Houston — The US oil and gas industry is likely to experience a "bumpy few months" ahead as producers begin to bring their output back online after shutting in large swaths of it in May and June to cope with low demand amid the coronavirus pandemic, a top upstream company CEO and industry veteran said June 10.
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Supply and demand are likely to be difficult to balance, resulting in temporary overhangs on both sides as oil and gas producers, refiners and consumers begin to lift fuel production and usage, ConocoPhillips CEO Ryan Lance said during an Independent Petroleum Association of America webcast.
"The question now is how fast does it (production) come back, and does demand pick up quickly enough that we don't see continued builds in storage," Lance said in a one-on-one discussion of current energy landscape perspectives with webcast moderator Jordan Horoschak, the managing director of CIBC Capital Markets.
"This week, we saw storage starting to build back up, and it's clear some producers are starting to come back online," Lance added. "We're concerned about a 'double trough,' if demand isn't coming back fast enough to absorb some of that supply."
ConocoPhillips alone decided to shut-in 460,000 b/d gross of its production in June, including 260,000 b/d in the Lower 48 US, 100,000 b/d in Alaska and 100,000 b/d from its Surmont oil sands project in Canada. That amounts to 420,000 b/d of oil equivalent net.
A day earlier, in webcast remarks June 9 during a conversation with IHS Markit's vice chairman Daniel Yergin, Lance said he saw "some strengthening in the market" and so is "thinking about" when and where the company will begin to restore its production.
MAY RESTORE OUTPUT SOON
"I would say we're probably thinking of slowly coming back into the market over the next few months and reducing the amount we've got curtailed because we're seeing some strengthening in the [oil] price," he said during that webcast.
By mid-March, low demand from the pandemic, combined with oil prices that plunged after a disagreement between Russia and Saudi Arabia over extending OPEC+ production cuts, resulted in a glut of oil, which pulled down crude prices to levels not seen in more than 20 years.
OPEC+ later mended fences and extended the production cuts, but an oversupply still exists, which has kept oil prices in the $30s/b. However, prices have risen in the last two weeks from the low to high $30s/b.
In contrast, oil began March around $46/b to $47/b.
In April, as prices continued to sink and later that month ended historically in negative territory, US producers began cutting output voluntarily. S&P Global Platts Analytics estimates those volumes grew to an eventual 2.2 million b/d.
The curtailments were necessary to rebalance the market, Lance said, as demand fell off anywhere from 20 million b/d to 30 million b/d at trough. OPEC's eventual agreement to take 9.7 million b/d off the market was crucial to prevent storage from reaching tank tops, he added.
RECOVERY WILL 'TAKE A WHILE'
Lance said he expects recovery and supply restoration to "take a while, even if we get back to 100 million b/d of demand" or slightly more -- the level of global demand pre-pandemic.
Apart from the sheer logistical requirements to return thousands of shut-in wells to production, repairing them where needed and a likely temporary scarcity of oilfield crew available to perform the work, time is needed for restoration, which could be lengthy, Lance said.
All this will also create volatility and consequently require a higher oil price than current levels, he said, which for NYMEX WTI on June 10 was around $39.50/b.
"The dynamics in the oilfield service industry, the ability to return cash to the drill bit, won't come as quickly as we were pre-pandemic," he said.
At the same time, some jurisdictions -- Malaysia and Alaska, for example -- are proposing tax increases for oil producers, he added, which may cause companies to re-think their investments in those locales.
Lance said ConocoPhillips has operated in Alaska for "a long time," and that has provided "certainty and stability," which higher taxes would put into question.
A citizen's initiative, which will be on the ballot in the November elections, proposes to double state taxes on large North Slope fields.
"If the tax rate goes up, cash flows go down and we have to manage in a rational environment," Lance added.