For months now US oil production has been stuck around 11.6 million barrels a day, according to weekly data from the Energy Information Administration (IEA).
While that’s around 700,000 barrels a day higher than a year ago, output hasn’t changed much in the past three months despite 20% more rigs being added to the drilling campaigns of companies large and small in the past six months.
Not even predictions of Brent at $US200 a barrel and even $US250 a barrel in coming months has been enough to spark a short-term rise, even though an estimated 3 to 3.5 million barrels of Russian oil are forecast to disappear from markets in the wake of the Ukraine invasion.
Traders point out that the December 2024 price for Brent below $US84 a barrel is too low for those expecting new oil to flood markets to catch the higher prices. US frackers with their new mantra of disciplined spending won’t be interested if futures price from 2022 onwards remain low.
At 11.6 million barrels a day, US production is also well under the 13 million barrels a day being produced in March, 2020 when the pandemic was starting to sweep the US (and global economies) sending demand down sharply and forcing oil and gas companies to make tens of billions of dollars of cost cuts, write downs and sack tens of thousands of staff.
Those scars remain especially when US crude oil futures hit a negative $US37 a barrel in April 2020 as an almighty squeeze crunched the market and left traders reeling.
The latest weekly report from services company, Baker Hughes reported a total of 524 oil rigs working in the US last week – that was up 68% from the 309 a year ago.
Much of the new activity is to make up for a depleted inventory of wells drilled before the pandemic and brought into production to save cash and cut investment (and debt).
Frackers brought the best of those online last year instead of drilling new ones to save money and conserve cash and will have to drill more wells than usual this year to offset those lost wells.
IEA data on new rig output shows the problem – for March it is estimated to be 1,086 barrels a day, for April it is projected to be 1,072 barrels a day even though rig numbers are projected to be higher next month. Not enough rigs are being used to maintain output.
The EIA projected declines for new rigs in every major producing region, such as the Permian in Texas/New Mexico which has been prime fracking ground now for several years.
That’s due to more low producing wells being brought into production while companies start drilling more productive areas.
From spudding in to first production can take six to eight months at the moment, according to industry estimates, to get oil into pipes.
Drillers have to overcome a shortage of workers and shortages of pipe, drilling chemicals and sand used in the fracking process.
Employment in the sector dropped from 137,000 workers in February 2020 to 113,000 a year later, according to the US Bureau of Labor Statistics (BLS). Numbers rose last year but BLS figures still show total employment in the sector is 12,000 or so under the February, 2020 level.
But the major factor is the threat from investors to company boards and managers who decide to go all out on exploration, drilling and production.
Frackers especially (and big companies like Exxon Mobil, Chevron, BP, Shell and BHP Petroleum) were accused (rightly so in many cases) of wasting tens of billions of dollars buying acreage, drilling and producing oil in a pell-mell fashion after global prices collapsed in mid 2014.
That saw huge losses, company collapses ad forced mergers and asset sales (notably BHP’s US gas to BP).
Now many oil company managers prefer to try and spend low and produce high, especially at high prices ruling at the moment. That maximises cash flows, profits and gives managements the cash to reward shareholders – especially the noisy ones – with higher dividends of tax effective buybacks.
Exploration and production companies seen explosive dividend growth in the past three to four years as managements cut costs, merged and hunkered down.
According to financial data group, Morningstar the average dividend in dollars per share has grown from $US14 in 2018 to $US40 in 2021, an increase of more than 180%.
And if you look at the salaries of CEOs and bonuses for them, boards and senior managers, there has been an explosion as well which makes then even more reluctant to spend money on new wells and production when the loot is just rolling in without much effort.
And even though they are not acknowledging it, the oil industry has been changed forever by the Russian invasion and getting by without Russian crude in the same volumes as before or the same amount if Russian gas going into Europe is going to be par for the course.
Russia is a pariah ands the cost of rebuilding Ukraine is going to strain Russian resources (huge war reparations will be paid one way or another).
Like it or not, all this will hasten the flight to renewables and perhaps that’s the unstated reason why US oil production remains stuck in low gear at a time when you’d think they’s be straining to produce every barrel they could.
