Biggest US shale operator says more drilling would harm industry

The head of America’s biggest shale oil operator has hit back at White House claims that his industry is acting against the national interest by failing to accelerate drilling, insisting that doing so would trigger a run on energy stocks.

Scott Sheffield, chief executive of Texas-based Pioneer Natural Resources, said that pouring profits into faster output growth at the expense of shareholder returns would send investors fleeing and leave the sector “back at the bottom” of the stock market.

His comments come after Amos Hochstein, the White House’s chief energy adviser, told the Financial Times that it was “un-American” for companies to funnel record profits fuelled by Russia’s full-scale invasion of Ukraine into shareholder returns. He called on operators to “seize the moment” by pumping more oil to offset the market disruption.

Hochstein was echoing remarks made by President Joe Biden who has lashed out at the industry for “profiteering” from the conflict as soaring oil and gas prices allow them to reap record earnings.

But Sheffield said that using the windfall to return to the rampant growth rates of the shale boom would demolish the industry’s efforts to win back investors who fled the patch during a decade of debt-filled drilling binges.

“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 said in an interview. “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.”

The stand-off between Washington and oil companies has rumbled on since Russia’s full-scale invasion in February sent oil and gas prices surging, feeding into rampant inflation as motorists paid record prices at the pump.

American oil and gas shares, meanwhile, have outperformed those of other sectors this year, as operators use the windfall to pay juicy dividends and strengthen balance sheets rather than increasing drilling.

US oil output sits at about 12mn barrels a day, according to the Energy Information Administration, well below the 13mn b/d record high hit in 2019. Growth next year is set to be about 500,000 b/d.

Sheffield said Hochstein was also failing to take into account supply chain shortages that mean even with Wall Street’s blessing any significant production increase would be very expensive and take years to materialise.

“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 said.

The White House has tried to spur investment in drilling by committing to refilling the Strategic Petroleum Reserve — which it drained this year in a bid to lower oil prices — when oil falls to about $70 a barrel on the spot market.

The administration on Friday announced a plan to start the process, saying it would provide companies with an “assurance” to increase drilling.

But Sheffield said $70 a barrel was too low because producers were focused on prices five years into the future, which sat at about $65 a barrel.

“Putting a floor of $70 is no help for the producer,” he said. “If they want to encourage additional activity, they will have to put a floor somewhere around $100 — especially with significant increases in service costs.”