Why US shale oil companies are in no mood to hike output despite rising crude prices

The price of crude oil continues to inch towards $100 as the threat of a Russia-Ukraine conflict gains momentum. Russia is the world’s second-largest exporter of crude oil in the world and the third-largest producer of crude, and a potential conflict heightens fears of possible supply crunches. With Russia being also the world’s largest producer of natural gas, energy prices are heading north.

In this environment, what is happening in the US shale oil industry? The shale sector produces around 65 percent of the US crude oil, the highest in the world

Despite the high prices, shale oil companies have not indicated that they will be increasing their production to enjoy the current windfall. Even after an increase in output and increasing drilling activity and spending hikes, companies are not keen on investing more in increasing their production.

The production of US oil shale is expected to increase by 109,000 barrels per day, said the US Energy Information Administration on February 14, mostly driven by the increased yield in the Permian Basin and Texas’ Eagle Ford Shale.

But investor sentiment and supply chain bottlenecks are behind that number not stretching even higher. US shale companies were famous for their debt-ridden production ramp-ups in the 2000s, which positioned the US as the premier oil producer in the world.

But the production increases often came at the expense of unhappy investors. Now US shale companies have exercised significant financial discipline, using most of their free cash in stock buybacks and dividends, making their investors significantly happier.

Companies like Pioneer Natural Resources, EOG Resources, Diamondback Energy and Devon have decided to keep their production rates flat for the year. However, smaller producers and private companies have increased their yields marginally.

“The capital that historically we would spend in growing the company, we’re now redeploying in the form of share repurchases,” Travis Stice, Diamondback Energy’s Chief Executive, said at an industry conference last month.

Supply chain issues like increasing labour costs, lack of computers and other components also prevent the expansion of rigs in the shale areas of the US. The current backwardation in the market also provides little incentive for the increase in oil production.
Source: CNBCTV18