OPEC+ decision will help US shale industry boost spending

WTI crude prices exceeded the $50/b mark, reaching $53.60/b on 5 January 2021 after Saudi Arabia announced at the OPEC+ meeting that it would cut its oil production by 1mn b/d in February and March. Total production cuts agreed at the meeting will be 8.125mn b/d in February and 8.05mn b/d in March.

The positive effect on oil prices is set to create a chain reaction in the US, where shale operators will see cash from operations (CFO) boosted by 32% in 2021, allowing them to increase their activity spending this year, according to Rystad Energy.

The price recovery has helped oil producers’ cash flow improve significantly since the second quarter of last year, reports the market analyst. In the US in particular, the rebound in prices – even before WTI hit $50/b – helped shale producers generate record high free cash flow in 3Q2020.

Cash from operations is a key driver for US tight oil activity. The figure correlates with the cash available for the E&P companies to invest in new wells, and represents the revenue minus all operational costs, royalty payments and gross and net taxes.

At a WTI oil price of $40/b for 2021, CFO would be expected to remain flat this year, says Rystad Energy. However, at the current oil price of $50/b, it is expected to grow by around 32%. This means that if companies continue to operate within their cash flows, the current oil price of $50/b will provide enough cash flow for a ramp-up in investments and a surge in US tight oil activity this year.

‘This increased activity has already started to manifest itself, with rig activity for tight oil up 60% since the low point in August last year. Completion activity is also recovering, measured by the number of wells started to be completed by month,’ comments Espen Erlingsen, head of upstream research at Rystad Energy.

The low point last year in terms of completion was the month of May, with 330 wells, down 75% from January. The recovery in activity became apparent in the later months of last year, and by December completion activity had doubled since May to more than 700 wells.

‘The production cuts from OPEC+ have definitely fulfilled their purpose by balancing the market and supporting higher oil prices. At the same time, higher oil prices have reactivated the US tight oil industry. With the current budgeting season and improved cash flows, Rystad Energy expects to see a further increase in US tight oil activity,’ Erlingsen concludes.

The CFO of shale operators in the US Permian Midland, Permian Delaware, Eagle Ford, Bakken and DJ basins in 2019 reached $87bn, but the downturn brought by the COVID-19 pandemic caused the figure to plunge to what Rystad Energy estimates was $55.7bn in 2020. If the positive trend persists and WTI averages at $50/d in 2021, the market analyst expects this year’s CFO to rise to $73.6bn.

Figure 1: Tight oil investments and cash from operations, with 2021 outlook scenarios
Source: Rystad Energy