Although the price for a barrel of West Texas Intermediate crude has slowly rebounded from a low point of about $27, prices must surpass $60/bbl for U.S. shale production to begin growing again, Anadarko Petroleum Corp. (NYSE: APC) CEO Al Walker says.
Walker said a lesser amount could mean the industry, especially those operating in capital-intensive shale plays, will not have enough cash flow to flourish or sustain growth. Walker made his comments June 21 at the Wells Fargo West Coast Energy Conference.
However, a $50 to $55 oil price might have “good wellhead economics,” bringing an internal rate of return of 25% to 30%, he said.
Oil and gas companies worldwide have seen profits fall due to lower commodity prices, the result of too much oil and gas with not enough places to go. To make financial ends meet companies have been cutting costs by delaying or scrapping projects, selling noncore assets, reducing staff and other measures.
But higher prices are still needed.
At $80/bbl oil, for example, “we might be able to develop a shale field in less than three years to free cash flow. At $50-$55, it’s going to take us five, six [or] seven years, if we stay within cash flow with our capital expenditures,” Walker said.
Among the other caveats: cost efficiencies gained since the downturn’s onset must be maintained.
Despite becoming more efficient, $50-$55 oil does not enable companies generate cash fast enough to quickly reinvest in fields. That means the ramp up to growth mode will be slower, he said.
“It’ll take $60 or more at around the service costs that we have today for cash cycling to start making sense for growth.”
When it comes to natural gas, Walker said the U.S. is in “good shape to have a better floor not a better ceiling,” given the potential for up to 8 Bcf/d in LNG exports and possibly about 4 Bcf/d or more in natural gas exports to Mexico.
LNG Growth Potential
The prospects for natural gas are both promising and, Walker said, self-defeating for producers.
LNG exports could position the U.S. to become a net export of natural gas before 2020, according to the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2016. Natural gas exports, including by pipeline and LNG, could grow more than five-fold.
But shale producers’ ability to outmatch demand will continue an uphill battle with prices.
“We’ve got a good demand equation going with supply,” he said. “The problem is history will repeat itself. We’ll get a better price environment and we’ll drill back down, because natural gas producers will get ahead of the expectations of the market to find more supply and will run prices down.”
The International Energy Agency (IEA) on June 8 pointed to a shift in global gas trade over the next five years, saying as new LNG supplies are coming online demand growth in weakening—particularly in Japan and Korea—forcing suppliers to find other markets.
Emerging as key buyers, according to the IEA, will be China, India and Southeast Asian countries.
While the IEA forecasts global gas demand rising by 1.5% per year to 2021, revised down from last year’s 2%, global LNG exports are expected to grow. The U.S. and Australia are forecast to lead growth in liquefaction capacity, which could increase by 45% by 2021.
“The world is sort of in a bad spot for natural gas. Longer term, outside the U.S., natural gas has more upward potential,” Walker said, noting the price is approaching $3 in the U.S. but is already $4 in Europe and more for LNG.
That doesn’t necessarily make natural gas a better investment in terms of wellhead margins compared to oil. “You still get a little bit better margin off of the oil,” Walker said, cautioning that oil price drives service costs, which in turn, drive capex. “Those are the things we need to think about in the days ahead.”
But the oil inventory has come down recently as wildfires in Canada, outages and Nigeria and less output from Venezuela have impacted output. When the volatility eases and production comes back online, however, Walker expects the market will at some point become oversupplied again, leading to depressed prices—perhaps this quarter or the next.
Workers in Canada have been gradually returning to oil sands production sites since May.
“A recovery this time needs to be demand, not supply-related,” Walker said. In the past, OPEC had control, with leading producers taking oil off the market to push up prices at times; however, a demand-driven recovery is sustainable, he added.
He still has concerns about the Saudis, questioning whether leaders there will be politically motivated to oversupply the market when demand is rising or see an opportunity to grow market share.
On a positive note, “it doesn’t take very long to absorb the oversupply,” putting off pressure on prices.
Data from the International Energy Agency show global oil demand is forecast to grow to nearly 100 million barrels per day (MMbb/d) by 2019 from just under 95 MMbbl/d in 2015.
Regardless of what the future may bring, oil and gas companies must figure how to survive troughs to participate in the upswing, Walker he said.
As with any commodity-based business, “you can’t have too much debt and you’ve got to be a low-cost producer.”
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