Lower 48 exploration and production (E&P) firms must resist the urge to dramatically ramp up production as oil prices and demand recover, according to the CEOs of two U.S. heavyweights, ConocoPhillips and Pioneer Natural Resources Co.
“I hope there is discipline in the system,” ConocoPhillips CEO Ryan Lance said Tuesday during a webcast panel at CERAWeek by IHS Markit. “I think the worst thing that could happen right now is U.S. producers start growing rapidly again.”
Oil prices have surged to pre-pandemic levels on an improving demand outlook as vaccines are rolled out around the world. Bullish sentiment was further buoyed on Thursday by the extension of strategic supply cuts by the Organization of the Petroleum Exporting Countries and its allies, aka OPEC-plus.
West Texas Intermediate (WTI) crude oil futures for April delivery were trading at $66.02/bbl shortly around midday ET on Friday, up $2.21 from the previous settle.
Lance cautioned, however, that commodity price volatility will remain as uncertainty abounds on the extent to which demand and supply will return as the market rebalances.
The good news for ConocoPhillips, Lance said, is that the Permian Basin of West Texas and southeastern New Mexico “has some of the lowest cost reserves and the lowest greenhouse gas intensity reserves in the world today, so I think there is going to be a need for that oil.”
Following its $9.7 billion acquisition of Concho Resources Inc., ConocoPhillips is now among the biggest players in the basin.
Lance highlighted a company mandate starting four years ago to return 30% of cash flow to investors, regardless of commodity price fluctuations, urging peers to follow suit.
“We as an industry can’t do what we’ve done over the last decade and expect investors to come our way.”
Around the same time ConocoPhillips acquired Concho, Pioneer joined forces with Parsley Energy Inc. in a $7.6 billion transaction to create another Permian juggernaut.
Lance shared the virtual stage with Pioneer CEO Scott Sheffield, who highlighted his firm’s recent implementation of a variable dividend on top of its base dividend, amid calls from investors to adopt a free cash flow (FCF)-centric business model.
The variable dividend also has been adopted by peers Devon Energy Corp. and Cabot Oil & Gas Corp., Sheffield noted.
He said Pioneer expects to generate $16 billion of cumulative FCF over the next five to six years, of which 75% would be distributed to investors, assuming a $55/bbl Brent crude oil price.*
Sheffield said Pioneer has re-tooled its compensation program to reward executives based on free cash flow “and how much we give back to the investors,” adding that he hopes E&P stocks start “trading off free cash flow yields like other industries.”
Sheffield said he expects U.S. production to stay “flattish” this year at around 11 million b/d, “with very little growth in the future.”
He expects Permian production to grow annually around 5% or 200,000 b/d for several years, noting, “The big swing factor” is what majors such as ExxonMobil and Chevron Corp., and large independents such as ConocoPhillips and Occidental Petroleum Corp., decide to do in terms of production.
The Permian rig count stood at 211 as of Friday, up from 208 the previous week but down from 415 in the similar week last year, according to Baker Hughes Co.
Equally if not more important than financial discipline is the reduction of greenhouse gas (GHG) emissions, the executives said.
Investors “demand more of us and should” on environmental, social and governance (ESG) metrics, Lance said. “If you don’t have a credible plan to deal with your scope 1 and scope 2 emissions…then you don’t deserve to have investors interested in your business.”
Lance said ConocoPhillips was the first U.S. operator to unveil an emissions strategy aligned with the United Nations climate accord, adding “we’ve got a game plan and a pathway to get there and we think that’s important for our industry, and we need everybody to be doing that.”
The company in 2020 announced its intention to reduce operational GHG emissions intensity by 35% to 45% by 2030, a revision from the previous goal of 5% to 15%, and to reach net zero emissions by 2050.
The path to net zero will involve tools such as emissions offsets and carbon capture, utilization and sequestration, Lance said.
Within the ESG initiatives, Lance and Sheffield also stressed the importance of curbing routine natural gas flaring, which remains a stubborn challenge in the Permian despite progress made on reducing flaring intensity.
Other measures such as electrifying fracture fleets, and better monitoring of methane leaks, will be crucial as well, they said.
Sheffield and Lance said they support the Biden administration’s efforts to curb flaring, venting and greenhouse gas emissions from the sector, but warned that a long-term ban of drilling on federal lands and the cancellation of energy infrastructure projects such as the Keystone XL crude oil pipeline would make the United States more dependent on oil imports from OPEC-plus countries.
*A previous version of this story misstated Pioneer Natural Resources Co.’s free cash flow projections. NGI’s Shale Daily regrets the error.
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