Why shale may not stage a comeback despite higher oil prices

Inflation in the oil sector is worsening and industry executives do not expect cost pressures on everything from steel pipe to frack sand to ease any time soon.

The increase in prices has been so swift that oil chief executives are being forced to increase the size of their annual budgets to preserve crude and natural gas output targets.

Those same executives have issued a warning that rampant oilfield inflation make any significant increase in domestic oil production much more difficult to attain despite the incentive of $100-a-barrel crude.

Benchmark US and international oil prices have surged by more than 40 per cent this year as strong post-coronavirus demand crashed headlong into anaemic growth in crude supplies and the worldwide market dislocations caused by Russia’s invasion of Ukraine.

“Given the substantial supply chain bottlenecks and scarcity of oil service equipment and field personnel, any attempt to increase activity in the US will be logistically challenging and capital inefficient,” Apa chief executive John Christmann said during a conference call on Thursday.

Apa, the oil explorer formerly known as Apache, this week raised its full-year drilling budget by 8 per cent, startling investors unaccustomed to such revisions a few months after the plan was minted.

The stock fell by as much as 10 per cent, wiping out more than $1.5 billion in market value in less than three hours on Thursday.

ConocoPhillips also increased its spending plan by 8 per cent while Murphy Oil and Laredo Petroleum raised theirs by 7 per cent and 6 per cent, respectively.

The inflationary trend has hit every corner of the oil exploration and production cycle. Drillers said they are experiencing sticker shock on everything from rigs and workers to diesel fuel and frack sand.

Shale company Continental Resources said the price of steel tubes used to line the interior of oil wells jumped by about 7 per cent in the month of March alone.