Shale Drillers Keep Output High Despite Oil Price Decline

By Asjylyn Loder

Shale drillers are planning on production growth with fewer rigs despite a worldwide glut that has sent crude prices to a four-year low.
Companies including Devon Energy Corp. (DVN), Continental Resources Inc. (CLR) and EOG Resources Inc. (EOG) said they expect to pump more from their prime properties while cutting back in their least productive prospects. That puts the onus on OPEC nations, led by Saudi Arabia, to cut output if they want to stem the slide in global oil prices.
“There’s a lot more production coming online this year and in the first half of 2015,” said Jason Wangler, an analyst at Wunderlich Securities Inc. in Houston. “This isn’t a machine that you can turn on and off with a switch. It’s going to take months, if not quarters, to turn it around.”

Oil Prices

Domestic output topped 9 million barrels a day for the first time since at least 1983, the U.S. Energy Information Administration said Nov. 13. West Texas Intermediate crude, the U.S. benchmark oil contract, sank 18 cents yesterday to settle at $75.64 a
barrel. Prices fell to $74.21 on Nov. 13, the lowest since 2010.
“Certainly if prices fall even further than they are now, it’ll have some impact, and it may slow the growth rate of U.S. production,” said Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy in New York. “I still think, unless they fall significantly further, U.S. production is going to see dramatic increases in growth.”

Growth Streak

Lower prices aren’t stopping U.S. shale drillers. Devon Energy, which pumped 136,000 barrels a day of crude in the third quarter, will boost output by as much as 25 percent next year, said John Richels, the Oklahoma City-based company’s chief executive officer, in a Nov. 5 earnings call. That rivals this year’s expansion, even though Devon will idle four of its six rigs in Oklahoma’s Mississippi Lime prospect.
Continental Resources, which produced 128,000 barrels a day in the third quarter, trimmed $600 million from its 2015 drilling budget by shelving plans to add new rigs. Nonetheless, the Oklahoma City-based company said in its Nov. 6 earnings call it will increase output as much as 29 percent.
Pioneer Natural Resources Co. (PXD) in Irving, Texas, the most active driller in West Texas’s Permian Basin, said in its Nov. 5 third-quarter call that it plans to add as much as 21 percent.
EOG Resources, a Houston-based driller that pumped 293,000 barrels of crude a day in the third quarter, said it will continue its “double-digit” growth streak next year.

Tuscaloosa Marine

Halcon Resources Corp. (HK), also based in Houston, in a Nov. 11 earnings call forecast 2015 growth of as much as 20 percent even after scaling back drilling plans to six rigs from 11. The company said it will slow development in its Tuscaloosa Marine Shale properties in Mississippi and focus drilling on its prospects in North Dakota and Texas.
“Any company that comes out and says we’re cutting growth is going to get hit,” said Wangler, the Wunderlich Securities analyst. “It’s not a fun spot to be in. Do you do what makes sense for the oil market, or do you do what makes sense to investors?”
Industry executives have pinned their hopes on a cutback in international production on Saudi Arabia, the world’s largest exporter and de facto head of the Organization of Petroleum Exporting Countries. The 12-nation cartel, which has increased its output by more than one million barrels a day since the end of May, will decide at its Nov. 27 meeting whether to curb output. OPEC members stepped up diplomatic visits to the kingdom last week, and the Saudi oil minister was in Latin America, as low prices slice into state budgets.

Saudi Production

Saudi Arabia’s production rose 1 percent to 9.75 million barrels a day in October, according to data compiled by Bloomberg. Global production of petroleum and other liquids will rise to 92.91 million barrels a day in 2015 from 91.95 million barrels a day this year, the EIA said last week.
“We’re in a battle with Saudi Arabia with regard to market share versus U.S. shale oil,” Scott Sheffield, Pioneer’s chairman and chief executive officer, said in the Nov. 5 earnings call.
Shale producers are also victims of their own success. New wells are being drilled faster and are pumping more oil. The same thing happened before the 2012 natural gas bust, when prices fell to the lowest in a decade. The improvements make the rig count a less reliable measure of future growth. In North Dakota’s Bakken, for example, 191 rigs will add 104,000 barrels a day in December, double the gains made three years ago, according to the EIA.

Rig Count

Even with the addition of 10 rigs recorded last week, the number of rigs drilling for oil in the U.S. has declined by 31 to 1,578 since the week ended Oct. 10, according to the weekly report from Baker Hughes Inc., an oilfield services company based in Houston.
“If you look at natural gas production, it continues to increase dramatically even as the rig count has fallen, because productivity is improving, because technology is getting better, because the completion time is getting shorter,” said Bordoff of Columbia University. “People are just getting better and better at this.”