Biden's Demands for Oil Collide With Drillers Reining In Output
Comment of the Day

March 12 2022

Commentary by Eoin Treacy

Biden's Demands for Oil Collide With Drillers Reining In Output

This article from Bloomberg may be of interest to subscribers. Here is a section:

U.S. shale producers expect the oil price spike to be short-term, and shareholders don’t want companies investing capital in robust drilling programs delivering new production in 18 months, Pioneer Natural Resources Co. Chief Executive Officer Scott Sheffield said Wednesday. Oil futures indicate companies would get lower prices for crude that begins flowing in 12 to 18 months. 

The administration’s approach assumes oil producers will turn on a dime in response to pleas from the same people “telling everybody that they are going to be obsolete in 30 or 40 years,” said Benjamin Salisbury, director of research at Height Capital Markets. 

Investors in shale also have brushed aside arguments that drillers should crank up production because it’s their patriotic duty. Many still bear scars from the last boom-and-bust cycle, when companies chased production growth, ultimately contributing to a glut that drive down prices. 

“The upstream industry is not a public service industry,” said Ben Dell, founder of Kimmeridge Energy Management. “For 10 years we made no money. The industry is profitable for two months, and the argument is that we’re supposed to price down the product or give away margins to support the consumer.”

Eoin Treacy's view

Shale drilling is capital intensive. The days when money would be thrown at the sector with little concern for profitability are over. Investors now demand returns. Unconventional wells require constant drilling to sustain production. Within months of the cessation of drilling, volumes shrink. That means these kinds of wells are price sensitive. It is possible to ramp up production provided future production can be hedged at attractive prices.  

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