Originally Posted by
PhiAlpha
As others have said, producers are pretty gun shy about ramping up operations based on a temporary price spike, especially after the massive losses sustained over the last few years. There are also labor shortages after all the layoffs over the last 2 years (especially on the service company side) which has made lining up rigs and completion crews much more difficult than during the 2010-2019 timeframe.
On the financing side, private equity, which helped keep the independent sector of the industry going between 2014-2019 has all but dried up due to the losses that private equity firms took during that time frame. Too many good ideas that didn't pan out nearly as well as projected which led to reserve estimates (and asset/company values) being slashed. The anti-fossil fuel push has also had an effect on industry investment but not near as much as poor performance and the low commodity price environment have. Also, I don't know to what extent this is the case across the board but I know a few of my clients are hedged at between $60-$80 per bbl so there's not much incentive to ramp up production until those hedges get closer to falling off.
While many of the majors and publicly traded companies are actually exercising restraint for a change, many private companies that are in good financial condition are gearing up their exploration programs in an attempt to capitalize on what seems like will be a favorable pricing environment for the foreseeable future. If prices stay over $80/bbl I would guess the majors and public companies will follow suit later this year or into Q1 2023.
As for the reasons that prices are so high right now...other than the obvious (geopolitical instability), the lack of outside investment as well as the consolidation and massive production cuts that occurred due to the pandemic oversupply crisis are the main contributors. The price was always going to increase when demand returned and corrected the imbalance caused by the pandemic and inability of the industry to quickly return to pre-pandemic production levels. I and many others thought we'd be looking at $100+ oil this summer and the instability in Russia/Ukraine has sped that up. What's interesting is that all of this price movement has been completely based on speculation that a bunch of Russian oil is about to be taken off the market...but nothing has actually been taken off the market yet. There was an announcement that Iran was going to be allowed to trade their oil on the market again which only caused a minor dip before oil resumed it's climb. If a full embargo goes into effect, it will be interesting to see how high it goes.
From a political perspective, as tired as I am of all of the Biden administration's anti-oil and gas rhetoric and illogical/ineffective policy decisions regarding the oil and gas industry, the Biden administration really has had little to do with the price going up. Anyone who has followed my posts here knows I'm definitely not a democrat or supporter of Joe Biden but any attempt to lay all the blame at the foot of his administration without also explaining the other factors that got us to this point is dishonest (just as politicians like Bernie Sanders blaming oil and gas companies for the price increase is). Any pundit or politician that puts all the blame on Biden or the Oil and Gas Industry is being either being ignorant or dishonest. That said, the Biden administration certainly is not doing anything to help the situation. Approving the Keystone XL Pipeline wouldn't immediately bring more oil onto the domestic market but would by mid-2023 if approved now. Given that it is a publicly traded commodity, the sentiment that more oil would eventually be on the market would likely help drive the price down. Same story for resuming the onshore and offshore federal leasing programs. If resumed, it would take a few years to see production from new leases (longer for offshore), but again, the sentiment that more domestic oil would enter the market eventually might help drive down the price. Doing nothing because those options don't immediately bring production onto the market and acting like they're trying to find a short term solution (that doesn't exist), is both shortsighted and frankly ridiculous, which is a word that accurately summarizes this administration's energy policy so far. It should say something when even Elon Musk supports increasing oil and gas production and said that in his opinion, renewable energy isn't anywhere near being capable of making up the difference right now.
I don't know at what point the price starts negatively effecting OK's economy but in the short term, the high prices should significantly increase royalties going directly to the state and will absolutely help any companies in the E&P sector here. If the price can stabilize and land consistently in the $80-$100 range, I think that's a sweet spot that will work well for both producers and consumers. If natural gas can stay over $3-4/mmbtu that helps as well.
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