‘You can’t just turn on the taps’: Bottlenecks hurt hopes of increased US oil production

Shortages of personnel and supplies are weighing on the recovery of U.S. oilfields, derailing hopes that Texas drillers could unleash spurts of crude to help tame soaring global prices.

The Biden administration has pleaded with oil producers to increase production to ease the burden on American motorists, who are paying high prices at the pumps after Russia invaded Ukraine.

But service groups tasked with providing materials, drilling equipment and labor warn that major bottlenecks mean it cannot be done overnight.

“You can’t turn on the taps immediately,” said Ryan Hassler, principal analyst at consultancy Rystad Energy. “It will take some time to reactivate the equipment and staff the teams and bring in the extra sand capacity.”

Over the past decade, the shale play in the United States has become something of a relief valve for the world’s oil supply, able to rapidly ramp up or down production as needed in a relatively short period of time. short. In previous years, this could be done in three to six months, analysts said.

But today, that timeframe is likely to be double, meaning any significant growth is a year away. The reason is a chronic shortage of labor and essential equipment: drilling rigs and fracking sand – used to support open shale rocks so that oil and gas can flow – crews and drivers.

The countdown won’t begin until investors, who have put the brakes on spending, allow operators to return to growth mode.

The bottlenecks will dampen the Biden administration’s hopes that a drilling push by U.S. producers will moderate prices. The price of Brent crude, the international marker for oil, stood at around $120 a barrel on Friday, up 25% since Russian troops invaded Ukraine last month. National average gasoline prices hovered just below record highs seen in recent weeks at $4.24.

Lack of frac sand is a key issue. During the Covid-induced downturn in 2020, when oil prices fell below zero, many sand suppliers went bankrupt and mines were shut down. Their recovery has been slow and supply is lagging behind demand.

Despite about 71 million tons per year capacity in the West Texas Permian Basin, underinvestment has forced many facilities to shut down, leaving production at less than 50 million tons, well in below the annual demand of 60 million tons. Spot prices climbed from around $20 a short ton to over $70 early this year.

“It’s almost like the industry thinks we’re driving a car with a five-speed transmission – but we went from fourth to fifth gear and that fifth gear just wasn’t there,” Dirk said. Hallen, CEO of Hi-Crush. , one of the largest sand miners in the country.

“All of a sudden now we are running into this kind of imbalance between supply and demand. It’s a really burdensome completion activity,” he added, referring to the process of bringing a well into production once the drilling is complete.

With minimal additional capacity to implement in the near term, sand suppliers say they need concrete signs from operators before they can invest in ramping up production.

“For idle mines to come back online, the market needs higher, more consistent prices and customers willing to support the industry through fixed-term contracts,” said Lee Beckelman, CFO of Smart Sand, another leading supplier.

But the availability of sand is only one of the constraints holding back oil production. Scott Sheffield, managing director of Pioneer Natural Resources, told the Financial Times this month that a plethora of supply chain factors were hampering his company’s return to growth. “There are labor shortages, there are fracking fleet shortages, there are rig shortages, there are sand shortages,” he said.

Hallen said: “It’s one of those things where if you solve one bottleneck, you’re onto the next bottleneck. And I think all of those things combine to make it really hard to get past the levels that we already have quickly.

Despite the surge in prices, U.S. crude production has yet to recover to pre-2020 price crash levels. barrels before the pandemic. The US Energy Information Administration expects production to reach around 12.5 million bpd by the end of the year.

But Sheffield said growth levels were “locked” for this year at around 700,000 barrels. That could potentially be doubled to bring in an additional 1.4 million barrels a day in 2023, he said, provided investors agree and supply chain issues are resolved.

Suppliers of sand, rigs and labor say it is possible for them to increase supply, but they need a clear commitment from oil and gas companies before doing so. make.

It would take time to hire workers to outfit drilling rigs and fracking operations – and bringing experienced people back to remote areas such as West Texas could take time.

“There is a big personnel problem,” said Raoul LeBlanc, principal analyst at IHS Markit and former director of strategic planning at Anadarko Petroleum. “People got laid off and they moved out in 2020 and they live in Montana or Colorado or North Carolina — and you need them and they need to stay there.”

“Money eventually straightens out this situation,” he added. “But you have to overcome that kind of resistance from people.”

The availability of drilling rigs – leased from contractors – is also cited by operators as a troublesome factor, as drillers could take months to bring equipment that has been idle since the recession online.

However, Nabors, the world’s greatest driller, dismissed this, saying he took care to maintain his equipment and could quickly put new rigs in the field.

“If operators come to us – if our customers call us – obviously we’re going to stand ready to support them with accelerated growth,” said Travis Purvis, senior vice president of global drilling operations. “But it comes at a cost. This is the challenge for operators: to balance their capital and how they will deploy it.

It currently costs companies about $50 a barrel to break even, according to a recent survey oil executives. According to IHS estimates, operating costs have already increased by around 15% this year, and a major drilling campaign would increase them by another 35% next year.

If supply chain issues are to be overcome and significant growth achieved next year, operators will need to put their money where their mouth is in the coming months, analysts say.

“I think the clock is ticking,” LeBlanc said. “Boards need to make capital allocations. . . grow in 2023. And they have to make those commitments by May or June of this year.

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