Page 7 - NorthAmOil Week 49

NorthAmOil COMMENTARY NorthAmOil
have focused on cash flow discipline. According to Rystad, shale investments have declined by 6% to around $129bn in 2019, and are expected to fall another 11% in 2020 as a result of this trend. The last time the industry lowered investment for two subsequent years was following the 2014 oil price crash, Rystad noted.
Production, however, continues to rise, even as spending and rig counts fall. In its base-case price scenario – which assumes WTI prices of $55 per barrel in 2019, falling to $54 per barrel over 2020-21 before rising slightly to $57 per barrel in 2022 – Rystad anticipates North Ameri- can light, tight oil (LTO) supply reaching 11.6mn bpd by 2022. In a price scenario with WTI remaining flat at $45 per barrel, the consultancy expects North American LTO supply to plateau at 10.1mn bpd towards 2022. This compares with a projected 8.6mn bpd of LTO supply in 2019. The US accounts for nearly 93% of this supply, Rystad noted, while Canada produces slightly morethan600,000bpdofthetotal.
“The flat development of US LTO production is also possible in lower price scenarios, but we would likely see an initial period of multi-quar- ter production decline, with output stabilising at a lower level,” a product manager in Rystad’s shale upstream analysis team, Sonia Mladá Pas- sos, said in a statement.
However, given that OPEC and its partners did decide to deepen their production cuts, at least in the short term, the shale industry now stands to benefit from this. The pressure to prior- itise returns over growth and to focus on capital discipline will remain, but with the production cuts helping to prop up oil prices, there will be some breathing room for shale producers to operate.
Shale remains a problem for OPEC and other producing countries, given that growth is driven
by the large numbers of independent produc- ers that respond purely to price signals rather than any kind of policy. Indeed, shale produc- tion played such a major role in contributing so much supply to the market that OPEC felt com- pelled to introduce output cuts in the first place. However, the cartel and its partners will now be hoping that shale drillers will be under enough pressure to remain disciplined and not overpro- duce, which would exacerbate global oversupply and weaken crude prices.
Some agree that this is exactly what will hap- pen. “Expect the recent shale restraint to persist even at moderately higher prices,” Goldman Sachs analysts wrote in a note to clients issued after the OPEC meetings concluded.
“Poor financial performance, excess lever- age and an increased focus on emissions have pushed the cost of capital of shale oil producers sharply higher. Importantly, this pressure is no longer delivered by oil prices like in 2015-16 but byequityanddebtmarkets,”theanalystscontin- ued. “Our US E&P equity analysts expect that incremental cash-flows above budgeted prices in 2020 will be destined to debt reduction, divi- dends and buy-backs rather than drilling.”
The danger for shale producers, however, is that their wells have steep decline rates, and a slowdown in new drilling would lead to a rapid drop-off in output. If such a drop-off becomes apparent, producers may have to step up drill- ing again after all, undermining the impact of the OPEC+ cuts once again. If Rystad’s obser- vations are correct and wells are still being spudded at a healthy rate, the industry has not yet reached that point. But if the slowdown in 2020 capital spending plays out as anticipated by the consultancy, shale players may be closer to the point of being forced to ramp up drilling than previously thought.™
Shale production, however, continues to rise, even as spending and rig counts fall.
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