Why shale might not make a comeback despite rising oil prices

Inflation in the oil sector is getting worse, and industry executives don’t expect cost pressures on everything from steel pipes to fracking sand to ease any time soon.

Price increases have been so rapid that oil executives are forced to increase the size of their annual budgets to preserve crude and natural gas production targets.

Those same leaders have issued a warning that runaway oilfield inflation is making any significant increase in domestic oil production much harder to achieve despite the incentive of $100 a barrel crude.

Benchmark U.S. and international oil prices have jumped more than 40% this year as strong post-coronavirus demand crumbled amid anemic growth in crude supplies and global market disruptions caused by the invasion of the coronavirus. Ukraine by Russia.

“Given significant supply chain bottlenecks and scarcity of oilfield service equipment and field personnel, any attempt to increase business in the United States will be logistically challenging and capital inefficient,” Apa chief executive John Christmann said in a conference call Thursday.

Apa, the oil explorer formerly known as Apache, increased its full-year drilling budget by 8% this week, surprising investors unaccustomed to such revisions a few months after the plan was created.

The stock fell 10%, wiping out more than $1.5 billion in market value in less than three hours on Thursday.

ConocoPhillips also increased its spending plan by 8% while Murphy Oil and Laredo Petroleum increased theirs by 7% and 6%, respectively.

The inflationary trend has affected every corner of the oil exploration and production cycle. Drillers said they got sticker shock on everything from rigs and workers to diesel fuel and frack sand.

Shale company Continental Resources said the price of steel tubing used to line the insides of oil wells jumped about 7% in March alone.

Meanwhile, another shale specialist, Coterra Energy, noted that it can take up to two years to take delivery of pipes, compressors and other production equipment.

Both companies said their drilling and production costs rose 16-20% from a year ago.

This represents an acceleration from earlier this year, when the industry expected cost increases in the range of 10-15%.

“I think it’s been here with us for a while,” ConocoPhillips chief executive Ryan Lance said of inflation on a conference call. “I don’t think it’s transient and we’re going to have to deal with it.”

Hess is increasing its capital budget to as much as $100 million this year, largely due to a 7% increase in drilling and fracturing costs in North Dakota’s Bakken Shale region.

Scott Sheffield, managing director of Pioneer Natural Resources, expressed concern that supply constraints could hamper production.

“I just think it’s going to be difficult to meet” some of Wall Street’s forecast for oil supply growth, he told investors. “That makes me even more optimistic about some of the oil price numbers that are out there.”

Shale executives are trying to minimize the pain of rising costs by ordering supplies earlier and reducing unit expenses through strategies such as drilling longer lateral wells.

Updated: 06 May 2022, 09:02

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Steve R. Hansen