The global oil and gas industry is facing long-term underinvestment, posing a growing challenge to meet future energy demand, Hess chief executive John Hess said today.
Investments made now will help meet future demand as energy projects have a long lead time. But five years of a bear market and a new focus on investor returns has cut global capital spending to about $420bn a year, well short of the $600mn needed annually to meet demand, the head of the US independent said in a keynote address to the Argus Americas Crude Summit in Houston, Texas.
"There has been a big shift in investor sentiment, from drill baby drill to show me the money," Hess said.
The investment community is focused on returns because energy share prices fell amid a broader equity rally. Crude prices ended 25pc higher last year, but the index of US independent E&P companies declined by 10pc, Hess said. Shale producers, which were the "darlings four to five year ago" because of their growth have fallen out of favor as investors lose confidence in their ability to generate returns.
The US shale industry witnessed an unsustainable rate of growth because of the large sums of money it attracted from both public and private investors amid low crude prices. Between 2015 and 2017, when oil prices were around $40-$55/bl, shale producers got $60bn of investment from the market and another $20bn from private equity investors. That resulted in shale output booming, something producers would not have achieved solely from cash flows.
Investors now realize the industry was growing too fast, that imposing financial discipline on companies is healthy, Hess said. As a result, the US rig count is down by 25pc and shale oil output should grow by about 500,000 b/d this year.
"I think it is a more sustainable rate," Hess said. "Shale is being recalibrated in investors eyes, and really what shale oil and gas companies have to do is win back the hearts and minds of investors."
Hess said he is optimistic about the changes the industry is going through, but said more work needs to be done by both shale operators and the broader oil and gas industry to win back investors.
While US shale had emerged as a key global supplier, it is not the next Saudi Arabia, he said. Growing shale production and US exports have helped keep oil prices in check amid geopolitical uncertainty, but the key challenge for the industry is that it is very capital intensive. Shale wells decline by 70pc in the first year, by about 30pc in the second and 15pc in the third, which means operators need to keep drilling more wells just to maintain their volumes. That limits shale's growth, he said. Output from the Eagle Ford basin in south Texas is already plateauing, the Bakken in North Dakota looks set to plateau in the next few years and the Permian region of Texas and New Mexico probably will follow by the middle of the decade, he said.
Given those challenges, Hess has strives to operate a balanced portfolio, with operations in conventional production and offshore. Many of its competitors exited offshore because costs were high. But costs have come down, with deepwater drilling rigs that used to go for $600,000/day now available for $150,000-$200,000/day, he said.
"While everybody was going to the shale side of the business, we thought that a shale-only strategy was not sustainable," Hess said. "We need both long cycle and short cycle to have the best portfolio."
Commenting on Opec, Hess said the producer group still has a very important role in balancing the market. The output cut agreement between Opec and other major non-Opec producers including Russia was helping global markets return to balance before the outbreak of the coronavirus. With the outbreak slowing China's economy, global oil inventories are set to grow again.
