The great disconnect Mfon Usoro, Jean Charles Combe, Pablo Prudencio and Mark Oberstoetter, Wood Mackenzie, USA, consider why US oil production growth and investment is disconnected from surging oil prices.
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il prices have surged this year as a result of the war in Ukraine but drilling activity in the US, particularly in the Permian Basin, does not fully reflect this. The disconnect between oil prices and activity levels is more pronounced than ever. And while 2021 was clearly an outlier year, activity so far this year is even further removed from historical trends. Well spuds today reflect something more akin to a US$50/bbl price environment. The reason for the disconnect is continued capital discipline, which has impacted reinvestment rates. Two US basins – the Permian and US Gulf of Mexico (US GoM) – are worthy of a deeper dive and highlight examples of how corporate factors are limiting growth in activity levels despite the rising oil price. The Permian and the US GoM accounted for over half of US oil production in 2021 (Figure 1).
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Key reasons why tight oil growth is not surging more this year
A combination of lingering balance sheet concerns, field development patterns, cost inflation, tight labour and the strong need to not deviate from 2021’s successful playbook all compound on one another. Energy transition pressures play a role in the restraint, but are muted compared to their impact on global upstream spending elsewhere. Some developments might suggest that companies are well positioned to advantageously increase budgets and accelerate rig additions. Leverage is lower, equity valuations are up and companies are embedding cost synergies. Yet, despite this, the capital discipline put in place in 2021 has proved iron-clad.
