and gas production has recovered from the pandemic-inflicted slump, but now it has to contend with higher costs and supply chain constraints which could dampen the most optimistic growth estimates.  

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