The fracking revolution revived the energy industry in Texas and the U.S., ushering in years of cheap oil and gas. But don’t count on frackers riding to the rescue this time.
Despite oil prices topping $100 a barrel, most shale oil and gas producers are unwilling to ramp up production in a big way. The primary reason: Investors are pushing to hold back spending and stick with slow-growth plans.
They fear being drawn into another boom-bust cycle that wipes out billions of dollars in capital. So instead, oil companies are rewarding their backers with big dividends, stock buybacks and soaring stock prices.
In the past, investors put a lot of money into the oil patch — and lost a lot, said Lutz Kilian, senior economic policy adviser at the Federal Reserve Bank of Dallas.
“Now, finally, the industry is generating profits, and they feel that this is the time for them to be compensated for the risk they took,” Kilian said during a recent virtual town hall. “They’re very much opposed to large-scale production increases because who knows what the price might do in a couple of years?”
Oil companies, he added, “cannot afford to go against the wishes of their investors.”
Many economic measures, such as the number of nonfarm jobs in Texas, have recovered to their pre-pandemic levels. But not domestic oil production.
In January, the U.S. produced 11.37 million barrels of crude a day, down from 12.83 million barrels in February 2020 — a shortfall of almost 11.4%, according to data from the U.S. Energy Information Administration. The gap in Texas production is slightly smaller, just under 10%.
On Thursday, the White House announced the largest release of oil reserves in history: 1 million additional barrels per day on average, every day for the next six months.
The supply is intended to serve as a bridge until domestic production ramps up by the end of the year. The White House said domestic production is expected to increase by 1 million barrels per day in 2022.
“Still, too many companies aren’t doing their part and are choosing to make extraordinary profits and without making additional investment to help with supply,” the White House wrote.
The Dallas Fed Energy Survey, which polls energy firms in Texas, southern New Mexico and northern Louisiana, recently asked executives why they were restraining growth amid high oil prices. The most popular answer was “investor pressure to maintain capital discipline,” cited by 59% of 132 respondents.
Frackers also face labor shortages and more competition for workers. In February, Texas added 5,100 oil and gas jobs, a 2.9% gain for the month, according to federal data. But the sector was still 38,700 jobs shy of the total in February 2020, before the pandemic hit.
Supply chain bottlenecks limit access to key materials, especially steel pipe for drilling, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University.
“But the darkest cloud on the horizon is that it’s very difficult for companies to raise capital right now, either through debt or share offerings through Wall Street,” Bullock said. “That window is still not open.”
Memories of bad investments and defaults remain fresh. From 2010 to 2020, the U.S. shale industry had negative free cash flows of $300 billion, impairments of over $450 billion and over 190 bankruptcies, according to a 2020 report by Deloitte.
The money-losing record prompted the big push toward capital discipline, which resulted in producers sharing more cash with investors and spending less on drilling. “They’re saying, ‘We’re not going to invest until you show us this discipline,’” Bullock said.
Irving-based Pioneer Natural Resources, a leading player in the Permian, said it’s returning roughly 80% of free cash flow to shareholders through dividends and stock buybacks. At the same time, it’s pledged to grow production no more than 5% a year.
In a February earnings call, an analyst asked whether that growth limit applied to 2022.
“There’s no change for us. Long term, we’re still in that 0% to 5%” range,” CEO Scott Sheffield said. “At $100 oil, $150 oil, we’re not going to change our growth rate. We think it’s important to return cash back to the shareholders.”
Sheffield worried about private independent operators increasing production too rapidly — and depleting the inventory of the shale fields. And there’s no guarantee that demand will stay strong for long.
“We may need the extra barrels today. The question is: Will we need them in ‘23 and ‘24?” Sheffield said.
In the early days of the pandemic, the price of oil fell below zero, to a negative $37 a barrel, as global energy supplies vastly outstripped diminishing demand. Oil prices gradually recovered as economies regained their footing, and prices soared after Russia invaded Ukraine.
In early March, West Texas Intermediate crude topped $123 a barrel. Prices have generally remained above the $100 threshold, and Texas drivers are paying about $3.82 for a gallon of regular gasoline — 50% more than a year ago.
“There’s a big fear premium that keeps pulsing in and out of the oil market,” said Jim Krane, a fellow in energy studies at Rice University’s Baker Institute for Public Policy. “It’s not a fun time to be driving an SUV or a pickup.”
In past supply shocks, such as after Iraq’s invasion of Kuwait in 1990, world leaders turned to Saudi Arabia to boost production. But Saudi and other OPEC members have made only modest increases so far, signaling they want to avoid being drawn into the Russian conflict.
Oil prices fell 7% Thursday after the White House announced plans to tap oil reserves for the next six months. But it’s not clear how that will affect prices at the pump.
“There’s no guarantee you’re going to have $2 a gallon gasoline for the life of your pickup,” Krane said.
