According to a Rystad Energy report, the US shale industry can reach a major milestone in 2021 if WTI futures extend their good run and average $60 per barrel this year, and natural gas and NGL prices stay stable: producers should foresee record-high hydrocarbon revenue of $195 billion before factoring in hedges.

The former rising mark of $191 billion was set in 2019. The calculation covers hydrocarbon revenues from all Permian, Eagle Ford, Bakken, Niobrara, and Anadarko tight oil horizontal wells. The Permian Basin itself is expected to raise $110 billion in pre-hedge hydrocarbon revenue from tight oil action this year, up from $91 billion in 2019.

Corporate money generated from operations does not set a new high until 2022. That's because major hedging losses would consume more than $10 billion in sales in 2021.

Though tight oil producers' hydrocarbon prices, income from operations, and EBITDA are all developing new levels in the $60 per barrel WTI setting, capital spending is not increasing rapidly as producers stay true to retaining operating consistency.

“In terms of upstream money flow, we expect reinvestment rates to fall to 57% in the Permian and 46 % in the other oil regions this year. Because of debt servicing and hedging losses, corporate reinvestment rates are estimated to be in the 60-70 % range this year,” said Artem Abramov, head of shale analysis at Rystad Energy.

When it comes to medium-term tight oil supply sensitivity, we are using a “status quo” paradigm in which existing oil producer practices and tax structures remain constant. Reinvestment prices are expected to decrease steadily as the market matures over the projected period of 2021 to 2025, but the average reinvestment rate is directly reliant on oil prices.

As per the most recent earnings season reports, even though oil prices climb, businesses continue to favor rapid balance-sheet changes and higher equity returns over expanded Capex and production growth expenditure. This implies that in the future, the reinvestment rate would be a function of the oil price, with a higher demand leading to lower reinvestment prices.

According to our bottom-up, company-by-company study, the average industry-wide reinvestment levels in 2021-2025 would be 50% at $65 WTI, 60% at $55, and 70% at $45 per barrel. Ses assumptions were used to assess the supply forecast for US tight oil.

The current maintenance situation, with a conservative budget profile, is perceived as a $45 per barrel WTI climate. The $55-$65 level opens the way for major demand increases during the next five years, with pre-COVID-19 output records set to be broken by late 2022 or 2023. The prediction would not include overall US oil levels that are impacted by traditional demand declines.

Even at $45 per barrel, the Permian Basin will comfortably rise, potentially making gains at 1 million bpd above its pre-COVID-19 production rate by the middle of the present decade. If we assume $55 as a long-term price list, Permian tight oil volumes are expected to rise at an 11-12 % compound annual growth rate (CAGR), or 2.6 million bpd of cumulative oil production growth, over the next five years.

This one will be partially mitigated by a 500,000 bpd fall throughout all regions other than the Permian, which needs a price of $60 per barrel to show any demand growth over the projected timeframe. Continuous Permian expansion is compliant with the recommendations given by public-tight oil producers.

Many among them projected steady portfolio volumes through 2021, which for most varied producers means some expansion in the Permian offset by decreases in much more developed or less economically important basins.

How federal carbon pricing program and taxes impact production

Even at conservative reinvestment rates, impressive productivity increases have prepared the tight oil industry for significant production growth in 2021-2025, as far as WTI futures remain above $45 per barrel. This growth opportunity is based on the established order in terms of taxation and other domestic energy policies.

In a $55 set, the US shale industry is expected to produce approximately $43.8 billion in upstream free cash flow by 2022. For an estimated $9.1 billion in loans to be repaired, the sector will already have a whopping $34.6 billion standing at the business level.

What happens if the Biden administration's new policies are adopted right away? A raise in the federal income tax rate from 21% to 28% will exclude $4.1 billion from the unrestricted cash flow projected in the current scenario. The elimination of exemptions for indirect exploration and construction expenses (IDC) and reserve depletion tax credits would result in a $2.9 billion drop in uninterrupted cash flow.

Contribute to that a theoretical carbon price of $100 per ton on upstream industries' Scope 1 carbon emissions (as proposed by several market participants), and also the sector will give another $9.4 billion to government coffers from the free cash flow provided underneath the status quo situation.

If the corporate tax rate is raised, subsidies are removed, and a price on carbon of $100 per ton is imposed all at once, business free cash flow for US shale producers in 2022 could decline to $18.3 billion from $34.6 billion. If producers intend to continue with a stable capital budget and seek to sustain their output growth curve, such a cut would mean a rise in the industry's reinvestment rate from 68 % to 81%.

If we assume an all-in new policy scenario 28 % federal income tax rate, the elimination of IDC and reservoir depletion bonuses, and a $100 per ton carbon tax on Scope 1 emissions the US tight oil industry's supply forecast in a $45-$65 WTI environment would be distinctly different if producers remain with the reinvestment rate goal from the status quo situations.

In such a situation, a WTI price of $65 per barrel would be required to support demand, whereas a price of $45-$55 would result in a slow but steady decline.

Any such trend does not rule out potential tight oil growth in the United States. Tier 1 inventory depth in the Permian and many other regions remains high, and producers are voluntarily sustaining a low reinvestment rate. In each price case, the industry would have some flexibility to raise its reinvestment rate relative to the status quo estimates.

Any structural changes will impact US tight oil market valuations, but we expect that several producers would only react to higher taxes or carbon costs with a modest reduction in Capex.

Maybe rather than a 60 % reinvestment rate on average in a $55 per barrel WTI environment, we could see a 70 percent reinvestment rate. With such investment, the country's tight oil output will steadily rise to its pre-COVID-19 peak by 2025 but will drop 1.4 million bpd short of the outlook under the status quo situation in 2025.