Interview: OPEC cuts not enough, but G20 deal could stabilize oil prices: Pioneer CEO

An OPEC+ deal to cut 10 million of oil production in May and June is not enough to counter plunging global demand, but an agreement for further cuts by G20 members could help stabilize oil prices in the mid-$20s/b, Scott Sheffield, CEO of top Permian oil driller Pioneer Natural Resources, said Thursday.

Sheffield has been pushing for US producers to contribute to a global supply curtailment beyond market-based declines already happening across the country, either through Trump administration intervention or pro-rationing by the Texas Railroad Commission.

Texas regulators will consider April 14 whether to impose uniform limits on the state's producers, although two commissioners have expressed skepticism.

Sheffield said he thinks the state commission will only go for such a plan if the OPEC+ deal is contingent on additional US cuts.

"If they say the 10 million b/d cut goes off the table if the US doesn't participate, then I'm more optimistic," he said. "If there isn't a US requirement, then I think it will be harder to get it approved."

SHRINKING US OUTPUT

Global oil demand is in free fall as the coronavirus pandemic stops travel and slows economies.

US oil production is expected to drop 1.23 million b/d this year to 11.76 million b/d, the US Energy Information Administration said Tuesday. US drillers pumped a record 12.23 million b/d in 2019.

Sheffield said $5-$15/b oil prices would slash US output to 7 million b/d by the end of 2021. But if prices stay within $30-$35/b for the next 18 months, he said output could be sustained at 10 million-11 million b/d. Permian producers drill about 40% of the US total.

US crude exports continue to flow, but a spike in oil tanker rates has made the arbitrage to Asia challenging.

Sheffield said he hopes the OPEC+ agreement leads to Saudi Arabia releasing oil tankers from storage.

"The rates should come down now if the agreement is put in place," he said. "It will help us export more crude oil."

SURVIVAL OF SECTOR

For Pioneer's part, Sheffield does not expect the company to shut in any horizontal wells, unless Texas regulators require it.

"We have firm transportation to the Gulf Coast, and we can get our oil to the Gulf Coast and to export," he said. "Independents without firm transportation will be shut in."

Pioneer has shut in 1,000 marginal wells representing just 3,000 b/d. Sheffield said they had operating costs of $25-$30/b.

After the demand crisis, Sheffield said only five to 10 US companies will have a "decent balance sheet," and "there will be no growth left in shale going forward." He said up to 80% of independents will be over-leveraged, left "trying to figure out how to refinanced debt at very high interest rates."

Sheffield said global supply coordination now will mean some of the US upstream survives.

"We're trying to keep the industry from being decimated," he said. "It will be crippled coming out of this, but the other scenario is dissolution of the industry. It's not great for energy security, for imports.

"The American consumer is going to benefit either way, whether it's 99 cents or $1.50," he said, referring to per-gallon gasoline prices. "At $1.50, our industry survives, at 99 cents, our industry is decimated."