By: David Blackmon – Forbes – Moving into the next boom time for the domestic U.S. shale oil and gas business doesn’t necessarily mean you will be repeating the outcomes of the last one. That’s a point of confusion my previous piece from last week – “The Next U.S. Oil And Gas Boom Suddenly Looms On The Horizon” – appears to have created.
Not Another Leasing/Exploitation Boom
One reader pointed out that Vicki Hollub, CEO of Occidental Petroleum OXY -4.7%, had told last week’s CERAWeek conference that she didn’t think the U.S. industry would ever get back to producing 13 million barrels of oil per day. That’s where, according to the U.S. Energy Information Administration (EIA), total U.S. production peaked back in November/December of 2019, before 2020 and the COVID-19 pandemic dawned and threw the industry into its deepest depression in 35 years.
It’s a risky proposition to ever say “never” where the oil industry is concerned, given its 170-year penchant for pretty much always surprising the experts. But I would agree that this nascent new boom does not currently appear likely to create a replay of the 2017-2019 boom, with its 1,100 active rig counts, drilling and fracking bonanzas, crowded highways in the Permian/Delaware Basin, small towns playing host to massive “man camps,” low profits and poor returns on investments. That was a classic production boom in which a series of major new resource plays had simultaneously formed, creating a natural competition among upstream companies to acquire prime acreage positions at often wildly exorbitant per-acre costs and begin the exploitation process.
But that initial leasing/exploitation phase that has always characterized any new play area in the business had largely already been completed when last year’s bust hit in earnest, as the Permian/Delaware region had already moved well into the development and infrastructure buildout phase. Other oily shale basins like the Eagle Ford, the Bakken, and the DJ Basin are more mature than the Permian, and with no new shale formation discoveries in recent years, the days of the classic leasing/exploitation booms appear to be in the rearview mirror, at least where U.S. shale development is concerned.
External Pressures Intercede
Strictly due to the natural progression of the business, this next boom was already destined to be more muted than its immediate predecessor without the existence of any external factors that might intervene to mute it further. As most are aware, a number of such factors exist, including the following:
- Pressure from investors – Over the past two years, management teams at upstream companies whose returns on investment have lagged behind the expectations of the investment community have found themselves under pressure to take a more disciplined approach to the exploitation of their shale resources, de-emphasizing rapid drilling and focusing more on cost-cutting and capital discipline designed to increase ROI.
- ESG considerations – As time goes on, many of the same management teams have found their companies under increased pressure from some of the same institutional investors to focus more of their resources on “ESG” – Environmental, Safety, and Governance – considerations. This also has the impact of reducing focus on and budgets for drilling and fracking new wells.
- Increased regulation – Last year’s elections installed a new presidential administration into office, one that will be more focused on regulating the industry and inhibiting its ability to do its business. New President Joe Biden announced his general direction related to energy policy by issuing immediate executive orders killing the KeystoneXL pipeline project and establishing a moratorium on new leasing on federal lands and waters.
As the Biden/Harris administration completes the process of getting its political appointees installed at EPA, the Department of Interior, and other federal departments, no one doubts that rafts of major regulatory efforts impacting the oil and gas industry will be coming soon.
While the industry has always been creative and efficient at conforming its business practices to meet new regulatory requirements, the coming four years promise to be a replay of the “death by 1,000 cuts” approach the industry managed to withstand during the second term of the Obama/Biden presidency.
A Different Kind of Shale Boom
As I pointed out in my previous piece, one of the few beneficial aspects of the industry depression of 2020 has been that the companies who have lived to survive it will pretty much all come out the other side as more cost-effective and efficient companies. These companies spent the last two years heavily-focused on cutting costs, increasing efficiencies, and deploying improved technologies, and they will certainly carry those areas of focus into this new, higher commodity price environment.
Certainly, the higher prices will continue to create internal enthusiasm within companies to enhance drilling programs, and we have already seen rig counts rise significantly since last September. But it’s key to note that, despite that rising count over the last 6 months, the active rig counts today still stand at roughly half of where they stood a year ago.
Those counts will continue to rise so long as commodity prices remain stronger, but the external pressures mentioned above will work to ensure the rate of increase remains slow and steady rather than a figurative explosion of new drilling in a short period of time. Thus, instead of topping out at 1,100, we’re likely to see a number of active rigs more in the 700 range by the end of this year.
This muted drilling response will in turn produce a more muted supply response from the U.S. shale industry. Instead of the phenomenal, unprecedented rise of about 3 million barrels per day in U.S. production seen during the previous boom, we should anticipate something more in the half-million barrel per day range by the end of 2022.
So, if it isn’t in drilling, fracking, and production, where’s the “boom” in all of this? My view is that we will see a boom focused on the following areas:
- Efficiencies and technologies – As companies continue to see their recent focus on adoption of new technological solutions and focus on efficiencies in their operations result in improved financial results, they will be likely to double down on success.
- Improved per-well results – This outcome will naturally flow from the adoption of better tech and the creation of improved internal processes.
- Stronger balance sheets – Obviously, better per-well results and higher commodity prices will result in better overall financials unless a company is simply mismanaged.
- ESG-related advances – We can expect much of the technological adoption by upstream companies to focus on ways to improve their ESG profiles and allow them to credibly establish “net-zero” emissions profiles that aren’t too far out into the future. My bet is that we will see more and more independent producers focus in on ways to engage in the arena of carbon capture, sequestration, and utilization (CCSU) as an effective means of meeting these goals in a real, potentially profitable way.
Again, this will not be a classic leasing/exploitation boom, but it will be a boom that could end up being of greater benefit to the long-term health of the industry, as well as the environment.
Two of my favorite boom-related sayings are “God, please give me one more oil boom and I promise I won’t screw it up,” and “You can always count on the oil and gas industry to drill itself out of prosperity.”
Whether it comes from God or, more likely, the vagaries of the OPEC+ exports limitation deal, the U.S. industry now finds itself presented with another boom. Believe it or not, thanks to the natural progression of the business in general and the confluence of a set of significant external pressures, this new boom might actually turn out to be one that even the U.S. shale industry won’t manage to screw up.