Exploration & Production

Fall in crude prices hit shale producers

Fall in crude prices hit shale producers

US shale firms hit the brakes


US shale producers are slamming the brakes on next year’s drilling with crude prices off 40 per cent and mounting fears of oversupply, paring budgets that in some cases were set only weeks earlier.

The reversal is alarming because blistering growth in shale fields has propelled US crude output 16 per cent to about 10.9 million barrels per day for 2018, above Saudi Arabia and Russia. Production has been expected to rise 11 per cent more in 2019 as large oil firms and independents added wells this year.

Shale producer Centennial Resource Development joined rivals Diamondback Energy, and Parsley Energy in cancelling drilling rig additions next year. Centennial, led by shale pioneer Mark Papa, withdrew its 2020 production target and cancelled plans to add 2.5 drilling rigs, citing market weakness.

"You’re really seeing folks pull back on extra spending, pull back on extra drilling and focus on being resilient," said Matt Gallagher, president of Parsley Energy, who will become CEO in January. The company plans to cut its 2019 capital budget by about 15 per cent compared to 2018 while increasing production.

Right now, shale prices are close to breakeven levels. US crude futures for 2019, based on an average of the year’s monthly contracts, this week dropped below $50 a barrel, near the $46-$50-per-barrel level that shale producers in the Permian Basin, the largest oil field in the United States, need to cover their costs.

The price drop is "a shock," said John Roby, chief executive of Dallas, Texas-based oil producer Teal Natural Resources LLC. "A lot of people are cutting back development programs and cutting rigs," he said.

Centennial said in a securities filing it could no longer stand by its 2020 projections or add rigs next year "in light of the current macro environment." Just six weeks ago, it forecast 2020 output of 65,000 bpd with "attractive" returns based on a US oil price of $75 a barrel.

"Realised pricing in the Permian Basin is near levels not seen since the end of 2016 while service costs have increased by about 35 per cent during the same time period," said Travis Stice, CEO of Diamondback. The company cut three rigs.

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