Should U.S. Shale Producers Resist Increasing Output?

Following a tumultuous 2020, U.S. shale producers face a new dilemma of ramping up production in the face of global oil supply uncertainty. With West Texas Intermediate (WTI) trading above $50/barrel, there is significant temptation for shale producers to surge their output, however, the constant growth strategy of previous years may prove to be costly at this juncture. Daily production is still down about 2 million barrels per day (bpd) from the same time last year, but many industry leaders are calling for a cautious approach to ramping up production again.

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U.S. Shale Producers Race for Permits

Over the past few months, there has been a drastic increase in U.S. shale producers’ race to acquire drilling permits from the Federal Government. This is due to the upcoming November presidential elections and concerns that a win by Joe Biden could mean a crackdown on oil and gas exploration. According to Reuters, “As of August 24, producers have received 974 permits so far this year for new wells on federal land in the Permian, compared with 1,068 for all last year and 265 in 2018, according to data firm Enverus. In the 90 days up till August 24, producers received 404 permits in the Permian, compared with 225 and 11 in the same period in 2019 and 2018, respectively. The scramble for permits comes despite the weak outlook for oil drilling and prices due to the ongoing coronavirus pandemic.”

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U.S. Shale to Slow Down

U.S. shale production has sustained a years-long boom of rapid growth, but that appears to be coming to an end sooner rather than later.  Following a mixed bag of earnings reports from shale executives, the common belief is that the growth frenzy is slowing down and coming to an end.  According to World Oil, “The key challenge for producers now is to meet investors’ new focus on return of capital.  This comes at a time when companies are facing a prolonged period of lower prices and when access to financing from capital markets has become difficult.”

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A Fresh Look at Marcellus Shale Water

As the debate over the environmental impact of hydraulic fracturing rages on, a new report from the Susquehanna River Basin Commission’s (SRBC) continuous water quality monitoring project does not show evidence of water quality changes as a result of natural gas development.  In an article by Kevin Randolph from the Pennsylvania Business Report, he reports that “in January 2010 the SRBC began measuring and reporting water quality conditions in small streams that could potentially be impacted by the natural gas industry.”  The SRBC water quality monitoring project monitors specific conductivity, turbidity and water temperature, which would reveal any immediate impacts from natural gas drilling activities.  One organization that has a particularly strong interest in this report is the Marcellus Shale Coalition (MSC).

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Supply and Demand

According to a survey by the Federal Reserve Bank of Dallas, the cost of profitably drilling a shale oil well in the US has fallen to a modern low of $50 per barrel, likely ensuring the growth of the onshore shale industry for years to come. The decrease reflects many factors including softer demand from refineries and concerns about the US-China trade war’s impact on global economic demand. The US oil benchmark is currently hovering near $63 per barrel. Cost reductions and increasing production should stop crude oil prices from rising to high.

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