The oil industry will survive its wounds, but the pain isn’t over: Fuel for Thought

Two of the biggest names in the oil industry believe that the wounds inflicted by cratering crude prices will heal slowly, but the result will be a patient stronger in the broken places and better prepared for future growth.

John Browne, former chief executive of UK major BP, and Mark Papa, ex-CEO of EOG Resources, one of the biggest US shale operators, said during the CERA conference in late February when the price lift comes, the industry will be changed in ways that prepare it for the coming decades, Browne said.

“I think we’ll see a pretty fundamental restructuring” in the industry, said Papa, longtime EOG chief from its 1999 spinoff from now-defunct Enron until mid-2013. He is now a partner at private equity firm Riverstone Holdings.

But in the next six to 12 months there may be a “decimation” of the industry, with many bankruptcies, he said. Of companies that survive, “a lot will be grievously wounded financially.”

Management teams that do weather the storm will be more conservative, and as conditions improve they will not stretch their balance sheets even if oil gets to much higher levels, Papa said. They will also be very careful in making acquisitions of other companies.

“Industry is going to act in a more mature fashion, particularly the independents,” he said, although he added “it will be interesting to see how majors respond to this.”

Papa sees the industry starting to rebound in the next six to 24 months.

Browne, now chairman of L1 Energy, a relatively new oil and gas company with the financial ballast of global investors Letter One, said $100/b oil that characterized the few years before crude prices began to drop in mid-2014 led to majors’ developing megaprojects.

These included huge, multibillion-dollar LNG export facilities, huge conventional oil and gas developments and offshore installations. Many of these are only now being completed, years after they were given the green light.

While many megaprojects have been postponed or temporarily shelved, they could re-emerge at higher oil prices—but with lower price tags since costs have come down “hugely” and some of it is likely to stick, Browne said.

“I believe people will make sure to be cautious that they deliver as specified,” so costs don’t skyrocket during execution, he said. Papa said today’s virtually nil spending on megaprojects, and the oil production gaps down the road as a result, may mean a revitalized market for crude into the next decade.

The biggest players are ‘full of patience’

“The future could be a lot brighter than people think if you look out four or five years, if you assume global demand continues to grow at 1 million b/d [per year] which is not a wacky assumption,” he said.

“I could ... say the whole thing is bright for US production and the US could be producing 13 [million] to 14 million b/d of crude oil, minus NGLs, and that the US is the leading producer of crude in the early 2020s—and we’re not oversaturating the total market [at that point],” Papa said.

Papa noted that similar conditions in the late 1990s to those today sparked a wave of mergers among major oil companies, but offered no insight on how majors might behave in today’s environment.

Browne, who was at the helm of BP in the late 1990s when it acquired Amoco and later Arco, said the reason for those combinations was the “inability to grow” at lower oil prices. His own large mergers and that of Exxon with Mobil and Chevron with Texaco—which all occurred within a few years of each other—came about because majors had to compete with national oil companies, Browne said.

But the last time prices were low they had to be low for “a very long time” before the majors did big deals together, Browne said.

For now, “there will be plenty of ... casualties from overleverage,” he said. “Those in the top half are full of patience.”

Technologically, one of shale’s biggest issues is its low recovery factor compared to sandstone or carbonate reservoirs: 25% to 30% “if you’re lucky,” Papa said.

The next breakthrough in the shale arena is likely to involve technology to rake out the next incremental 25% of shale oil from reservoirs, Papa said.

Conventional West Texas oil fields in the 1930s, a typical recovery was “perhaps up to 25%” with secondary recovery methods, he said, although now that has now been boosted with tertiary recovery to 50% or 60%.

“Somebody is going to figure out how to get to 50% recovery in these shale reservoirs for oil,” Papa said. “It won’t come at these low oil prices, but will come in the next 10 years.”