US oil producers remain cautious

HOUSTON – Oil and gasoline prices are rising. The profits of energy companies are increasing. President Joe Biden, who came into office promising to reduce the use of fossil fuels, has effectively joined in the “drill, baby drill” refrain. Europe would like to end its dependence on Russia.

Is this the moment the US oil industry has been waiting for? Not exactly.

Oil production by US energy companies is essentially flat and unlikely to increase significantly for at least a year or two. If Europe were to stop buying Russian oil and natural gas as some of its leaders have promised, it won’t be able to replace that energy with American fuels anytime soon.

US oil production is up less than 2%, to 11.8 million barrels per day, since December and remains well below the record of 13.1 million barrels per day set in March 2020 just before the pandemic. paralyze the global economy. Government forecasters predict that US oil production will average just 12 million barrels per day in 2022 and increase by about 1 million barrels per day in 2023. That would be well below the nearly 4 million barrels of oil that Europe imports from Russia every day.

“You had this explosive, pulsating industry that boasted of being the reincarnation of the American spirit of innovation,” said Jim Krane, an energy expert at Rice University. “And now that they could be springing into action to bring much-needed oil to the world, they are being uncharacteristically cautious.” The main reason oil production isn’t rising is that US energy companies and Wall Street investors aren’t sure oil prices will stay high long enough for them to profit from the drilling of many new wells. . Many remember the sharp and abrupt drop in oil prices two years ago, forcing companies to lay off thousands of employees, shut down wells and even seek bankruptcy protection.

Executives from 141 oil companies interviewed by the Federal Reserve Bank of Dallas in mid-March offered several reasons why they weren’t pumping more oil. They said they lacked workers and sand, which is used to fracture shale fields to extract oil from rock. But the most obvious reason – the one given by 60% of respondents – was that investors in oil companies don’t want the companies to produce much more oil, fearing it will hasten an end to high oil prices.

The Dallas Fed survey found that US companies need oil prices to average $56 a barrel to break even, just over half the current price. But some fear the price could drop to $50 by the end of the year.

“There’s a tremendous amount of muscle memory due to covid and the dramatic drop in prices,” said Ben Shepperd, president of the Permian Basin Petroleum Association in Midland, Texas. “If we were confident that oil prices would stay at levels of $75 a barrel or higher for another three years, you would see a higher level of capital deployment.” American oil companies are not alone. Saudi Arabia, the United Arab Emirates and other members of the Organization of the Petroleum Exporting Countries have also refused to pump much more oil since the war with Russia began in late February.

The reluctance contrasts with how the oil industry has generally behaved when prices have risen.

Over the past two decades, oil companies have almost always responded to rising prices by investing and pumping more. A drilling spree accompanied rising prices in the early 2000s and again during the recovery from the 2008 financial crisis. US oil production has doubled since 2006 and the country has become a major oil exporter , natural gas and petroleum products such as gasoline and diesel.

But every price spike has been followed by a huge crash – three in the last 14 years alone. Dozens of companies have filed for bankruptcy. Just two years ago, oil prices plummeted from more than $50 a barrel in a single day to below zero as the pandemic took hold and producers had no place to store oil that no one didn’t need to buy.

Exxon Mobil’s stock fell so much that the guardians of the Dow Jones Industrial Average removed it from the index. The company had been average in one form or another since 1928, and its departure has become a symbol of Wall Street’s growing distaste for fossil fuel stocks as more investors demand that companies cut emissions the cause of climate change.

Oil executives and investors cite a number of scenarios in which prices could fall rapidly again. For example, Russia might lose the war and have to retreat. Covid outbreaks and lockdowns in China could hamper that country’s economy, leading to lower global growth and lower energy demand. A new nuclear deal with Iran could open a spigot of oil exports.

Pioneer Natural Resources, a major Texas producer that acquired two other oil companies last year, no longer aims to increase production by 20% as it had done in previous years. It is now aiming for growth of just 5%. The company’s chief executive, Scott Sheffield, said it aims to return 80% of its free cash flow – the money left over after paying its operating expenses and capital expenditures – to shareholders.

“The model has totally changed,” he said.

Oil executives also say they are spending a lot of money on new oil and gas production, but inflation is undermining their efforts. Exploration and production spending will increase by more than 20% this year, but about two-thirds of that increase will be used to pay higher prices for labor, materials and services, among other costs. according to RBN Energy, a Houston-based research firm.

“It’s a bit of a sticker shock because we’re seeing inflation across the industry,” Jeff Miller, CEO of Halliburton, which drills wells and provides other services to oil companies, told analysts. during a recent conference call.

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