- Domestic oil production hit an all-time high last week, marking a full recovery from the Covid pandemic, after drilling fell more than 25% between pre-Covid highs and a trough in early 2021.
- The comeback is being driven by the Permian Basin in Texas, where ExxonMobil is now consolidating its position with a $60 billion acquisition of Pioneer Natural Resources and has low production costs per barrel and easy pipeline access that pays dividends faster than offshore -Drillings.
- For years, Wall Street has been pushing oil and gas companies to cut capital spending and increase buybacks and dividends, but production has risen by about 3 million barrels a day from its low point and could rise by nearly 1 million more by 2025.
Workers connect drill bits and drill bits used to produce oil in the Permian Basin outside Midland, Texas.
Brittany Sowacke | Bloomberg | Getty Images
After three and a half years, a tripling of the S&P 500 Energy Index and many soon-to-be-forgotten culture war salvos, the US Department of Energy announced on October 12 that US crude oil production had reached an all-time high of 13.2 million barrels per day, cutting losses from the Covid-era more than 3 million barrels per day will be fully offset.
The news came a day after a $60 billion deal between Exxon Mobil and independent oil producer Pioneer Natural Resources. The combination of a recovery in manufacturing, continued pressure from Wall Street to contain costs and high stock dividends, and consolidation like the Exxon-Pioneer merger is no coincidence.
The energy sector’s big rally in 2021 and 2022 was largely a recovery from a disastrous decade for oil majors, when tens of billions of cash flow was lost to unprofitable fracking wells, and consolidation that was positive for corporate profits, dividends and shareholders returns.
The foundation of the 2010s oil business collapsed when Covid destroyed it, said Rob Thummel, senior portfolio manager at Tortoise Ecofin in Kansas City, Missouri. Monthly production peaked at 13 million barrels per day in November 2019 and reached 9.9 million in February 2021.
“Capital discipline in the US industry has not weakened, and oil prices are at $85 to $90 a barrel,” he said.
So what brought Big Oil back and what happens next?
Here are seven important factors that have played a role in U.S. oil’s recent history and will influence its future.
Why the shale drilling bankruptcy ended
The oil broke off gradually and then suddenly. The S&P 500 Energy Index lost 40% of its value between 2014 and 2019. But the pandemic drove the rapid part of the crash, including by prompting Wall Street to insist on further cuts in capital spending, Thummel said.
What brought it back was renewed demand and higher prices.
Recessions are ending and oil demand is slowly recovering after the 2020 downturn and the ongoing supply chain shock. And rising prices for WTI crude oil – which fell to less than $15 a barrel during the Covid-19 crisis, shot back up to $120 in 2022 and is now near $90 – could lead to this that previously unprofitable businesses work, he said.
The recovery in US manufacturing is more concentrated
Big oil isn’t back across America: production is still down sharply in Oklahoma and North Dakota. Not much has changed in Alaska, where production has long been in decline. And offshore oil production in the Gulf of Mexico recovered to 2 million barrels a day, but has not grown.
Instead, the increase is concentrated in the Permian Basin region of Texas and New Mexico, where production costs are among the lowest in the country, said Alexandre Ramos-Peon, head of shale drilling research at Rystad Energy. Permian Basin oil production costs an average of $42 a barrel, he said, but in North Dakota the price is $50 to $60.
North Dakota is also hampered by poorer access to pipelines than the Permian Basin, where many producers can use pipelines located entirely within Texas, circumventing federal regulation of interstate pipelines. “This is just one example of a relaxed regulatory environment in Texas compared to places like climate-conscious Colorado, the country’s fourth-largest oil producer, where production is still falling by 3 million barrels per month,” said Jay Hatfield, CEO of Infrastructure Capital Advisors New York.
“There’s this place called Texas that doesn’t really know what energy regulation is,” he said.
Where oil companies spent their money
U.S. oil majors cut capital spending last year to $106.6 billion from $199.7 billion in 2014, according to Statista, contributing to the decline in oil production and arguably delaying the recovery. And They put that money into higher dividends and stock buybacks, Thummel said.
According to the Energy Department, oil and gas companies paid out about $75 billion per quarter last year. The share of the oil company’s operating cash flow that goes to shareholders rose to half of operating cash flow from about 20% in 2019, the department said.
The connection between the Exxon Pioneer deal and Peak Barrels
The decline in capital spending is being offset by higher productivity per well – while all U.S. oil production is back up and running, the closely watched Baker Hughes rig count is barely half of 2018 levels. According to the Energy Department, average production was per rigs just 1,000 barrels per day, up from 668 four years ago. So the industry didn’t have to add many new wells or drill in as many new locations to fully recover.
On CNBC last week, ExxonMobil CEO Darren Woods said the company pursued the merger because it believed its technology and scale could increase the productivity of the Pioneer fields.
“Her [Pioneer’s] “Our technology and development approach, quite frankly, delivers higher yield at lower cost,” Woods said.
That suggests more mergers will happen as rivals like Chevron also look to strengthen their presence in U.S. shale, particularly in the Permian Basin, Hatfield said. Chevron has already made several shale-related acquisitions in recent years, including $7.6 billion for PDC Energy this year and $5 billion for Noble Energy in 2020. Independent producers are under more pressure than more stable ones Supercorporations are paying very high dividends to justify the risk of oil price fluctuations, which will place tighter constraints on their ability to keep up with technology and scaling operations, he said.
US crude oil, energy security and the big oil economy
Is America repatriating its oil as crude oil prices recover? A little, says Hatfield. Permian shale is currently much cheaper to extract than offshore oil, carries much lower political risk than offshore drilling in much of the developing world, and requires much less time to produce profits than offshore drilling. That’s leading companies like Exxon to rely more heavily on Permian shale than offshore drilling, he said.
“The super majors are withdrawing capital from abroad,” Hatfield said. “They are reducing development abroad because it is riskier.”
The biggest part of the equation is that time equals risk, Ramos-Peon said. Global oil producers are not squeamish about investing in parts of the world where governments change, but the year-long investment cycles in offshore drilling make the much shorter turnarounds in Texas for companies like ExxonMobil, one of the biggest offshore players the industry, attractive.
“In the Permian, you get your capital back in a little over a year,” Hatfield said. “The return on investment is much faster and much higher because the wells start producing so quickly.”
What the recent oil trade and Israel-Hamas mean for gas prices
Gas prices tend to move in line with the price of crude oil, which has fallen to about $88 a barrel from $94 in September, resulting in a 20 cents per gallon decline in the national average price of regular oil. But the influence of OPEC, whose coordinated production cuts in June pushed prices up 35 cents, often offsets what domestic producers do, Ramos-Peon said. And there is still uncertainty over whether the war between Israel and Hamas will lead to a decline in production in Iran, whose government supports the Hamas rebels who have carried out bloody attacks on Israel, he said.
“I believe crude oil prices are likely to remain at current levels in the short term and decline in the long term,” he said. “If there are sanctions against Iran, it will be bad for consumers.”
Short-term shale issues, oil consumption and climate change
What is good for oil companies in the short term does not change the longer term development of the oil market or CO2 reduction.
Achieving climate goals has more to do with long-term changes in energy consumption than with short-term production goals, said Ramos-Peon. Rystad expects U.S. production to rise to 13.6 million barrels per day next year and 13.9 million in 2025, he said. After that, forecasting becomes more difficult because so much can change, but by the end of this decade oil consumption is expected to peak before tapering off, he said.
Even as more cars switch to electric, demand from older cars and the use of oil in chemicals will keep the oil business very large, Ramos-Peon said. And the risk of business eroding will prompt drillers to focus more on shale than offshore drilling, Hatfield said
“Given that you don’t know for sure, why wouldn’t you want a return on your investment in three years rather than 30 years?” he said.
In the short term, the biggest threat to the rosy scenario is that oil industry cash flows are declining sharply since their peak last year. The Energy Department says its survey of 139 producers at home and abroad shows a 36% decline in operating cash flow in the second quarter compared to 2022. Profits are shrinking for the first time in two years, the ministry said.
On the other hand, the price of crude oil has increased by $16 per barrel since the end of the second quarter. And in the oil business, price determines everything.