Oddly enough, the very source of the boom that put some wind behind the sails of the energy industry over the past decade and a half – the Shale Revolution – has become, to a large extent, a snag for production growth.
Arguably, it couldn’t have happened at a worse time.
In late February, when Russia invaded Ukraine, the anticipated decrease in energy supply pushed worldwide prices higher, as did U.S. sanctions against Russian energy companies a year later.
Add to that the loss of demand prompted by the pandemic, and it’s fairly simple to see why the fracking boom, which led to lower prices as supply began to overtake demand in the 2010s had become something of an anchor, even as more production was desperately needed.
It took just a few years for the U.S. to bypass Saudi Arabia and Russia as the world’s top producer of oil and natural gas, with crude oil output rising from 5.4 MMbpd in 2010 to a record 13 MMbpd as 2019 came to a close, according to the Energy Information Administration (EIA).
Growth during this period became the benchmark rather than profitability but as investors began to retreat, companies once again became more concerned with profitability.
The recent, some would say unsustainable, rise in natural gas prices is a new development, of course, and was highlighted by a 14-year high reached at Henry Hub.
The decline in supply amid world developments has placed even more pressure on the United States to crank up production, but so far that has not happened in an appreciable way.
For some time now most major shale companies have only been reinvesting in a manner that allowed for fairly flat production numbers, and that appears to be a policy they are ready to stick by for the time being.
Then, too, even with a change of heart from producers, there are supply-chain issues to keep in mind. It would be difficult to boost production at a time when basic supplies and equipment are not readily available.
In one example, cited by Reuters, fracking company Tall City Exploration said it has been unable to get enough of what would seemingly be a very basic component of its operations.
“We can’t get enough sand,” CEO Michael Oestmann, said in February. “We’re running less than the number of [fracking] stages we could pump in a day because we’ve run out of sand every day.”
Another way of looking at this is, if you’ve been having trouble receiving your home deliveries from Amazon as quickly as you would like, try imagining the problems inherent in shipping (and producing) tons of sand or massive pieces of equipment across the country to and from job sites.
So, while the Biden administration has tried to put more pressure on the sector to increase its production, there is not much that companies can do without the essential components needed to do the work.
In March, the administration asked Congress to pass “use-it-or-lose-it” fees for oil firms’ unused wells. This request appears to be ridiculous for any number of reasons, not the least of which is the fact that leases are issued before exploration begins and not every permit yields a gusher.
As American Petroleum Institute (API) President and CEO Mike Sommers put it, “The administration once again has a fundamental misunderstanding of how leases work.”
To that point, the EPA recently announced it will reverse a 2017 decision by designating regions of the Permian Basin of some New Mexico and Texas counties as non-attainment areas, which would mean that these locations no longer comply with Ozone National Ambient Air Quality Standards (NAAQS).
While I am not sure what the effect of such a move will have on production numbers, I doubt seriously it will do much to boost the confidence of investors in future undertakings.
