US oil boom nullifies OPEC efforts

2023-07-07 10:16:24

Near-record US oil production this year has kept energy prices stable despite attempts by Saudi Arabia and other major oil exporters to push them higher.

U.S. oil production is up 9% year-to-date through April, surprising analysts given the drop in oil futures and the country’s shale boom. This surge is driven in part by rising production efficiency and signals that the Organization of the Petroleum Exporting Countries may lose its ability to control prices as production in the rest of the world continues to rise.

After the price crash in 2015, U.S. manufacturers “are back in the lab and much more efficient, making significant technological advances and cutting staff and costs,” said Vikas Dwivedi, global oil and gas strategist at Macquarie Group.

This year, OPEC and its allies have announced production cuts of about 6% from last year’s levels. However, oil prices fell by about 13%. In addition to weaker-than-expected demand in China, prices are falling due to increased production in other countries, including Brazil, Canada and Norway. Rystad Energy estimates that non-OPEC output growth will offset about two-thirds of the alliance’s cuts.

Half of the new oil shipments come from the US, where major producers including ConocoPhillips, Devon Energy, Pioneer Energy and EOG delivered strong first-quarter production. Small private companies ramped up drilling last year when oil prices were higher.

Optimization in action

Efficiency gains have given companies more room to remain profitable even as oil prices decline. According to J.P. Morgan, production optimization since 2014 has resulted in a 36% reduction in drilling and fracturing costs in US shale fields, despite an increase in oil production.

Shale companies have found ways to force more water and sand into rocks and create more cracks to release oil. ConocoPhillips said project wells will be 14% longer this year than last year. Another major producer, EOG Resources, said it had drilled a well more than 5 miles deep and nearly 3 miles long in South Texas earlier in the year, a record for the company.

Efficiency gains mean EOG can make as much money trading $42/bbl oil today as it did trading $86 oil nine years ago. Sources familiar with Saudi Arabia’s oil policy noted that the government’s budget is estimated to require $81 a barrel. Brent is trading around $76 a barrel, down 13% from the start of the year.

Exxon-Mobil and Chevron are working to significantly increase production over the next few years in the Permian Basin, a key oil-producing region that spans parts of West Texas and southeast New Mexico. As Exxon-Mobil CEO Darren Woods said at a conference last month, the industry still produces only about 10% of the oil it could theoretically pump.

According to Ben Poppel, director of field engineering at Liberty Energy, one of the largest shale companies, even a small increase can lead to a major jump in production. However, this will not be easy, given that drilling crews are already working around the clock.

“We cannot work 36 hours a day,” he added.

Adapted from The Wall Street Journal

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