“Drill, Baby, Drill.”- But drill at what????

[Petroleum economist]

In his State of the Union speech last week president Trump once again uttered one of his favorite phrases: “Drill, Baby, Drill”. Energy secretary Chris Wright echoed this week this battle cry. The question is ”drill at what”????

It is that time of the year where most US companies have reported their 2024 reserves numbers. As such it is possible to take stock on what has happened in 2024.

Amongst the eight-four companies that I track, there are forty-six are American oil and gas producers. For these companies I calculate each year the Reserves Replacement Ratio (RRR) and the ratio between proven reserves and next year’s production.

Reserves Replacement Ratio (RRR) – see figure below
The average RRR of American companies has been falling since 2021. In 2021 thirty-four companies (=74%) managed to report a RRR >1, meaning that they managed to add more reserves to their books than the produced during year. Only two companies in 2021 reported a negative RRR (=no net additions).

Since 2021 things have turned for the worse.
In 2023 and 2024 only eighteen companies (=39%) managed to report a full replacement of their produced volumes. The remaining companies saw shrinking reserves. The reserves de-bookings (=RRR<0) peaked in 2023 (14 companies).

US companies on average have replaced only replaced 86% of the reserves they produced over the last four years with new volumes.

Ratio proven reserves and next year production – see figure below
Despite the falling reserves, production has grown since 2021. As a consequence, the ratio between reserves and production in the next year has fallen with 26% from 12.1 years (2021) to only 8.9 years (2024).

Reduced reserves mean that US companies will have to be less selective in which well locations they pick for their 2025 drilling programs. They will have no option but to also included develop well locations with higher unit cost. This makes them vulnerable to lower oil prices.

Conclusions
The falling reserves and RRR indicate that the moment that production will come off peak has come a lot closer for a lot of companies.

Most of the 2025 capex budgets were set in late 2024 when the oil price was $ 70-75/bbl. If the current lower oil prices ($ 65-66/bbl) are sustained, then we may see at the time of the Q1 results announcements of reductions in 2025 capex and consequential lower production in H2 2025 and in 2026.

There is talk that US production is at its peak and that a fall is imminent. Looking at my numbers I would agree. OK “Drill, Baby, Drill” but at what????

20211-2024 RRR.jpg (102.31 KiB) Viewed 10235 times

2021-2024 reserves production.jpg (48.9 KiB) Viewed 10235 times

[KGardiner]

Thanks Harry,

While some folks still debate if G&R are correct that the US is now in depletion, it is certainly true that insufficient investment is leading to reserves depletion. Drill Baby Drill is just slurping our way to the bottom of the milk shake faster. If Bessent gets his way and we magically boost production by 3 million bbl/day, our current reserves falls to 7.3 years.

Doesn't seem like a smart move to me.
I'd much rather see lower production, extend reserves and keep prices higher for shareholder returns.

Kevin

[dan_s]

I agree that U.S. upstream companies will not increase drilling budgets unless oil prices move over $75/bbl.

Note below from HFI Research this morning.
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When Chris Wright, former CEO of Liberty Energy, became the US Secretary of Energy nominee, the entire energy sector cheered. Finally, someone with actual oil & gas experience as the Secretary of Energy.

But then, reality hits.

In an FT article published last night titled, "Trump’s energy chief says US shale can ‘drill, baby, drill’ at low oil price." Chris Wright claimed that:

The US sector could “absolutely” deliver both lower prices and higher production by “innovating” and driving “efficiency gains”.

But he predicted a period of industry disruption ahead, similar to that experienced by the shale sector during a bruising price war between Opec producers and the shale industry in 2014.

“There were a lot of bankruptcies. There was a lot of disruption, but the end result was far lower costs to produce a barrel of oil,” he said. “We are going to see those same kind of market dynamics now. New supply is going to drive prices down. Companies are going to innovate, drive their prices down and consumers and suppliers will bounce back and forth.”

Huh?

That's a joke, right?

That doesn't sound like someone who has experience in the energy patch. It sounds like someone detached from reality.

Bankruptcy? Innovation? Survival? Consolidation?

US shale producers have gone through every iteration of that since 2014. Do people realize that despite 11 years of an oil bear market, US shale has managed to push US crude oil production to ~13 million b/d?

Do people realize that outside of the Permian, US shale oil production from Bakken and Eagle Ford has failed to pass their previous peak?

Innovation? No, geology is what saved the day first and foremost, and if it wasn't for the Permian, the global oil markets would've been in a steep structural supply deficit already.

And now the Secretary of Energy wants another oil price downturn? Does he realize that US shale crude oil production is all but plateauing and rolling over already (at $70/bbl WTI)?

It certainly feels like I'm screaming into the void here. But I'm not going to argue with policymakers, because they can have wishful thoughts, but reality will differ materially. And in the case of this fairy dust like thinking about US shale oil production growing at $50/bbl, you can throw that analysis straight into the garbage can.

Drill baby drill? More like decline baby decline...

[dan_s]

MY TAKE

Higher tariffs on imported steel concerns me more than the tariffs on Canadian oil & gas. Higher steel prices will increase completed well costs.

HFI expects EIA to report a large build in US crude oil inventories tomorrow. It is normal for US crude oil inventories to build this time of year, and the refineries need more feed stock to meet the increased gasoline and diesel demand that is starting this month.

For most of the upstream companies in our Sweet 16 and other two model portfolios, higher natural gas and NGL prices will offset the lower oil prices. All of our Sweet 16 produce a lot of natural gas and NGLs.

All of the Sweet 16 companies' forecast models have been updated. You can download them from the EPG website to Excel. Once in Excel on our computer, you can change the oil, gas and NGL price in all future periods to see how the different commodity prices impact the stock valuations. All of the forecast models are macro driven spreadsheets that update each time you change the variables.

All of the Sweet 16 are still quite profitable at today's oil, gas and NGL prices.