The Fuse

U.S. Oil Sector Back from ‘Brink of Extinction,’ Total Boosts Investment

by Matt Piotrowski | March 08, 2017

In the U.S. oil and gas industry, there’s no longer talk of oil prices remaining lower for longer. Last year at this time, U.S. companies were on “the brink of extinction,” according to Continental’s Harold Hamm. The question now is more about how much the North American market can boom with the worst supposedly over.

But it won’t be smooth for the industry as a whole. As Hamm pointed out Wednesday at CERAWeek by IHS Markit, the vastness of the country’s resources can be too much of a good thing and thus they have to be managed properly. “We have the potential to oversupply the market and it’s our responsibility not to do so,” Hamm told the audience. During the panel discussion on the outlook for North American exploration and production, Hamm cautioned that the industry needs discipline, saying growth “has to be done in a measured way or we’ll kill the market.”

Hamm cautioned that the industry needs discipline, saying growth “has to be done in a measured way or we’ll kill the market.”

His comments came on a day that oil prices saw their sharpest one-session drop in more than a year, falling by $2.86 to $50.28 per barrel as U.S. inventories rose to another record. The EIA reported that U.S. crude inventories increased by an enormous 8.2 million barrels last week, prompting a sell-off on NYMEX.

In a reflection of the confidence in market conditions and the U.S.’ resource base, Anadarko will be spending $16 billion in the country in coming years, despite being active in other markets, including Africa, said the company’s CEO R.A. Walker, speaking on the same panel as Hamm.

Anadarko is a bit of anomaly in the North American market as it is active in high-cost deepwater in the Gulf of Mexico. That is in stark contrast to most resources going into shorter-cycle shale projects.

Hamm’s Continental is, meanwhile, focused heavily on the Bakken. Despite oil prices trading at half levels seen earlier this decade, Hamm is “very confident” about the shale play in North Dakota and believes it will continue to “surprise to the upside.” In a sign of this assurance, his company is devoting more than half of its capital expenditures in the play. The state said on Wednesday that Bakken production rose by about 38,000 b/d in January to just above 980,000 b/d.

Hamm said that Continental pulled back considerably when prices fell to $25-$30 earlier last year and didn’t complete any wells in the Bakken at that price level. But he expects the company to return to a “normal” level of drilled but uncompleted wells (DUCs) by the end of this year. Besides North Dakota plays, Hamm is also bullish on the SCOOP/STACK play in Oklahoma, which has attracted a lot of attention from investors in the past year.

Total at the top of its game

While the entire industry has taken major hits over the last few years, some have fared better than others, with France’s Total having emerged as the strongest international oil company (IOC). The company’s CEO, Patrick Pouyanne, noted the positive atmosphere at the conference this year and agreed with the improved optimism. Total plans to step up investment in the current price environment despite caution through much of the industry with conventional projects. Total will “continue to be disciplined but also invest again,” he noted.

Total plans to sanction 10 projects in the next 18 months, with investments in Brazil, Nigeria, the U.S., and even Iran.

Total plans to sanction 10 projects in the next 18 months, with investments in Brazil, Nigeria, the U.S., and even Iran. The string of projects planned reflects not only improved market sentiment with prices in the $50s, but also the company’s confidence now that it is the most profitable IOC, thanks in part to the strength of its downstream business and diverse portfolio that includes oil, gas, renewables, and batteries.

Pouyanne believes in the importance of investing during the low end of the price cycle, which can make the company stronger when the market eventually moves higher. During his talk, Pouyanne said the oil market continues to see a number of “bullish elements,” but said that fundamentals have yet to rebalance. “It’s important that the OPEC/non-OPEC cuts are rolled over,” he said.

Scott Sheffield, the CEO of U.S. independent Pioneer, said this week that if the cuts aren’t extended, the market could fall to $40, reinforcing that oil prices should likely see wild fluctuations in the run-up to the OPEC meeting in the next two and a half months.

 

 

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