With $84 Billion Spree, Shale Drillers Are Outspending The World

In order to harvest fields that register fat profits even with the recent drop in oil prices, U.S. shale explorers are boosting drilling budgets 10 times faster than the rest of the world.

According to analysts at Barclay’s Plc., compared with just 3 percent for international projects, North American drillers plan to lift their 2017 outlays by 32 percent to $84 billion as they are flush with cash from a short-lived OPEC-led crude rally. Permian Basin, a sprawling, mile-thick accumulation of crude beneath Texas and New Mexico, is the place where much of the increase in spending is flowing into. Even with oil commanding less than half what it did in 2014, Permian Basin is where producers have been reaping double-digit returns.

But for OPEC and its partners in a global campaign to crimp supplies and elevate prices, that’s bad news. Equivalent to 44 percent of the reductions announced by the Saudi- and Russia-led group, new spending will add 800,000 barrels of North American crude this year, Wood Mackenzie Ltd. estimates.

“The specter of American supply is real,” Roy Martin, a Wood Mackenzie research analyst in Houston, said in a telephone interview. “The level of capital budget increases really surprised us.”

As explorers were forced to cancel expansion projects, cut jobs and sell oil and natural gas fields to raise cash and as the worst crude market collapse in a generation erased cash flows, drilling budgets around the world collapsed in 2016. By agreeing with several non-OPEC nations to curb output by 1.8 million barrels a day, the Organization of Petroleum Exporting Countries finally relented as the pain also swept across the OPEC.

But reflecting pessimism that the OPEC-led deal can withstand the onslaught of U.S. shale, oil prices have now dipped to around $46 after that initial pop above $55 in the weeks after the cut was announced.

So far, holding fast to their ambitious growth plans are independent American explorers such as EOG Resources Inc. and Pioneer Natural Resources Co. EOG Chief Executive Officer Bill Thomas told investors and analysts during a conference call on Tuesday that some recently finished wells in the Permian region yielded 70 percent returns at first-quarter prices.

Aimed to be between $3.7 billion and $4.1 billion, EOG plans to boost spending by 44 percent this year. It is the second-largest U.S. explorer that doesn’t own refineries. A 33 percent increase to $2.8 billion is being eyed by Pioneer. According to the Barclays analysts led by J. David Anderson, up from $35 billion in 2016, the sub-group that includes North American shale drillers like EOG and Pioneer is collectively targeting $53 billion in spending this year.

Even though output from the new wells being drilled won’t materialize above ground for months, U.S. oil production is already swelling. Noting a 1 percent increase from the April forecast, its full-year 2017 supply estimate was raised to 9.31 million barrels a day on Tuesday by the Energy Department’s statistics arm.

Noting 0.6 percent more than the department estimated last month, U.S. fields will pump 9.96 million barrels a day next year.

(Adapted from Bloomberg)

Categories: Economy & Finance, Entrepreneurship, Strategy, Sustainability

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