Oil prices may be around $100/bbl, but capital discipline-minded operators aren’t rushing to increase drilling activity to take advantage of the higher prices.
They are tapping into remaining drilled-but-uncompleted (DUC) inventory, using technologies that enable longer laterals and more-efficient drilling, and continuing the established practice of tying smaller hydrocarbon accumulations back to existing production facilities to maintain and grow output, Rystad Energy analysts said during a 30 April media roundtable in Houston.
Oil prices have risen with the Strait of Hormuz closure due to the Iran War, yet those prices are not as high as they could be.
“What the market's saying is this is going to resolve itself,” Rob Cordray, Rystad’s managing director for the Americas, said, citing future oil pricing. “Futures curves are not a forecast. Future curves are what you've paid today for that hydrocarbon then.”
Jai Singh, Rystad partner for North America oil and gas, said uncertainty about when the Strait of Hormuz will open and how the war plays out is causing uncertainty and raising risks.
“Nobody knows what's going on. It could be open. You also got the announcement from the Iranians that one day the strait is open. So, everyone is worried about, ‘okay, what if this just resolves and then I'm stuck on the wrong side of it because they keep dangling this kind of notion that it can be opened quickly,’” he said.
Technology and DUCs
Cordray said companies are exercising capital discipline in a way he hasn’t seen before in his career.
“I never thought I’d see the day where there was real capital discipline because every time we as an industry got a bunch of money, we went and blew it on wells all over. This is real, and this is very real, and companies are punished severely for stepping out of line,” he said.
As a result, many companies have been in maintenance mode, rather than growth mode. Matthew Bernstein, Rystad VP, North America oil and gas, said that raises the question of how companies can grow without sacrificing free cash flow or top-tier inventory.
Longer laterals are one answer.
“This has been a theme for quite some time now. The trade-off with a longer lateral well is, of course, you tend to degrade your productivity on a per-foot basis,” he said.
Rig efficiency and automation are making their contributions. It’s not necessarily new tools, he said, but applying technology in a way that drilling is no longer “stumbling your way to the end” but instead “avoiding all those hazards along the way and having a really optimal perfect well.”
Bernstein said companies are also deploying technology that helps them maximize resources. One example, he said, is ExxonMobil use of a proprietary version of petroleum coke (petcoke) as a proppant additive. They are also employing longer subsea tiebacks than ever to produce small discoveries back to existing platforms, he said.
Finally, he said, companies are taking what they’ve learned in one region of the world and applying it to other locations.
Many companies tapped into their shale DUCs last year for immediate barrels, which left them “ill-advantaged to take advantage of this immediate price spike to $100/bbl,” he said.
There are other constraints to production growth. For instance, Bernstein said, growth in the Permian Basin is tough because it needs gas takeaway capacity.
Yet the world needs more oil and gas, Cordray said. “There's a strong short production gap out through 2035, ‘40, and ‘50 that's being ignored.”
About 76 million BOPD will need to be sanctioned by 2040 to ensure sufficient oil supply for the world in 2050, he said, adding, “Shale can help, but shale can’t do it on its own.”
He said offshore investment is critical to closing the gap, but the industry must add a certain number of barrels of oil per day simply to keep offshore and shale production flat.
“You can't take your foot off the gas because, again, the goal isn't growth. We're not building into a boom. It's holding the line,” Cordray said.
He said the boom-and-bust cycle has been historically tough on the service side.
Bernstein said some who are thinking about adding rigs are early movers. Publicly held companies are more likely looking to accelerate completions work and carry out workovers before adding crews, he said. On the other hand, early movers will get better economics if they pick up rigs before service prices accelerate.
“Something like a 10% inflation in service costs on a typical Permian well could lead to 40% lower IRR (internal rate of return),” he said.
Singh said the first set of rigs brought online will cost less than the next tranche.
“The first rig you add, it's warm. It's ready to go. It's lower cost,” he said. “Let's say the first 25 rigs are going to be lower cost than the next tranche. If you're not part of that first 25, then you're saying, ‘okay, well if I'm late to the game, then maybe I just stick to the plan I have.’”
There’s also the question of what to drill, he said.
Cordray added, “You drill what you've got, or you drill what somebody else has, which is the M&A angle.”
