CEOs wrestle with a gloomy 2015 in the oil patch

— After emerging loudly from under the cloak of the holidays a month ago, the 2015 downturn is now in full swing as rig counts drop by the dozens each week and oil companies grimly whack away at their capital budgets.

But a week of E&P quarterly conference calls appears to have calmed investor pulses a bit by revealing the extent of activity cutbacks industry is prepared to make this year – particularly for Big Oil’s biggest players. And CEOs appeared quite willing to "go to the mattresses" to survive stubbornly low oil prices which have dropped by half since mid-2014 and stayed there for the past month.

Chevron slashed 13%, or $5 billion, off year-on-year spending to $35 billion in 2015; Shell plans to whittle down $15 billion in the next three years; and ConocoPhillips — in a second round of cuts — pushed down its capital budget this year further to $11.5 billion after reducing it 20% to $13.5 billion in December.

Chevron CEO John Watson led his company’s quarterly call Friday, after a year's absence from those routine events. He did not deny the seriousness of economic conditions, but stressed the company’s prudent exercise of capital during the recent gravy years and its adaptability under current conditions.

That was also true of CEOs at ConocoPhillips, Occidental Petroleum, Shell, Hess and Anadarko Petroleum, which all had quarterly calls in the past week.

The chief executives said their companies have negotiated down costs for oilfield goods and service and already have achieved concessions of 10-40% lower prices; Watson said in one global arena an offer of 50% reduction in rig costs was offered.

ConocoPhillips CEO Ryan Lance expects the lower cost of goods and services should amount to $500 million this year for his company, while Occidental Petroleum CEO Stephen Chazen mentioned $250 million of cost reductions for Oxy, and said that figure could double or more if prices stay low.

Chazen, whose company has slashed 2015 spending by 33% year-on-year to $5.8 billion, said in many cases, "we have amended existing agreements to tie discounts to oil price – the lower the oil price, the greater the discount needed to meet the market environment," he said.

Hess is also seeking to reduce costs not just for this year but also for a future oil development at Stampede, a US Gulf of Mexico deepwater field set for startup in 2018. The company has already contracted 50% of spending on the development through the end of 2014, and seeks to reduce costs not only for those contracts but also the ones yet to be awarded, company CEO John Hess said.

The CEOs suggested their corporate ships were prepared to hunker down and ride out the low price storm in 2015 of oil at the $50/barrel level or below, and while not ideal, all said they were in good financial shape to do so.

Lance also said his company’s successive capex take-downs were based on the assumption that prices “will stay low for 2015.”

In recent downturns, industry has debated the potential for "U-shaped" recoveries with a sharp falloff in activity, and some months of lull followed by a recovery, versus a "V-shaped" recovery – basically a quick activity falloff followed by a quick rebound.

To Anadarko Petroleum CEO Al Walker, this down cycle will likely be a "U."   Accordingly, Walker said his company, which has not released its 2015 capital budget yet but expects a "significant" reduction from its roughly $8.7 billion in 2014 spending– may do more longer-term value creation, such as exploration, during the bottom of the U-period rather than produce valuable reserves into a low-priced environment.

"I think what we will do is put a little bit of ... pause on some of the short-cycle well [activity] where frankly we as an industry just don't have proper well economics, until service costs sync up with commodity" prices, he said.

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Chazen believes a price recovery may take awhile. “The [OPEC] countries are saying that prices will quickly rebound once the evil shale producers stop producing,” he said. “But I think until that happens, it’s going to be slow.”

In spelling out the steps needed for prices to rebound, John Hess – whose company whittled its capex down to $4.7 billion this year, 16% lower than in 2014 – noted wells in shale fields, which will suffer in North America from less drilling, typically have a 70% decline the first year.

Between that high decline rate for existing wells and fewer wells this year from capex cutbacks,  the US’ approximate yearly growth of around 1 million b/d or so of crude oil production from shale wells in recent years should drop, Hess said.

“We see that attenuating quite a bit to where it flattens out probably the beginning of next year,” he said.

World demand growth is the key, CEOs said, with uncertainty over demand growth in China, India and even the Middle East.

"It's hard to say whether that growth will continue or not," Chazen said. "If we get demand growth – and lower oil prices stimulate demand  – this current situation will be over fairly quickly. If we don't, this could drag on quite a while."

Whatever the demand growth, Watson summed it up by saying oil prices need to recover simply because world demand will pick up, and current prices will not allow future energy demand to be met.

He noted that oilfields decline globally about 15%/year without investment, and roughly 3-5%/year normally. That level on roughly 93 million b/d of production worldwide “is significant,” Watson said.

A price of $50/barrel does not support new “big-volume” field developments in deepwater or oil sands, he said.

“That’s why you see … most of industry expecting to see some rebound in prices” in forward strip pricing, Watson said. “The projects that are going to meet demand going forward are more complex than 20 or 30 years ago, so the cost of those projects will be higher and require a higher price than we’re seeing today.”