Paal Kibsgaard, CEO, Schlumberger, on Global Oil Market Factors
Rarely should we pay a whole lot of attention to what shale CEO's say about the performance of their corporations as it is almost always rooted in self serving, self preservation. Their jobs are to raise money, mass manufacture shale wells, book more over inflated reserves and receive, as a result, higher bonuses and compensations. Nick Cunningham at Oilprice.com, for instance, recently wrote," Reuters Oil recently reported that the top 10 largest shale companies—including Devon Energy and Apache Corp.—paid their CEOS a combined $2.2 billion over the past decade in compensation, but shareholders have only taken in returns of 1.7 percent. Larger integrated oil companies have paid their executives less ($600 million) and earned shareholders a 3.5 percent return.“Management teams have been rewarded far too long for destroying value,” Todd Heltman of wealth manager Neuberger Berman, the seventh-largest investor in shale producer Cabot Oil & Gas Corp (COG.N), told Reuters."
Recently, however, Paal Kibsgarrd, the CEO of Schlumberger, who by the way, laid off 25,000 Schlumberger employees in 2016 and himself received $18M of compensation the same year, has some interesting comments about the global oil market in a conference call about his 2Q 2017 earnings. Those comments can be read on Seeking Alpha here. It is worth reading an excerpt of those comments:
"Thank you, Patrick. So next let’s turn to the oil market where a sustained growth and demand continues to provide a much needed foundation for the outlook leaving little reason for concern over this part of the oil market equation.
The supply side however is far more complex with market nervousness and investors speculation generally overshadowing facts and physical fundamentals leading to unpredictable movement in oil prices inspite of a third year of global under investment.
The status of the global oil supply is best described by splitting the production base into three main blocks. First, Russia and the OPEC Gulf countries, second U.S. lands and third the rest of the world.
The OPEC Gulf countries and Russia, which combined make close to 40% of global oil production, remain fully committed to sound and consistent stewardship of their resource base. This is reflected in a steady increase in oil selectivity over the past three years as the world’s best well economics easily absorbed the significant drop in oil prices.
These countries are also actively supporting the rebalancing of the global oil market by taking a procative role in moderating the current production levels. The other two blocks of supply are currently pursuing diametrically post directions to both investments and resource management driven by the respective stakeholders.
The production level from the U.S. land E&P companies which currently represent around 8% of global oil supply is largely driven by the U.S. equity investors who are encouraging, enabling and rewarding short term production growth inspite of marginal project economics
The fast barrels from U.S. land are facilitated by a factory approach to both drilling and production and supported by a rapidly scalable supplier industry with a low barrier to entry. In this market the pursuit of equity appreciation outweighs the lack of free cash flow, net income and return on capital employed for both E&P companies and the service industry. And although the fast barrels from U.S. land have already cooled the oil price sentiments as well as the evaluation of the equity investments themselves, this has yet to limit the investment appetite for additional production growth.
The last block of producers making up the rest of the world today represents over 50% of global oil production and covers a broad and diverse group of IOCs, NOCs, and independent operators. In aggregate, this group is for the third successive year highly focussed on meeting the cash return expectations of their shareholders whether these are equity investors or governance.The operators meet these requirements by striving to keep production flat by producing their existing outlets part of their normal and by limiting investments to what provides short term contributions to production at the expense of increasing deflection rates."
So, from Mr. Kibsgarrd's perspective the OPEC13 countries and Russia, representing 40% of world oil production, are dedicated to "sound, consistent stewardship of their hydrocarbon resources." Other international oil companies (IOC's), NOC's and independent operators around the rest of the globe, representing 50% of world oil production, are focused on profits, meeting shareholder equity and act under reasonable fiscal restraint.
Not so the US shale oil industry and its "fast barrels." Those 'fast' LTO barrels, by the way, only represent 8% of the total world production. For those people that believe America is now the world's "swing" oil producer, I suggest that 8% number be read again. Mr. Kibsgaard seems to suggest this particular 'block' of world production, the US shale oil block, is not acting as good stewards of their hydrocarbon resources and otherwise cannot achieve "free cash flow, net income or return on capital." Schlumberger is, of course, willing to service the onshore shale phenomena, though Kibsgaard seems to admit costs need to go up. Clearly he is not too otherwise impressed with its business model.
Then, recently from the Wall Street Journal, there is this: “There are no new shale plays that have come forward,” said Mark Papa, chief executive of Centennial Resource Development Inc. and former CEO of EOG Resources Inc. “Their ability to spew forth infinite streams of oil is really just a myth.”
The American LTO industry, in it's short term, 'me-first' management of America's hydrocarbon resources, is pissing away the last of our oil reserves. It is setting our nation up for serious problems down the road, problems that will lead America to becoming more reliant on foreign oil imports than ever before.