Shale Oil Producers Tentatively Gear Up for Increased Production

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Researched by Industrial Info Resources (Sugar Land, Texas)--While the price of oil has had its ups and downs in recent weeks, the overall price trend has shown definite upward movement for the past six weeks or so. At the start of April, crude oil futures were in the mid-$40s, and this week, they broke the $60 mark for the first time this year. Wednesday's report from the U.S. Energy Information Administration (EIA) that U.S. oil reserves had declined 3.9 million barrels for the week ending May 1 (the first drawdown in 17 weeks) encouraged producers that the existing oil glut may be on the wane and helped lift prices even more.

This price increase over the past weeks has led some of the major shale oil producers to begin talking about increasing drilling activity and completing previously drilled wells. Major shale oil producers Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas) and EOG Resources Incorporated (NYSE:EOG) (Houston, Texas) have both expressed that they will begin increasing oil production in the shale plays in the coming months if prices continue their current trend.

A press release from Pioneer earlier this week stated that the company is "expecting to add two horizontal rigs per month in the northern Spraberry/Wolfcamp [in West Texas] beginning in July if the oil price outlook remains positive and an agreement is finalized to sell the Eagle Ford Shale Midstream business." The company said that impact on production from these drilling rigs would be minimal in 2015, but would help grow production in 2016.

Pioneer estimates that this year's production from the Spraberry/Wolfcamp formation will increase more than 20% from 2014 production levels, with much of this additional production coming from wells that have already been drilled but are not yet completed. Pioneer also says that it will place into production 95 to 100 horizontal wells in the Eagle Ford Shale this year, increasing 2015 production by 9% or more from 2014 levels in the formation.

In a sense the Eagle Ford provides somewhat of a security blanket for Pioneer, which has governmental permission to export condensate. The company reports that its Eagle Ford production in the first quarter was 47,000 barrels oil equivalent per day (boe/d), of which about 40% was condensate, allowing the company to export 20,000 barrels per day (BBL/d) of condensate in the first quarter, "with significantly improved pricing compared to domestic condensate sales."

In EOG's quarterly earnings conference call on Tuesday, May 5, Chairman and CEO Bill Thomas repeatedly suggested that if oil prices stabilized at around $65, the company would begin ramping up drilling and production. EOG is currently drilling wells while prices are low with an aim to maximize investment. "We have no interest in accelerating oil production at the bottom of the commodity price cycle. Instead, we are drilling but deferring completions on a significant number of wells, known as DUCs, until oil prices improve," said Thomas. "By deferring completion, and accelerating oil growth in a better price environment, we maximize 2015 return on capital invested and build momentum as we head into 2016. We plan to enter 2016 with approximately 285 DUCs."

David Trice, EOG executive vice president of Exploration & Production, also pointed out how increased efficiencies and new technologies are helping shale producers gain more profit from their capital expenditures. When speaking about one the company's plays in the Delaware Basin, Trice said, "The well economics continue to improve as we tighten spacing and lower cost. In fact, much like the Western Eagle Ford, we made better returns at $65 oil now than we could in 2012 at $95 oil." Cheaper technologies and the ability to obtain more oil per well are growing dramatically each year, helping reduce the impact of lower oil prices on exploration and production profits.

Pioneer and EOG may very well be two of the first major companies with an eye to expanding production in the current price environment. Both companies have many drilled but uncompleted wells, which would allow them to respond more quickly to an increase in prices. However, several other producers are still waiting to see how the situation unfolds, concerned less about oil prices and more about the excess supply of oil on the market. While Wednesday's report from the EIA suggest that U.S. reserves may be declining, increasing production without once again oversupplying the market may to prove to be a difficult balancing act, depending on how other companies handle future production.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and ten international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.