[Note: Some content was previously published at Forbes.com]
The history of the oil and gas business in the United States is that every time the “experts” all line up to declare it to be dead, it finds a way to come roaring back. This scenario has played itself out at least half a dozen times across my own 42-year career in the business or writing about it.
Well, guess what: It appears to be happening again. I was about to say that it appears to be about to happen again, but the truth is that the domestic oil and gas industry has already staged a significant comeback from the depths of its COVID-19-induced depression last summer. Take the Enverus Daily Rig Count as an example: On September 1, 2020, that metric showed the number of active drilling rigs in the U.S. sat at just 276 rigs, depressingly near its all-time low. As of today, that number has risen to 460 active and working rigs, a 2/3rds increase in just six months.
As well, the Primary Vision count of active U.S. frac spreads had recovered all the way to 175 as of February 12, more than double the count of just 85 as of August 28 of last year. That count fell all the way to just 41 active spreads during the disastrous arctic freeze event that struck Texas, Oklahoma and other shale states in mid-February, but had recovered back to 140 as of the last available count on February 26.
While those financial factors continue to place pressure on corporate producers to focus on cutting costs and elevating investor returns, as we have discussed several times in the past, the natural inertia within companies that are still run by engineers and geo-scientists – rather than investment bankers and accountants, as so many are now – is still to drill more wells. Healthier commodity prices only serve to magnify that natural internal inertia.
Given that that announcement has already resulted in an increase of 10% in the price for WTI as of this writing Friday morning, Goldman and other price forecasters could have another increased estimate for WTI coming in the near future. In fact, Goldman Sachs raised its projection for 3rd quarter, 2021 Brent prices to $80 on Friday morning. “Key will be the potential shale supply response, although the latest earnings season suggests investors are still a long way away from rewarding growth,” the bank said. It simultaneously raised its forecast for 2022 U.S. shale production by 300,000 barrels per day.
Interestingly, Goldman Sachs also forecasts the Brent price to remain at a very robust level – $75 per barrel – through the end of 2022. Given the current low differential between Brent and WTI of just $3 per barrel, that would indicate a WTI price of $72 through the start of 2023.
Let’s all remember that the U.S. shale industry boomed like never before throughout 2018 and 2019, a time during which WTI traded in a range of $53 to no higher than $72 per barrel. While it is true that the financing market for new shale projects remains tight, it is also true that shale producers who have spent the last two years heavily-focused on cutting costs, increasing efficiencies and deploying improved technologies are now able to present a far more attractive profile to potential investors than they could in 2018. That’s what a depression will do to the companies that manage to live through it.
Another factor to keep in mind is that corporations aren’t the only significant players involved in the shale equation. In fact, Bloomberg recently reported that, as of December, privately held companies like DoublePoint Energy and Mewburne Oil Co. were running half of the active drilling rigs in the Permian Basin. Companies like these have different internal drivers and less pressures coming from ESG-focused investors than corporations, and thus present something of a wild card for those attempting to predict where overall U.S. production might head in the coming months.
The U.S. Energy Information Administration (EIA) reports that domestic oil production for December was roughly 11.06 million barrels of oil per day, about 1.8 million barrels below the peak seen in November, 2019. It is interesting to note that the domestic industry was able to hold production levels relatively stable throughout the second half of 2020 despite running a very low number of active drilling rigs.
The various elements of the U.S. oil industry outlook equation all still revolve around the central element of ‘what will OPEC+ do?’ Or, as Goldman analyst Damien Courvalin put it, “We were already bullish [on] oil prices because we expected OPEC’s conservative demand expectations to leave its ramp-up lagging our above consensus demand forecasts.”
Bottom line: Given that caveat assuming that the current discipline of the OPEC+ group continues to hold together for the coming two year time frame, the domestic oil and gas business is likely headed for another boom time. It will probably be more modest than the last boom, given the more disciplined outlook of the corporate players, but a boom it will most likely be.
Potential Limiting Impact of Biden Public Policy
But what about Biden’s energy policies, you might ask. What about that Keystone XL decision? What about that moratorium on new leasing on public lands? What about all the additional regulations to come?
Yes, all those policies designed to slow the domestic oil and gas industry down will have an impact, no doubt. But let’s look at how those moves will and will not impact the shale-based oil boom that is already growing:
- KeystoneXL executive order – This presidential order that effectively cancels the northern leg of the KeystoneXL system would in and of itself have little, if any impact on a nascent oil boom in the Lower 48. The Keystone system’s purpose is pretty singular: To facilitate the import of large volumes of Canadian crude into the United States in a safer and more environmentally-sensitive way than bringing it in by truck or rail. It is not designed to carry large volumes of U.S.-produced crude, and would have no impact on America’s various shale plays.
- Moratorium on new leasing on federal lands and waters – This could become more impactful should it be extended beyond its current 1-year term to last throughout Biden’s full 4-year term in office. This is solely because about half the lands in New Mexico’s part of the prolific Permian/Delaware Basin are owned by the federal government. Otherwise, America’s shale plays – especially those that focus on oil production – overwhelmingly lie on privately-held lands in places like Texas, North Dakota and the eastern half of Colorado.
- New regulations by EPA/OSHA/DOI and other federal agencies – No question there will be a raft of such new regulatory actions coming into effect in the coming years. For the oil industry, this will make the EHS/Safety/Regulatory Compliance departments big growth areas within companies and trade associations. It will also be a very good time to look for government relations jobs within the industry. But again, many of the regulations we’re talking about here would apply only on federal lands and waters, and the industry has proven to be quite resilient in dealing with major new regulatory actions that apply nationwide. As a result, we will see companies by and large be able to quickly adopt their business practices, finding innovative new ways to comply with the new regulations. They will be a nuisance for sure, and result in slightly elevated costs of doing business, but such regulations will not be able to halt the nascent boom that is building.
So, while the Biden Administration will no doubt continue to come at the industry with actions designed to limit its ability to do business, taken together they will be able to somewhat mute the boom that is building, but won’t be able to stop it.
Bottom line: as long as the OPEC+ agreement holds together and those countries remain willing to withhold some of their oil production, America is headed for another oil boom. In fact, we’re already in it.