The speed at which new rigs are put to new developments is considerably less than in previous price cycles. Most US shale producers are being conservative in their production and capital guidance, as priorities remain around protecting balance sheets and generating free cash flow. For many operators, this has led to a drawdown of drilled but uncompleted (DUC) inventory wells in the past six months, to reduce capital expenditure while maintaining production levels, says GlobalData, a leading data and analytics company.
Steven Ho, Upstream Oil & Gas Analyst at GlobalData, comments: “Uncertainty around the pace of economic recovery in some regions due to the Delta variant, and OPEC+’s decision to gradually increase output throughout 2021, is expected to restrict oil price. However, at least a third of US unconventional production is protected against a drop in price due to producers hedging strategies that are in place for the remainder of 2021. At the same time, this means that some operators are not able to benefit whenever there is a higher-than-expected spot price, as their hedging effectively puts a cap on the maximum price they can fetch.”
US domestic production is currently averaging around 11,000 mbd, accounting for at least 74% of the input into refineries. Net import volume remains relatively stable, averaging at 2,900 mbd in 2021 compared to 2,800 mbd in 2020, but remain lower than the pre-pandemic level of 3,850 mbd in 2019. This is mainly due to a build-up of petroleum products stock inventory that has been used to meet some of the increase in demand.
Ho continues: “All in all, the demand for crude oil has been steadily growing during 2021, signalling the recovery of the US economy. The vaccination efforts have definitely translated into a higher traveling activity in the US, as gasoline has been the main driver in oil demand. Over the past six months, supply for gasoline is a little over 8,700 mbd, representing a growth of 7% over the average of 8,100 mbd in 2020. Nonetheless, there is still uncertainty on the pace of the oil demand recovery and on the stability of oil price.”
Throughout the pandemic, US shale producers have behaved rather conservatively with respect to production levels and, more importantly, they have not reacted too quickly to the increase in oil price. Operators are utilizing their DUCs inventory to maintain production level, as well as protecting capital spending as their preferred strategy. As a result, the number of rigs in operation has not reacted as strongly to the price rally, as in other past instances of a price recovery. Shale producers also recognize the volatility in the oil and gas market and are encouraged by investors to hedge their production. This will protect them against a downside risk, while also capping the maximum price at which they sell their production.
Ho adds: “US shale appears to be finding a way to remain resilient and prepared for whenever oil demand requires more crude oil from unconventional developments. Operators will now need to assume a lower price scenario and favor operating in a cost-efficient manner. They also must address concerns around sustaining the generation of free cash flow, keep implementing optimal hedging strategies, reduce debt levels, as well as meeting their carbon reduction targets. Moreover, there is an expectation for increased consolidation across the shale sector where bigger companies can acquire smaller operators, which now are generally healthier in their balance sheet, and can increase the competitiveness of larger companies.”
