By Irina Slav
U.S. shale was among the biggest victims of the demand destruction caused by the coronavirus pandemic. But the sector has already proved resilient once, and now this resiliency is coming to the fore again. Earlier this month, JP Morgan said it expected U.S. shale output to start growing in the second half of the year, thanks to higher prices. The Energy Information Administration’s latest Drilling Productivity Report also pointed towards a recovery in production – but a selective one. The EIA forecast an overall decline in U.S. shale output for next month with one exception: the Permian.
Another sign that activity in the shale patch was recovering came from the latest Dallas Fed Energy Survey, which found that companies active in the shale patch are willing to spend again and production is climbing steadily. The U.S. total is still about 2 million bpd lower than the record pre-pandemic levels of 13 million bpd. Still, there has been a stable climb, not least thanks to higher shale output.
The latest in the positive signs comes from the biggest producers in the Permian: Exxon and Chevron. Both companies are taking the cautious approach, with no immediate plans to increase spending on production growth. Yet they do plan to increase spending at some point, and this point could be as near as next year.
“Although prices are up and underlying fundamentals are strengthening and recovering, we’re not out of the woods yet,” Chevron’s chief financial officer Pierre Breber said at the company’s investor day as quoted by Reuters. “So this year we’re going to stick with our budget.”
The company said in its Investor Day presentation that it planned to expand production from the Permian, with the goal of reaching 1 million bpd in 2025. To this end, it would start increasing its capital expenditure on the play starting next year, reaching about $4 billion by 2025. In exchange for that, Chevron expects free cash flow growth in the Permian from less than $2 billion in 2023 to about $3 billion by 2025.
Exxon is also not in a rush to boost Permian production in the short term. In its Investor Day presentation, the supermajor said it planned to pump some 400,000 bpd of crude in the Permian this year, deploying between 7 and 10 rigs. The output projection for 2025, however, is 700,000 bpd. The company also aims for double-digit returns at a production cost of some $35 per barrel of oil, even with capex for the region reduced by 40 percent for the period to 2025.
The plans for higher returns at lower capital expenditure suggest that the Permian has not yet lost its appeal as the lowest-cost shale play in the United States. While costs are not uniformly low across the play that spans Texas and New Mexico, there are still enough sweet spots for the majors to exploit at comfortable breakeven levels. Yet they are biding their time.
One reason for this is the impact of the crisis and the demand uncertainty as Covid-19 cases start climbing again, postponing the return to normal. Another reason, however, is that the majors can afford to bide their time, unlike small independents that have debts to pay and can only pay it by boosting production. Larger independents are also drilling again, but more than that, they are completing already drilled but uncompleted wells. This is also a sign of a cautious approach to production growth this crisis around.
U.S. shale is growing again, but it is not growing for the sake of production growth itself. With the demand outlook still murky because of the pandemic and green recovery plans, this seems to be the only sensible approach to oil production growth.