INDUSTRY
Russia’s Isolation Leaves Behind Stormy Seas for U.S. Operators
A
fter more than a month of fighting, Russia’s invasion of Ukraine has devolved into a grinding war of attrition replete with indiscriminate attacks on Ukrainian civilians, cities and infrastructure. The U.S., Canada, Western European allies and others have responded with increasingly severe sanctions that have isolated Russia and decimated its economy. Russia’s energy sector, which is one of the top three oil producers and the second-largest gas producer in the world, has not escaped unscathed. Calls are mounting — from Elon Musk to U.S. Energy Secretary Jennifer Granholm — for U.S. producers to man the helm and increase production, but as the saying goes: “Easier said than done.” The International Energy Agency said in its March oil market report that up to 3 MMbbl/d of Russian production could be shut in from April as sanctions bite and buyers shun exports. At the same time, hundreds of companies have announced plans to suspend their Russian operations or exit the country entirely, including major energy firms such as BP, ExxonMobil, Shell and Equinor. The U.S. has also banned Russian energy imports, while the U.K. plans to phase out imports by the end of the year and the EU is beginning to implement plans to reduce its own reliance on Russian oil and gas. Oil prices responded accordingly as the global supply-demand balance has tightened, with WTI and Brent reaching intraday highs of $129.44/bbl and $139.60/bbl on March 8, respectively. The same day, the WTI front-month contract settled at $123.70, the bench-
42
SHALE MAGAZINE MAR/APR 2022
mark’s highest settlement since August 2008. Prices have since fallen but as of March 28, WTI was still trading above $100, a level that was last seen in 2014. Volatility in oil markets is also at historic highs, with open interest volumes for WTI reaching multi-year lows in March. The U.S. announced on March 31 that it would release up to 180 MMbbl from the Strategic Petroleum Reserve over a period of six months beginning in May.
IEA member countries later agreed to release a total of 60 MMbbl from their own strategic reserves. The SPR release is the largest ever for the U.S. and will help put downward pressure on oil and gasoline prices. While this temporary measure will not in itself solve structural supply shortfalls, it appears to be timed to bridge the gap until U.S. production growth ramps up. In its latest PetroLogic report, Enverus Intelligence Research
(EIR), a part of Enverus, said that if its full sanctions scenario for Russian liquids is realized Brent could average $160 this year, implying a likely WTI average in the $150s. For comparison, the highest WTI settlement ever was $145.29 on July 3, 2008. EIR is currently projecting global demand growth of 1.5 MMbbl/d this year, already half of earlier forecasts. A $160 Brent scenario could reduce global demand by 3 MMbbl/d and lead to flat YOY demand growth compared to 2021. On the supply side, European imports of Russia’s Urals benchmark fell by about 1.5 MMbbl/d in March, and progress on negotiations with Iran on returning to the 2015 nuclear deal is unclear. OPEC+ has also stuck to its plan to ease production cuts by a nominal 400 Mbbl/d per month, and the group has struggled recently to raise production to meet the higher quotas. The U.S. oil and gas sector can step in to fill the void Russia left in global energy markets—at least partially — but doing so will require navigating numerous risks both old and new. Since 2019, U.S. operators have largely shifted from a growthfocused strategy to one of capital discipline and return on investment. In a March 17 research report, EIR said public shale producers went from reinvesting nearly 100% of operating cash flow in 2019 to 45% in 2021. That ratio is expected to fall even further this year at current strip prices. The significant free cash flow generated by this shift in strategy has been used to strengthen balance sheets, pay dividends and buy back shares. Shifting back to a higher growth model will likely be a tough decision
COREPICS/STOCK.ADOBE.COM
By: Matthew Keillor
