HOUSTON — Even as Secretary of Energy Jennifer Granholm was using the platform of a major energy industry conference to call on the nation’s oil producers to ramp up production, what was being said during other sessions made clear that was not likely to happen.
The increasing U.S. industries’ strategy of restrained output and investment was on display last week at two separate panels at CERAWeek. It’s a game plan that has implications not only for the price of oil in the short and medium terms, but also for the transportation industries that serve it, whether it is driving water via truck to a drill site, hauling frac sand to the oil patch via rail or so many other parts of the supply chain that service the upstream oil and gas sector.
Scott Sheffield, the CEO of Pioneer Natural Resources (NYSD: PDX), one of the largest producers in the shale fields of the U.S., did not refer to Granholm by name in giving his verdict on whether the U.S. upstream would ramp up output. But his comments came soon after her speech to a CERAWeek plenary session.
“We’re not going to chase growth like we all did,” Sheffield said during a panel on balancing growth and investor returns in the North American shale market. Growth rates would be kept at 5%.
The estimates by the U.S. Energy Information Administration are actually for more than 5% growth this year, rising from about an average of 11.2 million barrels per day in 2021 to just over 12 million barrels per day in 2022, slightly more than 7%. The world is looking to replace as much as 4 million barrels per day of Russian oil that has either been formally sanctioned or, more widely, informally “self-sanctioned” with many companies refusing to buy Russian crude or products. That 4 million barrels per day comes off a world market of about 100 million barrels per day.
On the same panel as Sheffield, Tim Leach, the executive vice president for the Lower 48 at ConocoPhillips (NYSE: COP), said that “accelerating investment in an inflationary environment is never a good idea.” He added that a “long-term view is what creates value for our shareholders.”
The site of the sort of “dueling” views on the level of oil production came at CERAWeek, which at almost 6,000 attendees was a record turnout as it gathered for the first time since 2019. It came at a time when the organizers could not have imagined an oil market screaming higher due to the loss of a significant amount of Russian oil supply because of its invasion of Ukraine, playing against a backdrop of a meeting with an agenda heavily tilted toward the energy transition to cleaner fuels that is a direct challenge to oil consumption.
On a separate panel, Chad Michael, the president of Tudor Pickering & Holt, one of the leading investment banks in the energy sector, said that for the U.S. shale industry, “an equilibrium has been reached.” There is now among investors “an expectation of returning significant amounts of cash flow.”
It is a reversal of the oil sector just three to five years ago, when enormous drilling rates and higher production resulted in an industry that looked ready to conquer the world but that largely paid no dividends because it generated no free cash flow. By some measurements, it was steadily producing negative free cash flow.
U.S. crude production reached 13 million barrels per day just before the pandemic. It fell to as low as 10 million barrels per day during the depths of the pandemic and more recently has been running at 11.6 million barrels per day, according to the weekly report of the EIA. It has not risen in five consecutive weeks and is slightly less than where it was at the start of the year.
Raising production for its own sake is no longer on the agenda. “The business model is mid-single-digit growth because that is what investors want,” Michael said at a panel on funding the future oil and gas supply.
Michael added that there are “practical constraints” beyond investor expectation that would hold back the type of increase in production sought by Granholm. “We cannot do much more,” he said, citing labor and general supply chain issues.
But while Granholm and other administration officials have called for a short-term increase in oil supplies, it also is an administration that has talked about the end of the hydrocarbon age. Then-candidate Joe Biden said at a presidential debate in 2020: “I would transition away from the oil industry, yes. The oil industry pollutes, significantly. … It has to be replaced by renewable energy over time.”
And it was clear from some of the comments in the panels that while everyone agrees fossil fuels aren’t disappearing, goals such as those espoused by the Biden administration are having an impact on investment decisions.
Raoul LeBlanc, vice president for unconventionals at S&P Global, now the owner of CERAWeek, said the industry needs to ask itself, in response to calls for more production, “just how reasonable is it to step on the accelerator? The current impact won’t last forever.”
LeBlanc was on the panel with Michael and Bob Maguire, managing director and partner at The Carlyle Group, who spelled out some of the long-range considerations that companies need to undertake today and how they might be slowing investment.
Maguire said in the past, an investment consideration in a drilling program was not just the current economics of oil and natural gas markets but the expectation that an upstream asset could also gain in value. But given the broad goals of the energy transition away from hydrocarbons, “there is a time limit on the investment piece and in some ways I have to assume I am going to be the last owner.”
The end result of that significant shift is that the expected returns from an upstream asset need to be 100% from the short-term “distributions” coming from the asset, Maguire said. “You are not going to be making anything from a capital gain.”
And possibly as a result of those sorts of considerations, in answering the question if we underinvested, Maguire simply replied, “Yes.”
Michael said it depends. “It’s hard to argue that we’re underinvested in the last five years when we were oversupplied for a while.” He said his view now is that the industry is “properly invested in light of the market.”
Karim Fawaz, the research director of the energy advisory group at S&P Global (NYSE: SPGI), reviewed the level of oil and gas capital expenditures worldwide. After spending $450 billion in 2019, that figure plummeted in 2020 to $300 billion and rose to $350 billion last year.
Returning to the amount spent in 2019 this year “looked manageable,” Fawaz said. “But put politics on top of it and suddenly it is a lot dicier.”
Even going back to the levels of the past would be a problem, Fawaz said. The spending of the last five years was heavily weighted toward shale expansion in the U.S., projects that have a shorter shelf life and that require increasing levels of drilling to stay at existing production levels. “It’s fair to say we were underinvested in international projects and overinvested in onshore.”
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