Shale’s resilience vindicates Conoco boss on return to OPEC

A gas flare burns near a crude oil facility outside Williston, North Dakota. With OPEC ceding control for the first time since the 1980s, U.S. shale oil has been anointed the world’s new “swing producer” by everyone from ConocoPhillips and Goldman Sachs to former Fed Chairman Alan Greenspan. CREDIT: Bloomberg News photo by Daniel Acker).

LONDON — When Ryan Lance, chief executive officer of ConocoPhillips, told an OPEC conference in 2012 the industry was under-estimating shale, oil was trading near $100 a barrel and his warning fell on deaf ears.

Two years and a price crash later, Lance returned to the same forum on June 4 and had no problem winning the attention of officials and executives. Shale oil “is here to stay,” Lance said, speaking over a chart showing the almost vertical rise in U.S. shale output.

His message: Shale has not only transformed the global energy industry but proved far more resilient to lower oil prices than most had expected. It’s a truth the global oil industry is rapidly taking on board.

In June 2012, when Lance spoke at the last biennial seminar held by the Organization of Petroleum Exporting Countries, the U.S. was pumping 6.2 million barrels a day. Now, it produces 9.5 million barrels a day, the highest since 1972.

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The increase — 3.3 million barrels a day over three years — is largely due to shale producers and is larger than the current output of the United Arab Emirates, OPEC’s third-largest producer behind Saudi Arabia and Iraq.

“Ryan Lance’s speech was listened to a lot more carefully this time than in 2012,” said Jamie Webster, senior director at IHS Energy consultant. “What he said it would come has come.”

From Rex Tillerson, CEO of Exxon Mobil, to Ben van Beurden, his counterpart at Royal Dutch Shell, oil captains said in Vienna this week that shale was weathering cheap oil far better than expected by cutting costs and focusing on the best drilling areas.

BP Plc CEO Bob Dudley summarized the new view, saying in Vienna: “It has been very resilient — the industry didn’t know it.”

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The surge in shale production — and its immunity to lower prices — has re-drawn the global energy map, forcing OPEC six months ago into a policy U-turn that sent oil prices from $100 to $60.

For most executives participating at the OPEC seminar, the question is no longer at what price shale producers would go bankrupt, but at what point they start drilling again, boosting output further.

With the support of billions of dollars in fresh debt and equity issuance, companies from Whiting Petroleum to EOG Resources have indicated that if oil prices stabilize at about $65 a barrel, they will start growing again.

Lance said that shale break-even costs have dropped 15 percent to 30 percent in recent months while the amount that drillers are able to suck out of the ground from each well has increased up to 30 percent.

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“This business will survive at $100 Brent oil pricing and it will survive at $60-70 Brent pricing,” he said.

Conoco believes that the best parts of the U.S. shale industry can generate returns of 10 percent with oil prices as low as $40 a barrel. If true, that puts shale on an equal footing with conventional fields and well above deepwater offshore projects and Canadian tar sands, which require higher prices.

While other industry leaders avoided pinning down the level at which shale is profitable, Claudio Descalzi, the head of Italian oil giant Eni SpA, used an athletic metaphor to explain the strength of shale.

“The shale industry is like a sprinter, very agile. They run, they win, they stop and rest, and they do it again,” he said in an interview in Vienna. “Shale is very resilient.”

Meanwhile, major oil companies are like marathon runners. “And you can’t run one marathon after another one,” he said.

The unexpected staying power of shale production, coupled with surging output from Saudi Arabia and Iraq, could cap the recovery in oil prices, analysts and traders said.

Chris Bake, a senior executive at Vitol Group, the world’s largest independent oil trader, said in an interview in May that shale producers could add up to 500,000 barrels a day of extra output of West Texas Intermediate recovers to $70 a barrel. The U.S. benchmark traded $59.40 a barrel on Thursday.

Robert McNally, president of oil consultant Rapidan Group in Washington, said shale oil would continue to surprise the industry with its flexibility, cost cutting ability and improved efficiency.

“We are in the early innings of a long game,” he said in Vienna.