Will America's shale producers make up for untradeable Russian oil? - The Economist

Western oil consumers are wiping their hands clean of Russia’s black stuff. America, Australia and Canada have banned imports of Russian oil; elsewhere traders are steering clear of it by choice. From April that could reduce the global oil supply by 3m barrels per day (bpd). Prices have fallen from their recent highs, though they are still up by around 85% compared with a year ago. Governments are searching for substitutes. In America eyes have turned to the country’s shale producers. The energy secretary, Jennifer Granholm, has implored oil bosses to think of the “regular working folks” struggling to afford dearer petrol. That means “you producing more right now”, she commanded. Will they heed the call?

Don’t count on it. A decade ago shale producers were highly responsive to price movements. “See high price, take high price” was the industry motto, notes Al Salazar of Enverus, a research firm. For most of the period between 2011 and 2019 producers added an extra 1m bpd every year, on average. But to shareholders the business model resembled a wonky rig. Firms burned cash and binged on debt; returns were inconsistent and share-price performance underwhelming.

Amid pressure from investors the oilmen changed tack. “Capital discipline” became their mantra. They spent less, reduced debt and returned cash to investors through dividends and share buybacks. Their reinvestment rate—the share of cash flow put into capital expenditure—fell from 154% in 2015 to 43% in 2021. Higher oil prices once spurred more drilling activity but that correlation ended in 2021 (see chart). Now firms aim to deliver a maximum year-over-year bpd growth rate of about 5%, says Ryan Duman of Wood Mackenzie, a consultancy, down from 20-25% in 2018 and 2019. Meanwhile they have become more efficient. In 2019 they produced 9.9m bpd with around 900 rigs; in 2022 they are set to churn out 9.4m with around only 600 rigs.

Despite pleas from the White House, changing course will require time. Adding an extra 1m bpd to already-budgeted supply increases (see forecast on chart) would take about 18 months. First, firms would need to get the nod from investors, who like the look of capital discipline matched with high prices. Even if producers want to pump more oil, they will be constrained by shortages of labour and materials, such as sand and steel. Private operators may react more swiftly to higher prices; last year they accounted for most new rigs. But they too will face supply constraints.

Firms were deploying new rigs in the past few months, though their response since war broke out has been “muted at best”, observes Mr Duman. Their responsibility, after all, is to shareholders, not the White House. ■

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