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US producers reporting stellar results, but snags seen ahead


Oil output rises, but will it be too much?

Inflation set to rise 10%-15%

Rig count has risen 5% so far in 2022

  • Author
  • Starr Spencer
  • Editor
  • Gary Gentile
  • Commodity
  • Natural Gas Oil

The first week of upstream producers' Q4 conference calls have revealed robust results, with predicted production growth in 2022, but have also highlighted some problems afoot including relatively high inflation, supply chain crunches and concerns of demand destruction from too much oil supply.

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Operators Hess, Murphy Oil, Chevron, ExxonMobil and ConocoPhillips all expect production increases this year: Hess and ExxonMobil from their second Guyana development, due online in a few weeks, and Hess from a third rig placed in the Bakken Shale of North Dakota. Murphy likewise expects growth from its new King's Quay hub in the US Gulf of Mexico, and ConocoPhillips, Chevron and ExxonMobil see increased production from the Permian Basin.

But the modest 2022 organic production growth rates telegraphed by the companies have been supplemented through much of 2021 by privately held companies, which took advantage of rising oil prices to drill up a storm. In fact, a sizable number of the 300 drilling rigs added to the US rig count in 2021 were hired by privates, analysts said.

ConocoPhillips CEO Ryan Lance, who raised his prediction in late January of a potential 800,000 b/d of new US crude/condensate production in 2022, revised his thinking during his company's conference call Feb. 3 and projected 900,000 b/d.

Lance claimed to be "absolutely concerned" about potential new oil supply overtaking demand, which had plunged in early 2020 from the coronavirus pandemic. Last year demand began gradually rising as fears over the virus eased and more normal living patterns took hold.

The 900,000 b/d "is perhaps the top end of what this fragile market can bear," Stephen Richardson said in a Feb. 3 investor note. But Richardson noted other factors provide some breathing room – OPEC+ under-producing its quotas, for example.

Rigs are also being added quickly to US fields, which imply potential production usually a few months down the road. On Feb. 3, the Enverus rig count jumped 13 to 741. Since the start of 2022, 35 rigs have been added to US fields, or about one a day, pushing up the rig count 5% this year.

Worries of a 2014 redux

The US shale boom accelerated annual output growth rates in the mid-2010s, which reached almost 2 million b/d in 2018 and caused volatility in the markets, severe price swings and led operators to slash spending and curtail output growth. The potential for a redux of that scenario from a 900,000 b/d gain in US output is what worries Lance and others who for years have feared the worst if oil prices should rise too high.

Also on Feb. 3, WTI topped $90/b for the first time since October 2014, a time when several years of sharply rising US shale production contributed to global excess crude. The price plunge that followed lasted a few years and resulted in an average oil price for 2015-2017 just below $48/b.

Others highlight demand destruction if oil prices get too high.

"We ... recognize as oil exceeds $90/b (and maybe $100/b) worries about high prices curtailing demand will likely ramp up," Wells Fargo analyst Roger Read said Feb. 4.

S&P Global Platts predicts US shale oil growth of 700,000 b/d in 2022 which is "significantly lower than would be expected given today's WTI prices, based on historical trends, and this is due to operators adhering to strict capital discipline," analyst Nathan Hasbrook said.

"Operators have largely kept to their strategies of working within cash flow and remain focused on returning value to shareholders, along with debt repayment," Hasbrook said. "Additionally, companies appear to have turned to M&A activity to ... add acreage to their primary assets and increase base level production."

Rene Santos, Platts Analytics Manager of North American Supply, noted that Platts' Analytics total oil production forecast for 2022, including non-shale oil sources, is 890,000 b/d.

The expectation released by the US Energy Information Administration in early January of domestic supply growth this year was 640,000 b/d, for total production averaging 11.8 million b/d. But that was before US producers began rolling out their 2022 outlooks in late January.

Discipline makes the difference

In any event, Hasbrook believes producers' commitment to moderate growth rates in the low-to-mid-single digits and fiscal discipline are different than, for instance, 2018 when US oil supplies grew by about 2 million b/d. And they may cause different outcomes, especially with demand rising.

If their capital discipline persists and low output growth rates prevail as planned, "the [current] high price commodity environment may stick around for much longer as radical supply increases do not look likely to come from US shale in the near-term," said Hasbrook.

As for inflation that is being seen mostly in labor, tubulars, trucking and fuel, most operators said they will treat it as they always have – through increased efficiencies.

Overall, upstream operators' fourth-quarter 2021 conference calls recapped three months of continued recovery from the financial and operational potholes left by the coronavirus pandemic.

Generally, E&P companies had much to boast about in Q4, centering around mounting cash flows amid oil prices that were up nearly 10% from the third quarter. Those results will provide more cash to both their shareholders and to their most productive projects and spruce up portfolios that needed replenishing as the shoestring environment imposed by the pandemic eased over 2021.

Speaking about his own company during its Feb. 3 call, ConocoPhillips Chief Financial Officer Bill Bullock's remark could have been echoed by others: "[Q4] was not only a strong quarter but one that also bodes very well for 2022 and future years."