Global oil and gas companies are facing a “huge investment challenge” with more dollars needed in the next 5 years vs. the past 5 years, according to Hess chief executive John Hess.
“The IEA [International Energy Agency] made it clear in their outlook that came out in December that the world needs to invest $500–$600 billion a year to grow global oil and gas to keep up with demand growth in the future,” Hess told the virtual attendees of CERAWeek by IHS Markit. “That number last year was $300 billion. We have an investment challenge ahead. If you look at global exploration, before the financial crisis last year, finding new resources that underpin future supplies— that number was $100 billion. Global exploration right now is $20 billion.”
Investment in shale has gone from $200 billion 2 years ago to $50 billion this past year. Hess claims in terms of supply, producers are not investing enough to grow oil and gas supplies for the future. He cites inflation as another wildcard in the supply/demand equation.
“The stimulus programs that have been introduced around the world are going to have a major impact as well as the accommodative monetary policies that you see from the Central Bank, and that is going to turbocharge consumers, turbocharge the economy, and turbocharge oil demand,” he said. “We don’t think peak oil is around the corner. We see oil demand growing for the next 10 years.”
He added: “Looking at the oil market going forward, we are in a V-shaped recovery for demand, we are in a U-shaped recovery for supply where we need more investment. Once inventories are drawn down and we get rid of the glut, the challenge will be investment, and we’re going to need stronger prices to encourage that.”
Hess sees US shale operators transitioning their operations from a growth business to a harvest business. Pointing to the overcapitalization of the business in the middle of this decade, he sees operators curbing their re-investment rate, generating more cash to return to shareholders. The result will be slower growth rates. For example, today, Hess is running two rigs in the Bakken, well below its double-digit average just a few years ago.
“We’re running the Bakken as a cash engine, not as a growth engine,” said Hess. “As oil prices improve, we will continue to run it as a cash engine, but we can afford to add two more rigs. We used to run 17 rigs in the Bakken, but productivity improvements as well as capital efficiencies have allowed us to be more capital efficient. This has gone on across all shale producers. At two rigs, we can keep our production flat at around 175,000 BOED. At four rigs we can go to 200,000 BOED and basically run the Bakken at plateau for the next 5 to 7 years. The key for shale producers is cash flow first, growth second.”
The push toward renewable forms of energy and an overall greener future will benefit hydrocarbon development in the mid-term. Conventional oil and gas companies interested in investing in new forms of energy can use cash from oil and gas sales to jumpstart their programs.
“One of the drivers for stronger oil demand is the push to renewables because you are going to need oil and gas to support the investment of that push,” said Hess. “The push to cleaner energy is going to require oil and gas to be successful.”
