U.S. oil production may decline in Q1 2023

[dan_s]

U.S. oil production normally declines during the winter because weather does impact field operations.

Frackers Say Oil Production Slowing in the Shale Patch
U.S. oil-and-gas companies offer little relief for tight global markets
The American shale boom is losing steam just as global markets need more oil to keep up with demand.

Updated Nov. 6, 2022 2:35 pm ET

Despite an extended streak of strong profits, shale companies are slowing their oil-field activity, keeping U.S. oil production roughly flat and offering little relief for tight global markets. What was expected to be a banner year for U.S. oil production has failed to materialize as creeping inflation-related costs, supply-chain snarls and disappointing well performance for some companies have coalesced to limit domestic output, executives and analysts said.

Global oil prices averaged about $100 a barrel in the third quarter, according to Bank of Nova Scotia and in past years such prices have prompted increased shale production. This time, companies like ConocoPhillips, Pioneer Natural Resources and Devon Energy are focused on profits instead of drilling and say there are constraints to growth.

ConocoPhillips on Thursday reported a profit of $4.5 billion, almost double the same period last year. Pioneer recently said it netted about $2 billion, while Exxon Mobil posted a record profit of almost $20 billion, and Chevron said it earned its second-largest quarterly profit, of $11.2 billion.

Many of the companies simultaneously lowered their projections for oil production as they reported strong profits.

Pioneer said its wells in the Permian Basin of West Texas and New Mexico-the most active U.S. oil field-this year had produced less oil than expected and that it was reshuffling its portfolio to generate higher returns starting in 2023. The company on average produced 352,421 barrels of oil a day in the third quarter, a slight decline from the previous quarter, it said.

ConocoPhillips had previously said overall U.S. oil production growth could rise by 900,000 barrels a day this year. But spokesman Dennis Nuss said U.S. oil output growth is coming in lower than the company originally anticipated for this year because of supply-chain bottlenecks and labor shortages. "Rapidly escalating costs combined with extremely tight supply are limiting the pace of industrywide production growth," said Ryan Lance, chief executive of ConocoPhillips.

The American shale boom that upset the world's oil hegemony is losing steam just as global markets need the once fast-acting producers to pump more to keep up with a recovery in demand. The Biden administration has urged drillers to pick up their sluggish pace, to help ease high pump prices, and to invest their profits in growth instead of increasing shareholder dividends and buybacks.

Lofty projections by the federal government and others for robust U.S. oil production growth in 2022 are proving overly optimistic, and doubts are emerging about how many barrels of shale oil drillers can add next year.

In the contiguous U.S., oil production through August has increased only 3% since December, up 288,000 barrels a day to 9.77 million, according to the Energy Information Administration. It had earlier expected total U.S. oil output-including Alaska and the Gulf of Mexico-to hit 12.64 million by December, growing more than 1 million barrels a day compared with the same month last year. It has since lowered its projection almost 500,000 barrels a day.

Even Chevron and Exxon, the largest U.S. oil companies that enjoy scale and logistical advantages, came in on the low side of their shale production targets.
Exxon recently said its oil-and-gas production in the Permian was projected to rise about 20% over last year's levels, down from its initial target of 25% growth. It attributed the recalibration to weather, facility delays and schedule adjustments. Chevron said its Permian output will come in toward the lower end of its targeted range for the year, around 700,000 barrels a day, as production levels out at a slower pace.

Growth forecasts may fall further because many drillers have relied on wells they had previously drilled but left offline for future production, so-called drilled but uncompleted wells, or DUCs. The EIA said companies have tapped most of their best DUCs, after they used the wells to save money on drilling as the pandemic led to a historic oil-price collapse. That trend, combined with a gas-pipeline bottleneck in the Permian, is expected to further constrain U.S. oil production growth, the EIA said.

Another key problem for shale companies is how much oil wells are producing in the Delaware basin, the western half of the Permian that frackers have drilled heavily. As the region matures, well performance is predictably deteriorating there, said Tom Loughrey, president of oil analytics firm FLOW Partners LLC.

"We have roughly 10 years of high-quality drilling inventory in the Permian, and less if we grow faster," Mr. Loughrey said. "That's going to mean these larger companies don't grow."

As companies rushed to drill, many chewed up some of their best inventory first. Now, they are left with inferior drilling spots likely to produce less oil and to cost more to bring online.

Some companies are saying that well productivity is an issue. Pioneer said it had been disappointed with the performance of its Permian wells this year and was revising its drilling strategy. "Well productivity isn't the same as it was three years ago," said Pioneer Chief Operating Officer Richard Dealy. He said oil companies have to figure out how to get more crude out of the ground with new technology over time.

Other companies said they were satisfied with their assets' productivity. Devon, which operates mostly in the Delaware basin, said its wells there had seen 11% production growth rate year-to-date.

Slowing production, combined with elevated production costs expected to persist into next year, means producers are unlikely to add much production in 2023, said James West, a senior managing director at investment firm Evercore.

Companies this year have had to deal with headwinds brought by inflation, which has boosted the price of materials such as steel and casing, and labor shortages, which have made hiring crews that drill and frack wells a zero-sum game, executives have said.

Self-imposed constraints have also played a role in dull production growth this year, analysts said. Even with U.S. oil prices topping $120 earlier this year, companies have remained committed to returning mountains of cash to shareholders in the form of dividends and buybacks rather than reinvesting it in production.
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[12345plainsman]

Very nice read, direct and to the point. Thanks for the nice work.