Oil's slide will affect sector for 'some time,' CEO says
Still in the midst of their worst downturn in 30 years, big oil companies warn that world oil markets are likely to remain vulnerable to sharp swings in prices for years to come.
Among the latest alerts is one from Ryan Lance, chairman and CEO of ConocoPhillips, the world’s largest independent exploration and production company.
“Today, the industry is anticipating an upturn. Low prices are stimulating demand, and non-OPEC production is falling,” Lance said in remarks prepared for a Norway conference last week. “So, supply and demand will rebalance, perhaps later this year. Then we’ll need to work off the high inventories. That will take some time.”
The bigger question, he added, is what happens afterward.
Lance’s appearance before the Offshore Northern Seas 2016 conference in Stavanger on Monday came during another setback for oil prices, the latest in a slump that has been going on for more than two years.
U.S. prices for October delivery closed at $43.16 a barrel on Thursday, down $5.36, or 11%, from $48.52 on Aug. 19, the high for the month. Brent, the global benchmark, settled at $45.45 a barrel on Thursday, for a loss of $5.43, or 10.6%, from $50.88 on Aug. 19.
Prices reversed course on Friday, rising on a weaker dollar.
In response to the turmoil, the oil and gas industry has slashed capital investments by $620 billion worldwide from 2014 through 2020, leaving producers with fewer options to respond to a spike in demand.
“The industry’s financial resources have been stretched,” Lance said. “It will take time to raise capital, pay down debt and raise spending. Also, some 200,000 workers have left the industry. So, service companies will need to re-staff and then ramp up activity.”
Of course, Lance and his peers have become more efficient in the face of the industry’s nose dive by streamlining operations and requiring fewer rigs to boost production than were needed in the past, especially in the United States’ abundant oil and gas shale deposits.
But that still leaves uncertain how this combination of factors will play out once oil prices rise to a level that producers consider sustainable.
One likely result is “some cyclical market volatility in the future,” Lance told the gathering in Norway.
“U.S. production would respond slowly to shortages at first, but then come on strongly, maybe too strongly. So, we could see short-term swings between over- and under-supply.”
Adding to the uncertainty are evolving strategies by ConocoPhillips and other oil majors, as they move away from production growth as a major goal.
“Chasing growth doesn’t always make sense,” he said. “Not at lower, more volatile commodity prices. Instead, we’re going ‘back to the future’ by emphasizing financial returns. Many companies did this back in the 1990s. It helped them survive the downturns then, and it will work today.”
That means prioritizing opportunities to develop oil and gas resources according to their potential to turn a profit quickly.
“You can’t tie up capital for years before earning a return,” he said, remarks that cast doubt on some particularly expensive ventures, like drilling in deep waters.
Still, the U.S. remains in a lucrative position among oil- and gas-producing nations because of its shale riches.
“Today’s industry transition is the most severe I’ve seen,” said Lance, a petroleum engineer by trade, with more than 30 years of experience in senior management and technical jobs at ConocoPhillips and other oil and gas companies. “But transitions force change, and change can bring progress.”
Bill Loveless —@bill_loveless on Twitter — is a veteran energy journalist and podcast host in Washington. He is the former anchor of the TV program Platts Energy Week.