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US shale shortages to limit efforts to replace banned Russian oil

/ 06:28 AM March 09, 2022
FILE PHOTO: A pump jack operates in the Permian Basin oil production area near Wink, Texas U.S. August 22, 2018. Picture taken August 22, 2018. REUTERS/Nick Oxford/File Photo

FILE PHOTO: A pump jack operates in the Permian Basin oil production area near Wink, Texas U.S. August 22, 2018. Picture taken August 22, 2018. REUTERS/Nick Oxford/File Photo

HOUSTON — U.S. shale producers are unlikely to replace banned Russian oil imports due to a shortage of oilfield materials, equipment and labor and a dwindling backlog of wells waiting to be completed, energy executives and analysts said on Tuesday.

U.S. President Joe Biden imposed an immediate ban on Tuesday on Russian oil imports in retaliation for its invasion of Ukraine, putting a spotlight on shale producers’ ability to boost output to make up for the loss of about 200,000 barrels per day of Russia crude typically imported by domestic refiners.

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Shale has a short-cycle — able to add or reduce production relatively quickly — and in the past, producers have delivered explosive growth when prices allow.

In the Permian Basin, the top U.S. shale field, output jumped by 100,000 bpd nearly every month in 2018, according to U.S. government data.

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But unlike 2018, there is a lack of oilfield materials, equipment and labor, and the fastest way to increase shale production – completing already drilled but not yet completed wells – has declined.

Shale wells waiting to be completed and turned on have fallen sharply to 4,466, the lowest since January 2014 and nearly half of the highs touched mid 2020, data showed.

“Drilled-but-uncompleted (DUC) wells represent latent potential, and that latent potential has shrunk,” said Stacey Morris, research director at Alerian, an energy index provider.

Analysts warned the time needed to drill and complete a new well can take six to eight months.

Even though the U.S. rig count has climbed for a record 19 months in a row, its growth has been slow and oil production is still far from pre-pandemic record levels as many companies focus more on returning money to investors rather than boosting output.

Today’s lack of materials, equipment and labor is “not adequately recognized as a significant impediment for growth,” Occidental Petroleum Chief Executive Vicki Hollub said.

Oil producers which have not planned for volume growth this year cannot change and abandon commitments to allocate profits to debt reduction and shareholder returns, she said.

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“Capital discipline today for oil companies is basically no (production) growth,” Hollub said.

Shale companies have set their production budgets for the year and, like Occidental, cannot revise them without investor approval, said Pablo Prudencio, a senior analyst at energy consultancy Wood Mackenzie.

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TAGS: Russian oil, Ukraine crisis, US shale
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