While 2017 may represent the year of recovery for the oil and gas industry, some industry leaders still remain on alert. The ups and downs in oil and gas markets have spurred a change in strategies for many companies, including ConocoPhillips, Occidental Petroleum Corp. and BP Plc. Each of their CEOs spoke at CERAWeek by IHS Markit in March.
Although the market is seeing some recovery and balancing, Ryan Lance, ConocoPhillips chairman and CEO, warned that prices could snap back in the next couple of years. However, there’s still light at the end of the tunnel, he said.
“I think you have to be prepared for what you do at the bottom end of the cycles,” said Lance. “They’re going to get longer and they’re going to get more frequent because the cycle times in this business are closing with the unconventional revolution that is going on in the U.S.”
Lance suggested that companies should put a business model in place that embraces the volatility and lower end of the price curve.
“We know what to do when prices are higher, but the real question is ‘What do you do when prices are back at the $40 or sub-$50 level?’” he said.
Robert Dudley, group chief executive of BP, said he feels like the industry is heading into a balancing point. “I think the world needs a higher oil price, or you end up with civil strife in many places,” he said.
BP has made several investments based on the confidence that it’s in a $55 world, Dudley said. In terms of managing costs in the current environment, Dudley suggested that these changes should be long-lasting. When oil prices were at $100, the industry made money with a certain margin, he said; it’s about the same at $40.
“The industry seems to always forget its lessons, that oil is a commodity and it feels high. Three years of high oil prices, we all start to think, ‘Well, this is the way it is,’” he said.
Dudley advised working through strategic relationships with suppliers, rather than making ultimatums and demanding lower costs to remain sustainable—something he sees companies doing well.
Investing for the long cycle
Since the Deepwater Horizon explosion in 2010, Dudley said BP has been quietly working to build projects, retool and turn around its assets. The company had to sell off about $50 billion in assets, including in the Permian Basin.
“We’ll bring on more projects this year than we have in the history of the company, in terms of activity levels,” he said.
The company will have seven major projects come on this year, from Egypt, Oman and the North Sea to Trinidad. “We have about 25,000 people working on these projects and pipelines, and about 14,000 or so people working in the desert of Oman. These are really important for the company,” he said.
These projects were generally initiated or started construction during the downturn, Dudley explained, with original cost estimates coming in well below that today. BP’s portfolio is about 50% oil, shifting to 60% in the next decade with the size of these projects, he said.
Currently, ConocoPhillips, based in Houston, is trying to reduce its breakeven costs, increase capital flexibility and focus its investments on the lowest cost of supply in its portfolio, Lance said, in order to fund its capital program and pay dividends to the shareholders at the lowest commodity price.
“We’re about cash flow; we’re not chasing growth,” he said.
The company is focusing a lot of its capital today in the Eagle Ford. Lance noted that companies that drilled early on in the Eagle Ford probably regret it, because they’ve learned more about how to complete wells more efficiently today than two to three years ago.
That learning curve is still there today, according to Lance. “We’re learning a lot more, getting more efficient and so the question I would have is, ‘Why do you drill into it so quickly when you’re still learning so much?’”
Resources aren’t going anywhere either, he further noted. “If you’re a company that’s trying to generate free cash flow, return money back to the shareholders and focus on returns, then it really does become ‘How capital efficient can you be to maximize full-cycle returns, not just forward-looking returns, but full-cycle returns of a play?’” Lance said.
Rebalanced and focused
Once a company active in more than 28 countries around the world, Occidental Petroleum Corp. is much more rebalanced and focused these days, according to CEO Vicki Hollub
“We knew we had to focus and concentrate on a smaller group of areas, to be in areas where we would have the best chance of success.”
Occidental began an initiative in 2013 to focus on investments that would give the best returns. The company was able to significantly narrow its production investments to three core areas in the Middle East, one area in South America and also the Permian Basin.
“Now we have assets that are perfectly positioned to support our dividend and to enable us to continue to grow value for the company,” she said.
Occidental is now in the position where it has the “best possible ability to invest dollars that will generate double-digit rates of return and enable growth,” according to Hollub. The company is looking to reinvest at a faster pace that will enable cash flow from operations to get back to where it was before, over the next few years.
“That will get us to the point where we’ll be (in a very short period of time) back to some of the production levels we had before we exited all of those countries, and doing it with investments that are much higher return,” she said.
As the largest producer in the Permian, Oxy has both its EOR business and its unconventional business located there. Hollub said that the company’s unconventional production is now almost as much as its EOR production.
“Unconventional, as you know, is very high decline. We couple that with our very low-decline enhanced oil recovery,” she said.
Hollub believes that Permian production could ultimately grow to 4- to 5 million barrels per day from the current 2 million. “It will be there one day, it’s just a matter of how fast it can get there,” she said, “and that will be dictated by oil prices.”
According to Hollub, significant opportunities exist now to economically develop the Permian under $40. “I believe that the price range that we’re in, and above, is going to encourage further growth in the Permian. So I think we’re going to grow,” she said.
Technology trends
An area that’s not finished developing in the industry is technology and innovation, according to Lance; specifically, big data analytics, which the industry is starting to embrace, he said.
“We are doing things like instrumenting drill strings so we can get real-time feed out at the rig floor, so drillers can optimize how fast they drill and really blow a lot quicker. That takes a lot of data,” he said.
Lance said multilaterals are going to be the next step-function change in terms of recovery efficiency and proactivity in the unconventional plays. “When the industry can figure out how to drill one wellbore and complete five or six laterals off that wellbore, and frack it the same way we frack one lateral, you know that’s going to be another significant change in this business that will make a step-function change … and the opportunity associated with these very large, thick stacked-pla
y types that we’re seeing in the Permian, the Montney and other places,” Lance explained.
Dudley agreed that big data analytics coming into the industry will play another huge role in terms of step-function changes and efficient recovery.
He said BP is also applying offshore approaches to its onshore shale operation, as well as new expertise that has been transforming the business. The company is also applying new tools and techniques with lateral wells, multi-stacked fracks and multilaterals coming out of wells that have promising potential, he said.
The BP outlook
According to Dudley, an estimated 2 billion more people will populate the planet by 2035, creating a third more energy demand in just 20 years. Each year, BP releases its energy outlook that projects global energy markets until 2035.
“That’s an enormous number. That’s like another United States, another China,” he said. All forms of energy are going to be needed, he said, creating a “tussling battle” between gas and coal, due to regulatory policies.
About $1.5- to $2 trillion worth of investment is either being canceled or deferred due to the downturn, Dudley said.
“We’re going to end up paying a price for that, in terms of being able to supply energy.”
However, that’s not in BP’s future plans. “We’re going to plan our structure in financial frameworks, as if the oil price is not going to move up in the $55 to $60s range. That is what we’re going to plan on in the next five years,” he said.
Recommended Reading
Liberty Energy Warns of ‘Softer’ E&P Activity to Finish 2024
2024-07-18 - Service company Liberty Energy Inc. upped its EBITDA 12% quarter over quarter but sees signs of slowing drilling activity and completions in the second half of the year.
Solaris Stock Jumps 40% On $200MM Acquisition of Distributed Power Provider
2024-07-11 - With the acquisition of distributed power provider Mobile Energy Rentals, oilfield services player Solaris sees opportunity to grow in industries outside of the oil patch—data centers, in particular.
Offshore, Middle East Buoys SLB’s 2Q as US Land Revenue Falls
2024-07-19 - Driven by a strong offshore market and bolstered by strategic acquisitions and digital innovation, SLB saw a robust second quarter offset by lower drilling revenue in the U.S.
Chevron Moving HQ, CEO from California to Houston
2024-08-02 - Chevron Chairman and CEO Mike Wirth and Vice Chairman Mark Nelson will relocate to Houston, where much of Chevron’s other top leadership is already based.
Offshore Guyana: ‘The Place to Spend Money’
2024-07-09 - Exxon Mobil, Hess and CNOOC are prepared to pump as much as $105 billion into the vast potential of the Stabroek Block.
Comments
Add new comment
This conversation is moderated according to Hart Energy community rules. Please read the rules before joining the discussion. If you’re experiencing any technical problems, please contact our customer care team.