While turning wells back on is likely to temporarily boost production this summer, U.S. oil output is expected to decline this year.
Photo: angus mordant/ReutersAmerican oil producers are reopening the spigots, complicating the crude market’s recovery.
Scores of shale drilling companies turned off wells to reduce output when U.S. oil prices fell to negative territory in late April, after millions world-wide stopped driving and flying due to the new coronavirus, causing a steep drop in global demand.
Now that more of the world is reopening and prices are rebounding to nearly $40 a barrel, companies including Parsley Energy Inc. and WPX Energy Inc. are starting to turn some of those wells back on, even as they continue to put off most new drilling.
The increased volumes remain far below peak levels before the pandemic, when the U.S. was pumping more than 13 million barrels a day of crude, the most in the world. But they come at a time when many of the world’s other top producers are still voluntarily curtailing their output to help rebalance global markets.
The Organization of the Petroleum Exporting Countries and its allies agreed Saturday to continue curbing production through July, but at 9.6 million barrels a day, just shy of the cuts targeted in their April pact.
Global oil demand has recovered from an April trough, but the International Energy Agency estimates that this month it will still be about 86 million barrels a day, or roughly 13% below last year’s levels.
While turning existing wells back on is likely to temporarily boost production this summer, U.S. oil output is still widely expected to decline this year. That is because shale wells lose steam quickly, and companies have dramatically cut back on the number of new wells they are drilling.
Oil prices have staged a remarkable recovery from April 20, when futures plunged to negative $37.63 a barrel as sellers effectively paid buyers to take contracts off their hands amid a growing shortage of oil storage.
In May, as stay-at-home orders eased, drivers returned to the road and American energy producers curtailed output, West Texas Intermediate futures posted their biggest monthly increase on record in both dollar terms and percentage gain. Crude futures climbed another 11% last week to end Friday at $39.55 a barrel.
“We’re seeing production coming back in pretty much all of the basins,” said Kelcy Warren, chief executive of pipeline giant Energy Transfer LP. “It’s been a steady recovery since the first week of May.”
The amount of oil traversing Energy Transfer’s systems fell about 20% from March to May, but the company said it is on track to regain about half of those losses this month.
American companies that can get their oil onto boats and into the global market can sell it for more than the U.S. price. Brent crude, the international benchmark, closed Friday at $42.30.
Current prices remain below the levels many companies need to drill new wells profitably. But the bounceback is sufficient for many to start up existing wells. The average price required to cover operating expenses on existing wells ranges from $23 a barrel to $36 a barrel in the U.S., depending on the region, according to a recent Federal Reserve Bank of Dallas survey.
EOG Resources Inc., one of the largest U.S. oil producers, has a plan to ramp its output back up in the third quarter.
“In the mid-$30s, some of the existing shut-in production will be coming back on. There’s no doubt about that,” Kenneth Boedeker, EOG’s exploration and production chief, told investors last week.
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Rivals aren’t waiting. Parsley Energy told investors last week that it is already restoring a “vast majority” of the roughly 26,000 barrels a day of production that it choked back last month from its Permian Basin fields in West Texas.
WPX, which drills in the Permian as well as in North Dakota, said in a securities filing Wednesday that it is restoring the 45,000 barrels a day that it took off the market last month.
Concho Resources Inc., another Permian producer, pinched its output by some 5,000 to 10,000 barrels a day during the lockdown.
“As prices have improved, we are working to bring that production back online,” Brenda Schroer, the Midland, Texas, company’s finance chief, told an online gathering of investors.
Some operators have said in recent weeks that they planned to turn wells off for only a portion of the month rather than shutting them down entirely, said Mark Houser, chief executive of University Lands. The organization manages oil and gas leases across 2.1 million acres in West Texas for a state endowment, with the royalty payments supporting education.
“It’s a mixed bag,” Mr. Houser said.
U.S. crude production during the final week of May averaged 11.2 million barrels a day, down from a record 13.1 million in mid-March, according to the U.S. Energy Information Administration. Some estimate that output has fallen even lower.
Roughly 1.75 million barrels a day worth of production losses this spring were attributable to turning off existing wells, according to IHS Markit. The analytics firm expects most of that output to be restored by September.
But without new drilling, U.S. onshore production would decline by more than a third in a year, far more quickly than in most other places in the world, IHS Vice President Raoul LeBlanc said.
“If you stop feeding the beast, it declines incredibly quickly,” Mr. LeBlanc said.
The number of drilling rigs in the U.S. has dropped by more than 70% in the past year, to 284, according to oil-field services company Baker Hughes Co.
Mr. Warren, the pipeline chief, said the loss of rigs is worrisome, longer-term. “You pull all those rigs out, it’s not overnight like a shut-in that you can just turn it back on,” he said. “We’re concerned about declines.”
Write to Rebecca Elliott at rebecca.elliott@wsj.com
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