The U.S. shale industry is gearing up to spend more this year, despite assurances to maintain capital discipline.
In the second quarter, shale companies signaled their intention to lift capex. Part of the reason is that costs are on the rise, so some drillers have to spend more to produce the same amount of oil and gas. That was an unexpected development, and one that shareholders are not happy about.
A survey of 33 shale companies by Rystad Energy found that while the group revised up spending by about 8 percent, they only increased their expected production levels for this year by 1.4 percent. “This disconnect might suggest that the shale industry requires more capital than before to achieve healthy production growth,” Rystad said in a new report.
There are some signs that the Permian, for instance, is running into some productivity problems, raising the possibility that the highly touted “efficiency gains” over the past few years are reaching their limit.
On the other hand, the industry is also spending more because they have plans to increase drilling activity, which could lead to higher output next year. “[W]hile a part of increased spending is due to service cost inflation, a significant part of the incremental budget is also planned to be used for additional drilling throughout 2H 2018 to support more intensive completion activity and production growth in 2019,” Rystad Energy said in its report.
The largest spending increase came from companies focused on the Permian basin, which is not surprising given both the frenzied pace of drilling in West Texas as well as the reports that the basin is suffering from bouts of cost inflation. Occidental Petroleum stood out from the bunch, with an announced increase in spending by $900 million.
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