Related Articles
Forward article link
Share PDF with colleagues

Oil prices and Naimi chill the Houston air

The great and the good of the industry gathered in Texas for IHS Ceraweek. It wasn’t a happy affair

Houston's stormy skies proved an apt setting for a gloomy IHS CeraWeek conference, an annual gathering of oil executives, analysts and journalists. Few of them saw much of a silver lining for the industry any time soon.

If conference-goers last year underestimated the depth of the price slump to come, this time it was different. You could barely walk through a lobby or sit through a speech this year without hearing new prophecies of doom.

"Some people call it a cycle,” Enterprise Products Partners’ chief executive Jim Teague told the conference. “I call it pure hell.”

“It's going to be really, really ugly to get through this valley," said Mark Papa, former chief executive at shale driller EOG Resources who is now a partner at private-equity firm Riverstone Holdings.

“The impact on investment has been devastating for the global oil and gas industry… it is going to have a supply effect that is far reaching,” said John Hess, longtime boss at Hess.

Mark Papa

Scorched earth

Oil in the low $30s has laid waste to balance sheets from Houston to Riyadh to Moscow, led to hundreds of billions of dollars in investment to be pulled from oil projects and seen tens of thousands laid off. Still, few saw a recovery coming anytime soon.

Those hoping Saudi Arabia’s oil minister Ali al-Naimi would bring cheer with him to Houston left disappointed. For US oil bosses besieged by the low oil prices Saudi Arabia helped engineer, Naimi had harsh words.

There has been no “war on shale”, the Saudi oil minister said. But nor would the kingdom bail out America’s foundering drillers. “Cutting low-cost production to subsidise higher cost supplies only delays an inevitable reckoning,” he said. No one should expect Opec to cut production: “that is not going to happen”.

What should tight oil players do in this market? Naimi was blunt. “The producers of these high-cost barrels must find a way to lower their costs, borrow cash or liquidate.” Most of them have done the first two, repeatedly. Now some will follow the third path.

As for when the market could turn, a consensus has quickly formed that market re-balancing will happen in late 2016, perhaps in time to make 2017’s IHS CeraWeek a more festive affair.

“We’re halfway through this cycle,” Occidental Petroleum’s president Steve Chazan predicted, echoing a widely held view in the plush corridors of downtown Houston’s Hilton Americas. But hold onto your hats. “Usually you get a false bottom, or two, or three, or four,” he added.

Whatever the latest consensus, the industry should be wary of groupthink. It underestimated the resilience of shale production last year; and just two years ago Chevron’s chief executive John Watson declared at CeraWeek that “$100 a barrel is becoming the new $20 in our business”. Triple-digit oil prices weren’t much on the tongue at this year’s conference.

The pace and strength of a recovery will depend on how quickly US tight oil responds to price increases. But this is the sector’s first real test, so it was no surprise that opinion on its future was divided too.

The International Energy Agency (IEA) predicts a fairly quick recovery for the shale sector. Six months will pass between a price jump and a pick-up in shale activity, but when that happens – likely from 2018 – output growth will be robust again, IEA boss Fatih Birol said. The agency sees the US adding 1.3m barrels a day (b/d) of new production by 2021, leading non-Opec production growth. “Anyone who thinks this revolution has stalled should think again,” Birol said.

Fatih Birol


Others, including some shale executives, were less sure. “The industry won’t be able to respond like [some] think because it has been decimated by high balance sheets,” Scott Sheffield, chairman at Pioneer Natural Resources, said.

Devon Energy’s president David Hager agreed. “We will ramp up – it’s a cyclical business – but the service companies are letting go of a lot of capability so people are going to be an issue and it’s going to take a while to ramp back up.” Six months is the minimum and it will “probably” take a lot longer than that.

For now, most shale companies are just fighting to keep pumping oil another day. “Most are in a hunker down mode and just trying to survive,” Hager said.

Sheffield and Hager agreed that shale production could remain flat at an oil price of around $45-50/b. But if the market needs shale production to grow prices would have to rise to $65-75/b.

Not all companies will live to see that day. “We’re in a long-term market, but everyone is thinking short term,” concluded Hess.

Also in this section
Unions flag North Sea safety fears
16 October 2018
Changed working terms have triggered strikes in both the the UK and Norwegian North Sea oil industries
Ecuador: In a hurry to mend the past
15 October 2018
After a decade marred by corruption and legal disputes, Ecuador’s reformist government wants a more investment-friendly exploration regime
Big guns boost UK North Sea commitments
12 October 2018
Shell and Equinor have bolstered their offshore presence in the UK, while Total has made a sizeable discovery