US Oil & Gas Review

Mergers and acquisitions in the top oil-producing shale play, reduced areas for federal lease sales, record oil and gas output levels, and higher reinvestment rates in the US shale patch were the highlights in the US oil and gas industry over the past few weeks.

Shale Reinvestment Rate at Three-Year High

The reinvestment rate of US shale oil producers hit its highest level in three years in the second quarter of 2023, Rystad Energy research showed at the end of August, although the independent research firm warned that the most recent trajectory would not last.

Rystad Energy’s analysis of a peer group of 18 public companies, excluding majors, found that those firms collectively accounted for about 40 percent of total US shale oil output in 2022. That peer group had a reinvestment rate of 72 percent in Q2 2023, up from 58 percent in the first quarter. The second-quarter reinvestment rate was the highest since the 150 percent in the second quarter back in 2020, Rystad Energy’s research showed.  

Yet, the trend is expected to reverse by the end of 2023 as inflation eases and global oil prices rise due to tight supply.

“At first glance, a rising reinvestment rate might point to a return to the old days of aggressive capital expenditure and rapid production growth. However, discipline is the name of the game for public shale companies now, which ensures this trend will not last,” said Matthew Bernstein, senior upstream analyst atRystad Energy.

“As inflationary pressures ease in the coming quarters and oil prices rebound, this spike will be a short-term anomaly instead of a shift of strategy.”

Upstream M&A Set To Accelerate

The peer group Rystad Energy has analysed has shrunk due to recent merger and acquisition (M&A) activity and is likely to shrink further as consolidation continues and the number of public upstream companies dwindles.  

In one of the most recent deals, Permian Resources has signed an agreement to buy Earthstone Energy in an all-stock deal valued at $4.5 billion, which is expected to create a $14-billion producer in the Delaware basin in the Permian.

“After evaluating over $20 billion of potential transactions during the past twelve months, we firmly believe the acquisition of Earthstone represented the best transaction for Permian Resources. It checks all the boxes, enhancing shareholder value while improving upon an already best-in-class company,” James Walter, Co-CEO of Permian Resources, said.

The latest deal comes after a busy second quarter in which US upstream mergers and acquisitions boomed with $24 billion transacted across 20 deals, and the Permian returned to its usual position at the top of M&A activity, Enverus Intelligence Research (EIR) said in a quarterly report in July.

Permian Resources’ acquisition of Earthstone Energy effectively creates a new member of the US Large E&P peer group, the first addition to that club in quite some time, analysts at Wood Mackenzie said in a commentary.

The deal also creates a third pure play Permian producer which will join Pioneer Natural Resources and Diamondback Energy.

“The deal illustrates the pace at which relatively small, nimble companies can quickly combine into a formidable player in the most important basin in the US,” WoodMac said.

Moreover, the Permian could have more geologically viable but not yet economically proven inventory, Enverus Intelligence Research (EIR)said in a report at the end of August.

EIR has increased its long-term Permian Basin oil production forecast to sustain production levels until 2040. It also expects dry gas production from geologically viable inventory to add an additional around 2.7 Bcf/d in the Permian in 2030.

“The incremental ~80,000 geologically viable locations across the Permian primarily breaks even between $50 and $70 WTI and will be sufficient to sustain production levels until ~2040 and extend the years of inventory remaining from 17 to 32,” said Stephen Pratt, report author and Permian analyst with EIR.

“Geologically viable but relatively unproven inventory across the Permian Basin will be at the forefront as high-quality drilling locations breaking even below $50 WTI become scarce over the next decade for many operators,” Pratt added.

Texas Hits Oil and Gas Production Records

Texas broke its oil production records in June, July and August—and has increasingly driven US supply, the Texas Oil & Gas Association (TXOGA) said in a report in early September.

TXOGA estimates that Texas produced a record-high 5.5 million barrels per day (bpd) of crude oil in June and July 2023. The association projects that production rose to 5.7 million bpd in August 2023.

Texas accounted for 43.2 percent of US oil production through the first eight months of 2023, which is its highest since at least 1981, the association said. In addition, Texas represented 55.1 percent of US oil drilling in the first eight months of the year, its highest share since 2019.

“Crude oil prices have historically driven drilling activity, and the historical correspondence between prices and drilling has strengthened so far in 2023,” TXOGA said.

In natural gas output, Texas drove the highest share of US natural gas drilling in a decade in August 2023. Texas accounted for 30.7 percent of US natural gas drilling in August, which was the highest share since 2013, according to the association’s estimates.

For August 2023, TXOGA estimates that Texas produced a record 34.1 bcf/d of gross production, including 30.9 bcf/d of marketed production, 26.35 dry gas production, and 3.2 mb/d of natural gas liquids (NGLs).

Oil and Gas Industry Slams Biden’s Scaled-Back Lease Sales

While Texas and the US are set for record oil and gas production, the industry is criticising the Biden Administration for reducing and cancelling lease sales in federal waters and on federal land.

At the end of August, the Bureau of Ocean Energy Management (BOEM) announced it would hold the Gulf of Mexico Oil and Gas Lease Sale 261 as required by the Inflation Reduction Act of 2022, but with reduced acreage on offer to protect the habitat of a rare whale species. The lease sale will offer 12,395 blocks on approximately 67 million acres on the US Outer Continental Shelf in the Western, Central, and Eastern Planning Areas in the Gulf of Mexico, which would be 9 percent less acreage than the original plan.

The American Petroleum Institute (API), via API Vice President of Upstream Policy, Holly Hopkins, commented on the decision,

“With this announcement, the administration is removing approximately 6 million acres of the Gulf of Mexico and adding new and unjustified restrictions on oil and gas vessels operating in this area, amounting to a lease sale in name only.”

“While the Department of the Interior announced a much-needed offshore lease sale today, the Biden administration continues to throw up roadblock after roadblock to American energy production, prioritizing their campaign promise to stop American oil and natural gas development in federal waters over their duty to meet Americans’ energy needs,” Hopkins said in a statement.

API joined with the State of Louisiana and US supermajor Chevron in filing a challenge to BOEM’s decision to reduce the lease area.

“Today we’re taking steps to challenge the Department of the Interior’s unjustified actions to further restrict American energy access in the Gulf of Mexico,” said API Senior Vice President and General Counsel Ryan Meyers.

API also condemned the US Administration for cancelling in early September oil and gas leases in the Arctic National Wildlife Refuge (Arctic Refuge) and more in the National Petroleum Reserve in Alaska (NPR-A).

In the Arctic Refuge, Secretary of the Interior Deb Haaland has authorised the cancellation of the remaining seven oil and gas leases issued by the previous administration in the Coastal Plain. The Department of the Interior has also proposed new regulations for the NPR-A that would ensure maximum protection for the more than 13 million acres of Special Areas in the reserve.

The announcement “sets a concerning precedent for the future of oil and natural gas leasing, exploration and production on federal lands. This industry needs clear, consistent policies in place to support the long-term investment needed to produce affordable, reliable energy, but the Biden administration instead continues to send the wrong signals,” API’s Hopkins said.

“We urge the administration to stand up for Alaskan communities and the economy by establishing a forward-looking vision for domestic energy production in the state and across the country.”

Read the latest issue of the OGV Energy magazine HERE