The COVID-19 pandemic has exposed the vulnerability of US shale oil production, and output from the Permian basin may never recover to pre-crisis levels, the CEO of Occidental Petroleum told the 11th IEA-IEF-OPEC Symposium on Energy Outlooks.
Oil extracted from shale rock formations has been the largest contributor to the doubling of US oil production over the last decade to almost 13 million barrels per day (bpd) in 2020. The pandemic triggered a dramatic drop in global oil demand last year which sent prices plummeting, forcing companies to cut capital expenditure.
"In the Permian basin, certainly the pandemic has had a major impact... It has shown the vulnerability of a shale development when capital is not reinvested. The lack of consistent reinvestment in the shale play means that the decline is going to happen and happen in a bigger way," Vicki Hollub told the symposium by video link from Texas.
"The shale wells decline up to 70 percent in the first year on production so if you are not consistently putting capital in, that decline is going to be significant. I feel like shale has been so impacted by this that when the pandemic is over, we're not going to get back to the 13 million barrels per day that the U.S. had achieved prior to the pandemic."
The shock of the pandemic has also changed the focus for may oil companies operating in the United States, she said.
The investment community is not going to reward growth but rather value, and the only way to create value in shale development for the long term is to have sufficient scale so that infrastructure costs are minor compared to well development, she said.
Hollub said infrastructure has not kept pace with shale's growth. "That's caused our industry toinvest a lot of dollars in the Permian that will never deliver any returns," said Hollub.
She spoke with International Energy Forum (IEF) Secretary General Joseph McMonigle during the virtual symposium, which was sponsored by the IEF, the International Energy Agency and the Organization of the Petroleum Exporting Countries. The session brought together global government and energy industry leaders on 17 February 2021 to discuss the future of the sector in the wake of the pandemic.
Occidental is investing on the assumption that oil prices have established a floor at $40 a barrel of West Texas Intermediate crude. The Houston-based company is not targeting growth, but rather plans to keep its production flat while reducing its operating cost so that it can generate free cash to help pay down debt.
"We have long felt that it's important for our industry, if you're in the industry, to try to achieve a $40 breakeven," Hollub said. "If you go back and look at the history of WTI oil prices, the WTI first averaged $40 back in July of 2004. Since then, 95 percent of the time, the WTI was $40 or above. The 5 percent of the time when it wasn't 40 or above has been during the pandemic. We feel like a floor has been established at 40 and below."
With that as a backdrop, Hollub said she was hopeful about early signals from the administrationof President Joe Biden. She said it appears the new administration wants to be "very thoughtful about how they manage and regulate the industry."
"Certainly, they want to apply more methane regulations and reinstate some [regulations] that were starting to take off during the Obama administration," she said. "We believe those regulations are justified. Certainly, we're prepared to help, and we want to be part of the solution and not be resistant to change."
But any delay or halt to oil and gas leasing on federal government lands in the United States would reduce production. "If that happens, it's certainly going to have an impact on U.S. production," Hollub said.
The CEO commended the action by former President Obama and the U.S. Congress to lift the crude export ban that stimulated the shale revolution growing U.S. production to hit 13 MMB/D and made Occidental the largest crude exporter in the nation.
The Biden administration's endorsement of carbon capture and sequestration was very "exciting", she said, because it supports the work of Occidental in this area. Because it is the world's largest user of CO2 for enhanced oil recovery, Occidental is already working with a number of companies including ethanol and methane plants to apply that knowledge.
"We feel our contribution to climate change mitigation is leveraging this expertise and experience to take carbon and sequester it in our oil reservoirs and doing it in much bigger way," said Hollub. "We're going to need oil for years and decades to come. The best oil to use is netneutral or net-negative oil, and that's what we can generate from our oil reserves."
Additionally, Occidental is working with United Airlines to help it reach its goal of being 100 percent green by 2050. The two companies are committed to installing one of the largest, if not the largest, direct air capture facilities in the world in the Permian Basin. The facility will produce a stream of CO2 that can be reused in Occidental's reservoirs. The feed study is being done now, and they'll start construction in 2023, with the goal of having it on line in 2024. "There is no other way to meet the goals of the climate accord without direct air capture," she said.
Hollub says the United Airlines venture along with its recent net-zero oil VLCC shipment to China, which was completed by buying carbon offsets, is setting the stage for a new company business model. In fact, Occidental's carbon management revenues could exceed upstream revenues in the coming decades.
"With respect to the carbon-neutral barrel we sent to China, we have to do more of this whilecreating carbon capture," she said. "Since we ship a lot, we intend to provide carbon credits. With respect to how you fund it, more and more companies are trying to become carbon-free, and they're willing to invest in carbon capture. We'll provide the expertise and the place to store it."
Looking ahead, Hollub said reductions in business travel and the popularity of working remotely have reduced energy consumption during the pandemic, but those losses will be more than offset by digitization that will require more energy in the future. These kinds of behavioral effects can create a more unpredictable energy future and raise new questions.
"What is the unintended consequence of a lot of the things we're doing today and the things we'll figure out in the next 6 to 8 to 10 months," she said. "What are the things we're not seeing?"