A man works on the rig of an oil drilling pump site in McKenzie County outside of Williston, North Dakota March 12, 2013. Enerplus is boosting their budget in hopes of completing new wells in the region.SHANNON STAPLETON/Reuters
Enerplus Corp. raised its spending target for this year by 12.5 per cent and says it will pump more oil from its operations in North Dakota's Bakken region, a sign that companies are prepared to revive drilling plans even as the Organization of the Petroleum Exporting Countries claims victory in the battle for market share.
Calgary-based Enerplus on Wednesday boosted its 2015 budget by $60-million and increased the amount of oil and natural gas liquids it expects to produce this year to between 97,000 and 103,000 barrels of oil equivalent per day, up from 93,000 to 100,000 oil-equivalent barrels previously. The company now expects to spend a total of $540-million as it accelerates the development of eight wells in the Bakken's Williston region.
The move comes as oil prices firm up after plunging by as much as 60 per cent over the past year, forcing producers to dial back spending and staffing levels.
It shows that some companies are keen to resume operations as U.S. demand picks up and supply pressures ebb, strengthening the outlook for West Texas intermediate oil and the ability of companies to generate returns by locking in higher prices with financial hedges.
"We don't think this is a reckless decision," Ian Dundas, Enerplus's chief executive officer, said in an interview. "The economics of these programs, even at the current prices, are very robust. So we think the conditions are all there to start to re-establish growth."
The spending increase is underpinned by financial contracts that enable companies to secure fixed-price sales for future production, generating potentially higher returns even as oil prices today remain subdued.
Enerplus said 44 per cent of its expected net production after royalties in the fourth quarter this year is now hedged at $80.09 (U.S.) a barrel. About a third of its net oil production is also hedged in 2016 at $64.48, it said. West Texas intermediate oil traded around $60 a barrel on Wednesday after U.S. government data showed inventories fell by a higher-than-expected 6.8 million barrels last week.
Such moves point to gaps in OPEC's strategy of squeezing high-cost shale producers out of the market. The cartel agreed last week to maintain production at current levels in a bid to keep world oil prices low. On Wednesday, it said global oil demand is poised to increase while growth in non-OPEC supply declines in the second half of this year.
"The current oversupply in the market is likely to ease over the coming quarters," the group said in its monthly oil market report.
To be sure, the strategy has shown signs of success – knocking more than one million barrels a day off the Canadian industry's long-term production outlook, for example. However, some analysts and executives say U.S. shale producers have proved more resilient to the downturn despite idling hundreds of drilling rigs. That has prompted speculation that even a moderate lift in prices could trigger a flood of new supplies. "It's the most responsive to short-term price variances," said Judith Dwarkin at ITG Investment Research in Calgary.
U.S. government data released this week pointed to declining output later this year, but growth is expected to resume early in 2016, according to the U.S. Energy Information Administration.
A test for how quickly that happens hinges on the ability of North American producers to bring down costs, analysts say. U.S.-based ConocoPhillips Co. has said the break-even cost of shale plays has fallen by 15 to 30 per cent as technology improves.
Mr. Dundas at Enerplus said he is skeptical of such claims, noting that his company achieved more moderate savings of 10 to 15 per cent in the first quarter this year.
Still, the company is reviving plans stalled as recently as last fall as fears that oil would slide as low as $30 a barrel subside, he said.
Mr. Dundas said he expects the company to claw back costs further although he is reluctant to say by how much. "I think it's going to be really tied to how long oil stays in this kind of price range," he said.