As oil nears $100 a barrel, U.S. drillers get busy in costly shale basins

Crestwood Equity Partners LP

08/02/2022 11:00

By Liz Hampton
    DENVER, Feb 8 (Reuters) - As U.S. oil rises toward $100 a
barrel, producers in some high-cost shale basins are buying
properties and adding rigs and frack crews in places that fell
silent when prices crashed early in the pandemic two years ago. 
   Benchmark U.S. prices last week topped $93 a barrel, up
around 65% in the last 52 weeks and the highest since 2014. U.S.
producers are cranking up spending at double-digit rates as fuel
demand has soared and fears have waned that OPEC will again
punish them by flooding the market with crude that is cheaper to
produce.  
    Some executives say current high prices and relatively low
service costs make production economics the best in years. Firms
are buying U.S. oil, pipeline and gas processing rivals in a bet
that higher prices will more than cover rising costs of labor
and equipment.       
    "Drilling economics today are better than they’ve ever been
since the shale revolution started," said Chris Wright, chief
executive officer of Liberty Oilfield Services  LBRT.N . Closely
held companies, in particular, are accelerating output, he said.
 
    New activity is stirring in secondary oilfields like
Colorado's DJ Basin, Wyoming's Powder River, Louisiana's
Haynesville and North Dakota's Bakken shale, which last year
lost its spot as the second largest U.S. oil producing region.
    
    (For a graphic of oil production in secondary basins, click
here: https://graphics.reuters.com/USA-OIL/PRODUCTION/lgvdwxxeopo/)
    
    ACQUISITIONS SPUR OUTPUT
    Spending budgets among U.S. independent producers are up 13%
over a year ago, according to analysts at Cowen. Among secondary
fields, the natural gas-rich Haynesville is among the only to
fully recover output from the 2020 oil-price crash. Other shale
fields, including the second-largest producing oilfield, are
adding to holdings and rigs. 
    "When you look at the oil prices in the Bakken, the prompt
price is close to $90 a barrel," said Bob Phillips, chief
executive of energy pipeline company Crestwood Equity Partners.
"That doesn't happen very often."    
    Last week, Crestwood completed a $1.8 billion deal to
purchase Oasis Midstream Partners' oil, gas and gas-processing
assets in North Dakota and Texas as part of a plan to become a
top-three midstream operator in the Bakken, Powder River and
Permian shale fields. 
    Shale dealmaking that leads to more output could accelerate
this year, said Andrew Dittmar, who specializes in merger and
acquisitions for energy tech firm Enverus. 
    "Most of the selling private companies are ones that bring
inventory as well as production to the table," he said. 
    In Wyoming's Powder River oilfield, Continental Resources
has made several acquisitions since last year, the latest from
Chesapeake Energy. That purchase could revive the area's output,
said Crestwood's Phillips. 
    Continental is scheduled to release its fourth-quarter
results next week and has not yet highlighted its 2022 budget or
plan, a spokesperson said. 
    
    PRICES BENEFIT ALL 
    Ben Dell, managing partner at energy investor Kimmeridge
Management and interim CEO at Colorado's Civitas Resources, said
every basin is enjoying an uplift from higher oil and gas
prices.
    "The DJ has been particularly profitable," he said. In fact,
Dell thinks the prices may stir too much production, leading to
oversupply.
    In the Haynesville shale in East Texas and Louisiana,
natural gas production is forecast to hit a record 14.1 billion
cubic feet per day this month, according to U.S. government
data. 
    Output gains are happening so fast production forecasts in
some areas have proven too low. Data and analysis firm East
Daley Capital had estimated Haynesville output would rise 12%
this year based on 37 active rigs. 
    There are 42 now drilling, five more than it expected for
the year. "There is further upside to our current forecast,"
said Rob Wilson, a vice president at East Daley. 

    ROOM TO RUN
    Still, outside of Haynesville and the Permian, oilfields lag
their peak production. Bakken producer Hess Corp. aims to
increase its overall production by 12% to 15% this year, driven
by output in the Bakken and Guyana. Chevron plans to boost its
Permian shale output 10% and Exxon said it could deliver 25%
more oil and gas from its Permian holdings.
    In the Bakken, oil output is around 1.2 million barrels per
day (bpd), below its 1.52 million bpd late 2019 peak. In the
Eagle Ford shale of South Texas, oil is averaging 1.1 million
bpd, off the peak 1.7 million bpd in early 2015. 
     U.S. producers have been adding three rigs per week, but
they would need to add 11 rigs per week to hold production at
current levels, according to Mizuho analysts. 
    Ron Ness, head of trade group North Dakota Petroleum
Council, said supply chain challenges could limit production
gains this year, as could investors demanding higher returns. 
    "Unless $100 plus oil changes the investment mindset toward
growth, I'm not sure we will see 1.5 million barrels per day
again" in the Bakken, he said.

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Secondary oil basins eye a comeback    https://graphics.reuters.com/USA-OIL/PRODUCTION/lgvdwxxeopo/
Oil prices near $100 a barrel    https://tmsnrt.rs/3gy8z2R
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 (Reporting by Liz Hampton; Editing by David Gregorio)
 ((liz.hampton@thomsonreuters.com; +1 469-691-7668;))