Shale Giant Pioneer Explains Why U.S. Drillers Won’t Drill More

By Irina Slav - Dec 21, 2022

• Pioneer Natural Resources’ CEO Scott Sheffield indirectly told the White House why U.S. shale drillers aren’t eager to drill more.
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• Energy stocks have become the best performers on the stock market this year.
• Energy Secretary Granholm has taken a softer stance on the oil industry in recent months.
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Earlier this month, the White House’s top energy advisor Amos Hochstein called shale drillers “un-American” for their refusal to boost oil production despite the administrations’ multiple calls to that effect. Now, the industry is striking back. Pioneer Natural Resources’ CEO Scott Sheffield, one of the most outspoken industry executives, has indirectly explained to the White House that shale drillers will not be drilling more and that is it. And he had an excellent reason for it.

Speaking to the Financial Times in an interview, Sheffield said that returning to production growth now would cause an outflow of investors and energy stocks will plummet to the bottom of the stock market. And this is why no public oil driller would do it.

“You’ve got to realise: when you produce a 2 per cent return on capital employed, you end up being at the bottom of the S&P 500,” Sheffield told the FT. “And so if we end up doing what he’s asking us to do, we’ll end up back at the bottom of the S&P 500.”

Investor pressure for higher returns has been one of the reasons given by both industry and analysts for the current unwillingness of the U.S. shale oil industry to start ramping up output the way it always did in the past when prices rose.

These investors have been watching for years how shale drillers burn their cash in order to turn the United States in the biggest oil producer in the world. Then they had to watch all this breakdown in 2020 with oil prices dropping below zero for the first time in history, even though the drop was a short one.

Now, two years later, things are very different both with oil prices and with shale drillers. No company seems to have the ambition to see just how much oil it can produce if it puts its mind and resources to it. Instead, shale drillers are relearning capital discipline and prioritizing their shareholders after, one might say, years of neglect.

As a result, the FT points out in its story on the interview with Sheffield, energy stocks have become the best performers on the stock market this year. It is unlikely that any energy company would risk this performance just to respond to the calls of an administration that has from the start been against the whole oil industry.

Yet, there are also purely practical constraints as well, as Sheffield noted in his talk with the FT. Oilfield services cost a lot more than they did a couple of years ago and there are equipment shortages.

“He was criticising the majors and independents for not growing more. He doesn’t realise if we wanted to grow more than 5 per cent, I’d have to call up all the service contractors; they’re going to charge me 30 to 40 per cent more; it’s going to take a year to build new equipment; it’s going to take two years to start showing results. By that time, you may go through an oil price collapse,” Sheffield explained.

Indeed, messaging from the White House to the oil industry has had a remarkably short horizon, the focus being on the present and involving the apparent assumption that with a bit of good will, the industry could add another million barrels daily to output in a matter of days.

For now, however, this is physically impossible, and threats of windfall profits have not helped put drillers in a more generous mood. Neither has the much softer message that came last week from Energy Secretary Granholm.

“We are eager to work with you,” she told an industry association, acknowledging that oil and gas were going to be used for a long time yet and admitting the energy transition, if it happens too fast, “could have unintended consequences that hurt people, cause backlash.”

This olive branch, as Bloomberg called it, might be a positive sign in itself but it is unlikely to change shale drillers’ minds. There is simply no good reason for them to drill more and the administration cannot give them one.

By Irina Slav for Oilprice.com