Fractioning oil at lower prices will not help, miners would lose

In a world that calls for more oil, the Southwest Texas region of the United States is one of the few places where production capacity can be rapidly increased. Although the price of this key raw material is currently above one hundred dollars per barrel, shale oil miners are slowing down.

For most of the past decade, the Perm Basin has been a major resource in the Texas area. This massive field has helped turn the United States into a global oil supplier. The US was ready to increase production in times of soaring oil prices, or to suspend it when prices plummeted.

In the extraction of shale oil, the method of so-called fracking or hydraulic fracturing is used, in which cracks are formed in a layer of weakly consolidated rocks by means of a compressed liquid mixture. Cracks then facilitate mining.

As shale miners built up reserves of wells that could be mined in a matter of weeks, it was certain that rising oil prices would trigger a fever that would help replenish global reserves and cool prices.

But not this time. After Russia invaded Ukraine at the end of February, oil prices rose sharply to a 13-year high and petrol prices rose sharply. The price of aviation fuel in New York even climbed to record levels last month. Nevertheless, the miners show no signs of going to the rescue of high prices.

In addition, U.S. oil production is expected to grow by less than half this year from 2018, when oil traded at around $ 65 a barrel. This would mean further hardship for consumers and rising fuel prices, according to investment bank analysts JPMorgan Chase.

“The U.S. oil and gas supply system remains very strong, but at given prices, production growth will be slower and slower,” Raoul LeBlanc, vice president of North American oil and gas at S&P Global, told Bloomberg. “Without the support provided by shareholders, consumers can expect higher prices,” he added.

Publicly traded oil companies, which produce more than half of U.S. oil, now pay investors about a third of their cash. According to S&P Global, this means that shale oil needs to reach a price of around $ 60 to $ 70 per barrel, compared to the previous $ 40 to $ 50 per barrel, in order to be able to mine extensively in major U.S. oil areas.

The pressure to prioritize shareholders over mining is a direct result of the pre-pandemic growth model at all costs, which, according to Deloitte, has led to an outflow of nearly $ 300 billion over the past decade. Although shale mining will increase this year, estimates show that the war in Ukraine will result in only minimal additional growth, despite rising oil prices.

According to an average of five major forecasters, including S&P Global, Rystad Energy, BloombergNEF, Enverus and the US Energy Information Administration, US oil production will increase by approximately 900,000 barrels per day this year.

For comparison, in 2018 it was about 1.9 million a day. This year’s growth was planned before the Russian invasion of Ukraine, and analysts see only a slight increase of about 800,000 barrels a day next year, which would finally bring production in the US to pre-pandemic levels.

Some experts say that current estimates may be too optimistic. At the same time, several OPEC producers are trying to meet their production quotas, so the world oil market is becoming increasingly tense.

However, Wall Street investors are not the only source of trouble. According to research and data company Enverus, the global supply chain crisis is also affecting the Perm Basin, which will account for 80 percent of this year’s US mining growth.

The disruption to technology supply means that if the mining company wants to increase production, it will now take a year or more for oil to be extracted, compared to three to four months before the pandemic, said Linhua Guan, CEO of Surge Energy.

Guan expected a 16 percent increase in costs this year and claims that costs will be even higher next year. As a result, Surge expects a 12 percent year-over-year increase in production this year, down less than 29 percent in the previous 12 months. Nevertheless, Guan expects the company to make record profits this year if prices remain elevated.

It is more difficult to get some of the key materials we need

Travis Thompson, CEO of FireBird Energy

“The cost of casings that help stabilize wells is three times higher than usual and delivery times are much longer,” said Dena Demboski, vice president of operations for UpCurve Energy. “Rates for rigs are higher than I’ve ever seen, and it’s over $ 30,000 a day,” she said. Pioneer Natural Resources, a major miner in the Perm Basin, expects contracts for new rigs to rise by up to 40 percent next year.

“It’s harder to get some of the key materials we need, whether it’s pipeline or sand,” said Travis Thompson, CEO of FireBird Energy, a Midland company. “If we wanted to increase activity, say from three rigs to four or five, we would definitely have to plan much earlier than would have been a year or two ago,” he said.

US oil production increased by 7.05 million barrels per day between 2012 and 2019, increasing by the same amount of production in just eight years as in Iran and Iraq combined. OPEC has failed in its attempts to wean producers from slate deposits to the sidelines by letting prices fall.

And yet American shale now has little hope of replacing an estimated two to three million barrels a day from Russia, which are either blocked or considered non-tradable due to anti-Russian sanctions.

“The shortfall in Russian production is too great for the slate to fully replace it,” said Al Salazar, vice president of Enverus. According to him, various restrictions on oil fields reduce the ability of shale deposits to depress prices this year.

The sharp rise in oil and petrol prices has helped bring US inflation to its highest level in decades, and it is becoming increasingly clear that shale oil is no longer the right tool to deal with soaring oil prices. In addition, US President Joe Biden seems to have abandoned public calls to encourage US miners to increase production, which his administration focused on earlier this year.

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