How industry is learning to live with the downturn

By Nathanial Gronewold, Mike Lee, Edward Klump | 04/22/2015 08:49 AM EDT

HOUSTON — Oil producers are in survival mode, with all more or less following the same playbook for weathering the crude price slump while crossing fingers for better times next year. Executives across the industry have gathered here for the annual IHS CERAWeek conference, the largest annual meeting of insiders from all facets of the energy sector. Topic No. 1 is the sharp drop in oil prices that began in the fourth quarter of 2014 and what to do about it.

HOUSTON — Oil producers are in survival mode, with all more or less following the same playbook for weathering the crude price slump while crossing fingers for better times next year.

Executives across the industry have gathered here for the annual IHS CERAWeek conference, the largest annual meeting of insiders from all facets of the energy sector. Topic No. 1 is the sharp drop in oil prices that began in the fourth quarter of 2014 and what to do about it.

Top executives from some of the largest oil and gas firms agree that growth in U.S. oil production cannot occur at current pricing levels. West Texas Intermediate crude prices hovered at around $56 per barrel in trading yesterday.


John Hess, CEO of Hess Corp., told attendees that the U.S. shale oil story is not over by a long shot, but said the industry is in need of a "rebalancing," to be completed, hopefully, by the time 2016 comes along. He and others suspect that growth can get back on track at WTI prices of $70 per barrel or higher.

More than one oil and gas CEO said the end to restrictions on U.S. crude exports could help the industry get there, possibly saving thousands of jobs in the process.

"It’s going to be a function of price," Hess said.

Scott Sheffield, CEO of Pioneer Natural Resources, a major player in the Permian Basin oil play, agreed that $70 per barrel would be a manageable level for his firm, and that his company and industry in general would do even better with an $80 WTI price. Anything lower, and U.S. output will have to either plateau and wait for demand to catch up with production or decline until it’s at a level where traders become convinced that the price should move up again.

"We cannot grow U.S. supply at $60, in my opinion," Sheffield said.

With a $70-per-barrel price range, executives said U.S. production growth can continue, albeit at a much slower rate than seen during the hottest part of the shale oil boom. Over the past couple of years, U.S. oil output has risen by around 1 million barrels per day, nearly doubling since 2008. Company leaders say a $70 price range would see a more tepid growth rate of perhaps 500,000 barrels per day.

Counting on lower costs

Oil companies are by and large adopting the same coping strategies, too, as they wait to see what price the markets will bring.

Executives said they are keeping to their previously announced spending plans, pulling back capital expenditures by about a third. Further spending cuts may be in order depending on market trends.

More speculative shale oil plays will be out as drill bits are focused on the three core areas and main drivers of modern U.S. oil production growth: the Permian Basin and the Bakken and Eagle Ford shales.

Aside from cutting back on their own spending, oil and gas firms are counting on lower oil field services costs to help out even further. Costs for onshore and offshore rigs are expected to decline. The industry can be expected to pressure oil field services providers to improve the cost environment even further should lower crude pricing persist.

Oil field services providers are already feeling this pressure. This week, Halliburton Co. announced 9,000 layoffs as it reported weaker first quarter 2015 financial results. Baker Hughes, a competitor with which Halliburton is seeking to merge, posted earnings yesterday, reporting a loss to investors and expected layoffs topping 10,000.

What oil companies don’t do during this year will be as important as the actions they do take.

Wells that don’t need to be drilled, won’t be. Executives also proudly admit to drilling some wells but not completing them. It’s a good strategy in a low price environment, and when the oil price comes back up, the completion costs should be lower, making those wells even more economical.

Harold Hamm, CEO of Continental Resources, provided a straightforward answer to the question of how the industry can best respond to $50-per-barrel oil.

"We adapt to it," he said. "Conserve cash."

Exxon Mobil Corp., the largest publicly traded U.S. oil and gas firm, has so far announced a more modest pullback in operations in response to the price dip.

CEO Rex Tillerson said his company still plans reductions in capital expenditures of around 12 percent during 2015. He said the focus of his firm is mainly on efficiency and completing major projects on time and on budget. Tillerson warned his colleagues that weaker oil prices may persist for a couple of years, and said it’s in the industry’s interest to develop joint strategies for coping until more favorable market conditions return.

"The full parameters of this new world remain to be determined," Tillerson said. Weaker crude prices, he said, "demand that we work together as we have never worked together before."

Pain spreads to oil sands

U.S. companies are hardly the only ones being forced to adjust.

In Canada’s oil sands region, which holds the third-biggest pool of proven reserves in the world, operators are starting to scale back plans for new projects as a response to prices, said Greg Stringham, vice president of the Canadian Association of Petroleum Producers. Projects that are already under construction, which often take four to five years to complete, will continue, he said.

The economic pressure — and the need to comply with environmental regulations — is forcing companies to collaborate on technology to reduce emissions and conserve water, said Dan Wicklum, CEO of Canada’s Oil Sands Innovation Alliance.

Meanwhile, TransCanada Corp. is bullish enough on the oil sands’ future that it’s still pushing forward with two pipelines designed to move the crude to refineries on the U.S. Gulf Coast and Canada’s Atlantic coast, Executive Vice President Paul Miller said. The Obama administration has delayed a decision on the Keystone XL pipeline to the Gulf of Mexico coastline because of environmental projects. The Energy East line, which connects to Canada’s coast, could be open in 2020.

"The pipelines are still needed by the marketplace today," Miller said.

U.S. executives see the absence of the Keystone XL pipeline as another factor hurting their business during the downturn in pricing. They agreed that more pipelines are needed to move oil to the Gulf Coast, weak prices or no. Permian and Midwest oil prices can be much lower than benchmark WTI prices if producers face difficulty moving oil fast enough.

Refiners push back on exports

On Monday, the CERAWeek conference opened with oil industry proponents calling for an end to U.S. crude oil export restrictions. That mantra was repeated frequently yesterday.

Echoing U.S. Sen. Lisa Murkowski (R-Alaska), executives have taken to contrasting the export ban with moves by U.S. and European states to end an embargo on Iranian oil sales to Europe and the Far East, arguing that the ban amounts to the United States sanctioning itself.

Refinery operators benefiting from the captive supply of rising U.S. crude have pushed back on calls to free up U.S. oil experts.

Gary Heminger, CEO of Marathon Petroleum Corp., said the resurgence of the petroleum industry has allowed U.S. refiners to demonstrate their role as a manufacturing powerhouse. Still, he said, some dark clouds exist because of policy uncertainty, particularly on the ongoing debate over the export ban.

"U.S. refiners can accommodate our increased domestic crude oil production," he said, while adding that many people advocating the end of a crude export ban have incomplete or faulty information.

Marathon Petroleum’s "position is that free markets work best," Heminger said. "At the same time, the crude export oil ban has shaped the U.S. petroleum industry" for years, he said, so any discussion needs to be based on facts.

"I’ll just remind you that even in the last decade, many of us refiners were concerned about where the next barrel of crude oil was going to come," he said.

Other barriers remain, as well, Heminger said, and he called for the end of the renewable fuel standard. He said the Jones Act also makes little sense, as sending gasoline from Houston to Europe and then to New York is cheaper than sending it from Houston to New York.

A comprehensive energy policy approach should be taken to remove barriers to a free market, not just choosing one area to change that picks winners and losers, he argued.

Some are voicing confidence that a deal can be achieved in Washington to lift export restrictions entirely or at least partially, possibly by the end of the year.

Meanwhile, industry observers continue to watch for signs that U.S. output is starting to peak for the year after oil companies have pulled more than 1,000 land rigs out of service. Oil production could be close to hitting a plateau in the Bakken Shale of North Dakota. Nationally, though, government analysts expect the oil flow to continue growing at least to the second half of the year.

Demand growth isn’t rising fast enough to absorb the increase.

"It does feel like the world is awash in oil today," said BP CEO Bob Dudley. "We’ll continue to be for quite some time."