New report shows rise in drilling activity

Source: New report shows rise in drilling activity in Permian Basin ( by Mella McEwen

A report just issued by the energy analysis firm ESAI Energy finds drilling activity is increasing as operators deplete their inventory of drilled, uncompleted wells (DUCs). While supply chain bottlenecks and rising costs will continue to drag on growth, ESAI still sees enough of an acceleration in drilling for US shale production to end the year producing roughly 830,000 barrels a day more than at the beginning of the year.

ESAI Energy’s analysis shows that after reaching a peak in June 2020, the backlog in DUCs has fallen by more than 60 percent as producers completed more wells while keeping drilling subdued to preserve cash. The company estimates that viable DUCs will likely be depleted by year-end, leaving many producers with no choice but to accelerate drilling to keep production levels up. The company also reported that the addition of frac crews will lead to strong production growth from the Permian Basin into 2023 as the rate of new wells spud has recently begun to rise more than twice as fast as the number of well completions.

Elisabeth Murphy, ESAI Energy’s upstream analyst for North America, said oil prices above $100 a barrel have incentivized more rigs, especially from private companies, while the diminishing number of DUCs means more drilling will be necessary just to maintain production levels.

Murphy told the Reporter-Telegram by email she sees the rate of growth in drilling and production accelerating this year, relative to last year and she sees steadier growth in the years ahead.

“But I do not believe the high rate of US production growth of well over 1 million barrels a day we had in 2018-2019 is in the offing. Drilling activity has accelerated, but that was to be expected due to the heavy draw on DUCs last year,” she wrote.

Currently, she wrote, ESAI sees total US shale production growth averaging about 725,000 barrels a day in 2022 and in 2023. Of that, Permian production growth will be in the low double digits both year – projected at just more than 500,000 barrels a day in both 2022 and 2023 – while the other major shale basins will be positive but in much lower single digits.

“The Permian still remains the center of the universe when it comes to US crude oil production, with higher levels of dedicated capital and so both higher drilling and completion activity,” Murphy wrote.

Private companies are going near-full out on growth, she added, but public exploration and production companies are seeing the success of fiscal restraint with their shareholders. High oil prices are helping these public companies accumulate a lot of cash and investors want to maximize returns while producers are reaping the profitable success of financial discipline, she wrote.

“I don’t think they will stray from the model of lower reinvestment rates, but I do think there will be a big consideration of higher 2023 drilling budgets stay elevated,” Murphy wrote. It depends, she noted, on the price outlook by each firm and the level of production that maximizes profits for them.

“There is confidence in elevated oil prices largely because of the Russian situation, but I also believe there may be a lot of questions about how much further demand will grow,” she wrote. “Coming out of the pandemic, economic activity was on hyper-overdrive. There was a lot of pent-up demand. But China’s zero-COVID tolerance means lockdowns may return, possibly depressing demand. Then, of course, there is a lot of uncertainty over whether we are on the cusp of a recession. Fed interest rate policy may result in a soft or hard landing, it’s anyone’s guess. It’s a volatile time, for sure, and government policy has been a seesaw, keeping everyone guessing as to the direction of US energy policy.”

Much mention has been made of supply chain bottlenecks and labor shortages, but Murphy said she sees high levels of uncertainty and volatility as one of the biggest barriers to growth as uncertainty and volatility make markets jittery and tend to discourage investment.

“There is so much uncertainty about whether we are headed for a recession and, of course, around the situation in Ukraine and what happens regarding the level and type of sanctions on Russia,” she wrote. “Details about a potential price cap on Russian crude are slim at the moment, creating more uncertainty about how markets will react.”

She predicted 2023 could be a worse year for Russian production, which could provide upward pressure on oil prices – but then she also sees possible easing of sanctions on Venezuela and Iran, which could bring more crude to the market and provide downward pressure on prices.

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