Falling prices dampened mood at annual conference

Analysis HOUSTON • The feeling of restrained optimism that imbued a major energy conference here this week was short-lived.

Oil and gas executives in Houston for CERAWeek, an annual conference that draws thousands of energy professionals, expressed confidence in their ability to drive down operating costs to counter lower commodity prices.

The mood, though still cautious, was much lighter than a year earlier when prices were hurtling toward US$30 per barrel.

Now, it seemed, oil markets had entered a period of relative stability amid output declines in some regions.

But on Wednesday, as if in cruel jest, oil prices took their steepest single-day dive in months.

Higher-than-expected inventory data in the U.S. helped push down futures contracts for West Texas Intermediate by five per cent, settling at a 2017 low of US$50.28. On Thursday prices dipped below the US$50 threshold, wiping out hopes that an agreement by OPEC and non-OPEC countries to curb supplies had put a “floor” on prices above the US$40 range. They closed down US79 cents at US$48.49 on Friday.

The drop in prices underscored the seemingly endless uncertainty that has hobbled the industry in recent years, causing companies to dramatically reorient their corporate structures.

“You have to put a business model in place that embraces the volatility,” said ConocoPhillips Co. CEO Ryan Lance.

“We know what to do when prices are higher — the real question is what do you do when prices are back in the US$40-or-so level.”

The lowering of breakeven costs dominated discussion. In particular, executives focused on the economics of oily shale basins in the U.S., where production has boomed in recent years despite stubbornly low prices.

“Turning to the U.S. oil and gas industry, it’s just as important to note that our collective efforts to reduce global market volatility directly Ryan Lance, chief executive officer of ConocoPhillips Inc., speaks at the 2017 IHS CERAWeek conference. benefit the U.S. industry, which is the bellwether of the global industry,” Khalid Al-Falih, Saudi minister of energy, industry and mineral resources, told the conference.

With less capital, Lance said his company is keeping its production flat. Like other oil giants Exxon Mobil Corp. and Chevron Corp., Conoco has focused their portfolios around big projects in U.S. shale basins with faster return cycles.

Many, however, are speculating how much U.S. shale would continue to grow— and whether that growth could adversely impact producers. Continental Resources Inc. CEO Harold Hamm said increasing shale output could “kill” oil markets if producers continue to efficiently pump out more and more crude.

That discussion was particularly focused on the Permian Basin in northwest Texas and southeast New Mexico.

Vicky Hollub, the CEO of Occidental Petroleum Corp., speculated that Permian production could in coming years reach as high as four or five million barrels per day, up from around 2.2 million bpd today.

The prospect threatens to undermine the efforts of OPEC, which now looks at risk of having ceded market share for no substantial price gain.

A confluence of factors has created “near nirvana” for the U.S. shale industry, analysts at Citi Group said in a recent research note. Among those factors was the OPEC-led agreement to curb oil supplies in an attempt to lift prices.

With group says it has still not decided whether it will extend its agreement to cut supply, which are currently set to terminate in June.

“Should OPEC extend the production caps and global demand remain robust, global inventories should still drop,” the analysts said.

Saudi Arabia’s energy minister attempted to strike a more conciliatory tone with U.S. shale producers during prepared remarks last week, saying recent investments by its state-run oil giant Saudi Aramco in the U.S. Gulf Coast was “indicative of the alignment between the United States of America.”

Al-Falih downplayed the risk of growing U.S. shale production, saying that declines in other areas of the world would “more than offset” gains in the Lower 48.

Most executives, after more than two years of slumping oil prices, had seemed to comfortably settle into a war of attrition — typically summarized by the mantra that prices will remain “lower for longer.”

Some were only slightly more optimistic, including BP CEO Bob Dudley who revised the phrase to include the caveat: “lower for longer — but not forever,” as he said last week.

Statoil A.S.A. CEO Eldar Saetre said was more direct about the impacts of lower prices.

“The downturn has been long and painful.”