A global clamour for sustainability will help ensure the oil industry maintains capital discipline if a new cycle of strong demand emerges, according to a panelists at the CERAWeek by IHS Markit conference.

US independent Hess typified what the industry has been going through, slashing the number of rigs in the domestic Bakken shale play from 17 to two to cope with the current downturn.

Capital efficiency

Chief executive John Hess told a CERAWeek panel on future energy investment that his company will stick to a maximum of four rigs even if West Texas Intermediate crude passes $75 per barrel.

“We are running Bakken as a cash engine not a growth engine... productivity improvements and cost efficiencies have allowed us to be much more capital efficient,” he said.

According to Hess, two rigs can keep the company’s Bakken production “flat” at about 175,000 barrels of oil equivalent per day.

Shale in 'harvesting phase' - John Hess

“Four can get us to 200,000 barrels of oil equivalent per day and we can run it at this plateau probably for the next five to seven years,” he said.

Hess acknowledged that the shale sector was overcapitalised before the current downturn, but said it has shifted to a "harvesting” phase, with the focus on discipline and returns, rather than growth.

Brian Singer, head of Goldman Sachs’ energy and utilities unit for the Americas, suggested that the industry is heading into a tight corner after half a decade of under-investment in long lead projects, leaving little elasticity for short-term cycles, even in shale.

Hess added to this, saying investment over the last five years has been running at barely half the $500 billion to $600 billion that the International Energy Agency has said is needed to meet demand, and exploration spending at a fifth of what it was.

Turbo-charged

He added that economic stimulus programmes introduced around the world to help economies recover from the effects of the coronavirus pandemic will stoke inflation, “turbo-charging” demand for oil.

“I don’t see peak oil around the corner, I see demand growing for the next 10 years... Once inventories are drawn down and we get rid of the glut, the challenge will be investment,” he added.

Marcel van Poecke, head of Carlyle International Energy Fund, predicted that a shortage of investment in oil and gas will soon have consequences.

“People are underestimating the importance of commodities for growing all kinds of businesses,” he said.

'Investor sentiment has gone negative'

Hess said: “This is a challenge for oil companies because investor sentiment has gone negative. In order to get those investments you have to generate visible and durable cash flow year in and year out."

He added that his own company was lucky in having its position in Guyana to offer longer-cycle returns.

Against this backdrop, higher benchmarks on environmental, social, and governance (ESG) criteria will also go to the heart of financing investments, panelists agreed

“Last year’s returns were very disappointing in oil and gas, and the energy transition has been driving a reallocation of capital to renewables and exposed oil sector to pushback from regulators,” said Van Poecke.

“Private equity can’t solve all the problems,” he added.

Panelists implied that a combination of ESG-based reticence and recent traumas could help avoid another round of irrational exuberance as oil demand tightens.

Continued discipline

Maynard Holt, chief executive with investment bank Tudor, Pickering, Holt, said the oil crash made many shale producers look “awful” but said lessons have been learned, also predicting “continued discipline” in getting cash back to shareholders.

Van Poecke expressed a preference for investing in oil companies that “stick to what they are good at” by producing cleaner barrels more efficiently, rather than “becoming a wind or solar company".

“If you look at the period from 2008 to 2012, you see a time when the world thought it was short of oil and gas and ploughed money into business models which were all about finding more," said Holt.

"Now it is almost as if we have decided we are short of clean energy and we are ploughing in lots and lots of money to capitalise this ferociously.

"There is an odd parallel with what happened in the shale world, although the perception of what we need has changed dramatically,” he said.

Energy Transition

ESG benchmarks and boom-and-bust legacy could keep oil producers walking the line