Shale drillers risk relapse into rampant output at $30 crude
Producers can add rigs, bring them online quickly, creating more potential to upset oil global supply and demand
Shale drillers are signaling they’ll throw off restraints on oil production if crude reaches $30 a barrel, an ominous portent for a global industry still drowning in a supply glut.
The about-face is stunning for a sector scorched by the once-unthinkable twin disasters of a worldwide pandemic that slashed demand and negative crude prices. The historic market collapse prompted production shut-ins globally, but the retrenchment has been particularly acute in the U.S. as storage tanks approach capacity and refiners scale back oil processing.
For OPEC, Russia and other international producers, the implications are dire. It took years of painful output caps to tame a pernicious oversupply that gutted crude prices, starving national budgets of sorely needed cash all the while. Just as the uptrend gained momentum, COVID-19 strangled the world’s biggest economies, paralyzing energy demand and erasing all price gains.
“Shale producers are nimble — they can add rigs quickly and bring a well online in three months or less when the time is right,” said Bernadette Johnson, vice president of strategic analytics at Enverus, a data and research firm. “There will still be more painful announcements, but we are seeing the bottom.”
Diamondback Energy Inc., one of the most prominent shale specialists in the Permian Basin, sees a crude price in the high $20s-a-barrel or low $30s as a trigger to revive curtailed output and consider reactivating idled frackers.
Parsley Energy Inc., which has idled one-fourth of its production and suspended all drilling and fracking, cited $30 as the critical price point. Centennial Resource Development Inc. hinted that $24 or $25 may be enough to prompt the driller to reverse at least some of its 40 percent output cut, though Chief Executive Officer Sean Smith declined to provide a specific trigger price.
“There’s a lot of factors that weigh into that, but you’ve got to have prices in the high 20s or low 30s before we kind of signal going back to work in an aggressive or even in a nonaggressive way,” Diamondback CEO Travis Stice said during a conference call with analysts Tuesday. “As we evolve as an industry into this new world order, I think it’s going to look a lot different than what we’ve historically been accustomed to.”
New gushers
It’s not just so-called independent drillers that are prepared to discard production restraints when prices strengthen. Exxon Mobil Corp.’s strategy for curtailing supply while prices are low has been to turn off its newest, most prolific shale wells — precisely so that crude can be reserved in the ground and unleashed as soon as markets recover. Unlike its rivals, though, the supermajor hasn’t disclosed any of its internal price levers.
Across U.S. and Canada, explorers are expected to turn off 3.5 million to 4.5 million barrels of daily crude output this month, including about 1 million in the Permian region, according to pipeline giant
Plains All American Pipeline LP.
The curtailments have been so steep and swift that they derailed a movement in Texas to impose output limits for the first time in half a century. The proposal, which would have penalized drillers $1,000 a barrel for exceeding quotas, was abandoned by the Texas Railroad Commission on Tuesday, in part because so many wells have been shut in.
Market disruptor
“Prices have been below break-even for so long that it only made sense to stop drilling and shut in active wells,” said Christiane Baumeister, an associate professor of economics who specializes in the shale industry at the University of Notre Dame. “Those were the first logical steps to cutting production.”
The shale sector is in an unusual position to upset the global supply-and-demand because the nature of the geology allows for the wells to be turned off and on in very short order. Whereas an oldstyle, conventional well can require months of careful handling and manipulation to bring back into service, shale wells in places like West Texas and North Dakota can be back online in as little as a week.