Did You Know? US Oil & Gas Drilling Up 60% This Year – Watts Up With That?

Guest “Shedding Light on the Big Lie” by David Middleton

While most of my recent posts have focused on Biden’s lies about the oil and gas industry, there is one BIG LIE that has become so pervasive that it has become common knowledge.

US producers reluctant to drill more oil, despite high gas prices
BY IRINA IVANOVA

UPDATED ON: MARCH 25, 2022

Consumers hit by soaring gasoline prices shouldn’t expect relief from the oil industry anytime soon.

Many oil and gas executives say they have little interest in increasing oil production, even at near-record crude prices, which makes extraction very profitable for their companies.

The price of crude oil has been steadily rising since the beginning of last year. It hit $100 a barrel in March after Russia invaded Ukraine, the first time in 12 years that it went above triple digits.

At that price, oil companies would normally rush to grab land and drill new wells. But a sizable number of oil and gas executives say they won’t increase production at any price, according to a survey released this week by the Federal Reserve Bank of Dallas.

[…]

CBS News

To be fair to the mainstream media, they are too stupid to understand the difference between not increasing production and maintaining the discipline of capital. This particular reporter totally misread the Dallas Fed survey. The survey did not find that “a considerable number of oil and gas executives are saying they will not increase production at any price.”

“What West Texas Intermediate Crude Oil Price Is Needed to Get US Publicly Traded Producers Back into Growth Mode?”

What West Texas Intermediate crude oil price is needed to get publicly traded US producers back into growth mode?
Dallas Federal Reserve

Saying that the decision to “return to growth mode” is not dependent on price is not even remotely close to “saying that they will not increase production at any price”. First of all, oil companies cannot just flip a switch and increase production. Oil companies have to increase capital expenditures (CapEx) and drill more wells to increase production. And guess what? Oil companies are increasing CapEx and drilling more wells. Second, “return to growth mode” is a 100% subjective phrase. Shrinking is sometimes a prerequisite for growth (shrink to grow).

capital expenditure

In my previous post, I focused on Pioneer Natural Resources Co. (PXD) because Biden specifically lied about what his CEO said about oil prices and rising production. Today I will expand that to include two other large independent shale-focused oil companies, EOG Resources Inc. (EOG) and Devon Energy Corp (DVN). First, let’s take a trip back to when shale was getting hit for not making big enough profits. Just before the onset of the shamdemic*, the shale sector actually started to generate free cash flow.

  • Shamdemic: Government Ordered Senseless Economic Blockades in Response to ChiCom-19.

US SHALE INDUSTRY TURNS CASH FLOW POSITIVE
August 21, 2019

In a notable change, the second quarter of 2019 is the first three-month period on record in which US shale operators achieved positive cash flow from operations after accounting for capital expenditures, according to Rystad Energy. .

Rystad Energy, Norway’s independent energy research and consultancy with offices around the world, has studied the financial performance of 40 US shale oil companies, focusing on cash flow from operations (CFO ). This is cash that is available to expand the business (through capital expenditures or capex), reduce debt, or return to shareholders.

In the second quarter of 2019, 35% of peer group operators balanced their expenses with operating cash flow and reported a cumulative surplus of $110 million in CFO versus capex.

[…]

Rystad energy

Free cash flow is what allows companies to buy back stock, pay off debt, pursue M&A opportunities, etc.

I don’t have the time (or the inclination) to try to recreate Rystad Energy’s “40 Dedicated US Shale Companies,” but I did have time to look at three of the biggest independent “shale players.”

Pioneer Natural Resources (PXD), EOR Resources (EOG) and Devon Energy (DVN): Net Operating Cash Flow (NOCF), Capital Expenditures (CapEx), Free Cash Flow (NOCF-CapEx) and Oil Prices (WTI ).

As can be easily seen from the chart above, all three companies roughly doubled their CapEx when the price of oil increased from $48 to $78/bbl. However, they did so in a financially disciplined manner. Not only did they maintain positive free cash flow, but they increased their free cash flow as oil prices increased. They did exactly what they were criticized for not doing between 2008 and 2019. These companies will publish their financial data for the first quarter of 2022 in the coming weeks. I’ll try to update this chart with those numbers.

Drilling

US oil companies have increased drilling by 60% in one year
Robert Rapier Senior Contributor

March 27, 2022

One of the latest lines of attack in the charge over rising gas prices is this: US oil companies have a slew of permits, content to make huge profits while refusing to drill for oil. of oil.

This is mostly false, but with a kernel of truth that is never taken in context. So let’s talk about what’s really going on.

The truth is that the number of oil drilling rigs in the US is constantly increasing. The year-over-year increase in Baker Hughes North America’s rig count is now around 60%. In fact, historically it has rarely risen at a faster rate than this. Clearly, the notion that the oil companies are sitting idly by, content to hold back production and squeeze American consumers, is false.

[…]

Finally, and here is the part that contains a grain of truth, many oil companies have said that they are going to be more financially disciplined than they have been during previous boom and bust cycles.

Critics of the oil and gas industry have seized on this financial discipline as evidence that oil companies are holding back production. However, one of the biggest criticisms of the shale boom of the last 15 years is that the oil companies never consistently make any money. In fact, if you look at the finances of many oil companies, they lost money in four of the last ten years.

[…]

I can assure you that every oil company wants to produce as much oil as it can at current prices, because they will indeed be very profitable with oil prices above $100/bbl. But they can’t immediately increase production and they don’t have crystal balls. They don’t know where oil prices will be in a year or two, and that’s why they don’t see them increasing drilling at an even faster rate.

You can disagree with their decisions, which is your right. But you should at least understand the reasons for these decisions.

Forbes

As Mr. Rapier goes on to point out, there is a time lag between drilling and production. However, oil companies are increasing CapEx and spending more money on drilling.

Industrial Production: Mining, Quarrying, and Extraction of Oil and Gas: Drilling of Oil and Gas Wells (NAICS = 213111)
St. Louis Federal Reserve

While still below the pre-shamdemic peak, oil and gas drilling activity is growing at about the same rate as it was between 2017 and 2019.

Production

US crude oil production has been slowly increasing. It is currently about 1 million bbl/d higher than it was in September 2020. Although it is still about 1.4 million bbl/d lower than just before the shamdemic*.

The most prolific oil field, the Permian Basin, has already surpassed its pre-Shademean* level.

Here is a zoomed-in version of Permian Basin oil production (lower left panel):

Perhaps if Biden hadn’t been illegally blocking slow lease sales and permits, the US’s second most prolific oil-producing region, the Gulf of Mexico, might be doing the same thing.

no crystal ball

After 41 years in the oil and gas industry, if I’ve learned anything, it’s that nearly all oil and natural gas price predictions are wrong.

We think gas prices will stay in this $9 to $11 range, there will be times like July when they will be above, there will be times when they will be below, and of course the weather will also matter a lot. . But we’re pretty sure much less than $9 would see a drop in drilling activity, particularly among conventional drilling and then those pretty aggressive declines of 35% to 40% in the first year will kick in and rebalance the market.

I saw something the other day where some analysts had concluded that production in 2010 was going to increase by 8-10 BCF per day and gas prices were going to be $6.25. I think that kind of analysis can only happen at the dangerous intersection of Excel and PowerPoint, it can’t happen in reality.

Chesapeake CEO Aubrey McClendon August 1, 2008

NEW YORK (Reuters) – Texas oil billionaire T. Boone Pickens said on Thursday crude prices could soon fall to as low as $110 a barrel amid falling gasoline demand, but they shouldn’t plunge for below $100 because the United States relies heavily on oil imports.

“I don’t think it will go below $100,” Pickens told Reuters in a telephone interview. “I would say $110 is where it could go, something like that.”

T. Boone Pickens, August 14, 2008

Needless to say, the predictions of the late Aubrey McClendon and the late T. Boone Pickens about permanently high oil and natural gas prices were wrong. This is not a criticism of either of them. Both were brilliant pioneers of the oil and gas industry. They were simply wrong.

We may not have a crystal ball, but we do have a futures market. Why would an oil company in their right mind be spending money on the assumption that $100-$130/bbl oil is here to stay, when the same type of investors who demand financial discipline think that oil prices will drop again in the $80 next year?

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