US shale oil production slumped by around 2 million b/d from March to May last year after producing wells were shut in and new drilling dried up in response to the pandemic oil price crash. Since then, US tight oil output has recovered gradually, but production remains some 1.4 million b/d, or 15%, below pre-pandemic levels despite oil prices reaching near three-year highs of $77/b since the start of the year.
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Part of the delayed response reflects the changing makeup of the shale sector, which has seen a sharp rise in the concentration of integrated majors in recent years, increasing the sector's exposure to financial discipline, according to BP chief economist Spencer Dale.
"The big issue now is how the business models of US tight oil producers have changed as a result of this," Dale said in a press briefing this week. "We're seeing far greater demand for financial discipline. Reinvestment rates are coming down very substantially as more companies give more back to shareholders, and that's likely to have an impact on tight oil's response to higher prices."
US output growth is being driven by small and private producers that have reopened their wallets much faster than larger producers, which are maintaining capital discipline to repay debt and improve returns to shareholders as they recover from the 2020 price slump.
IOC expansion into US shale plays means the energy majors made up some 30% of drilling rig activity in the US in early 2020.
According to S&P Global Platts Analytics, small and private shale operators have increased drilling activity at more than twice the rate of other operators and currently make up a third of US oil production but account for 60% of drilling activity. The rig count for small/private operators is currently only 2% below pre-pandemic levels, while majors are still 68% below, according to Platts Analytics.
As a result, US onshore rig counts are rising, but they are still only a third to half the levels seen in 2018 and 2019.
"I think the big issue is, does that greater financial discipline have a persistent effect on the responsiveness of tight oil going forward? ... That's a huge question," Dale said.
After hitting a low point in June at 10.9 million b/d of crude, US oil production is expected to start growing again as drilling picks up, particularly if the WTI crude benchmark remains above $70/b.
Platts Analytics expects US oil production to end 2021 some 360,000 b/d higher than the 2020 exit rates with production to add a further 940,000 b/d in 2022.
A key implication of the changing economics of US shale oil is how forecasters model long-term future oil prices to account for shale's short-cycle supply response to price signals. A continued move toward tougher capital discipline in the sector as shareholders demand a greater focus on profitability could be supportive for oil prices in the coming years, according to Dale.
"A key aspect of many high oil price forecasts is that US tight oil does not respond strongly to higher oil prices, but we don't know yet how that financial discipline will affect the responsive of tight US in the next few years," Dale said. "I think that's one of the key unknowns when we think about where oil prices will settle over the next few years."
Dale said BP is "still working through" the potential impact of shale's changing responsiveness to prices and the implication for its own long-term oil price assumptions.
In mid-2020, BP slashed its long-term oil prices assumption from $70/b to $55/b for Brent to reflect expectations that the pandemic will accelerate the shift away from fossil fuels.
BP added billions of barrels of US tight oil to its own proven reserves in 2018 when it acquired BHP's prime US shale oil and gas play assets, creating a new production heartland for the company.
Uncertainty over long-term global oil demand, the falling costs of drilling and fast development times for US shale have underpinned a strategic shift by many oil majors to prioritize shorter cycle returns from shale developments.
But with BP and other energy majors transitioning faster to renewables and lower-carbon energy, Dale said even that assumption may start to break down further out.
"If you think that increased corporate ambition to get to net-zero is going to quicken the pace of the energy transition, that may cause you to think that post-2030 or 2040, oil prices may come down a little bit, and so we're still working through that type of analysis," he said.