Exxon CEO says oil prices will stay low
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The world should “settle in” for a period of relatively weak oil prices, the chief executive of ExxonMobil has said, with US shale production more resilient than many people had expected.
Rex Tillerson’s comments came as the world’s largest listed energy company said it would cut capital spending by 12 per cent this year even while increasing its oil production by 7 per cent, in a sign of how the industry is pushing to cut costs in response to the plunge in crude prices.
Mr Tillerson told an annual meeting for analysts in New York that oil prices had crashed because demand growth in China and elsewhere had slowed, while US supplies were “coming like a freight train”. Those conditions could persist, he suggested.
“My view is people need to kind of settle in for a while,” he said: “There’s a lot of supply out there. And I don’t see a particularly healthy world economy.”
The fall of about 50 per cent in oil prices since last summer has led to expectations that US production, which has grown rapidly in recent years, will soon level off and perhaps go into decline if prices do not rebound quickly.
However, Mr Tillerson said the precedent of the shale gas industry, where production has continued to grow even as prices slumped and the number of rigs drilling wells dropped sharply, suggested that US oil output would be more robust than assumed.
The same companies that had cut costs and increased productivity in shale gas were often involved in shale or “tight” oil as well, he added, meaning that the industry would not be crushed by low prices and competition from other regions. “I think you’re going to see some of the same resilience on the tight oil side, too. And therefore it will compete globally,” he said.
Mr Tillerson told analysts Exxon planned to cut annual capital spending for this year to about $34bn per year, and to a little less for 2016-17, down from an earlier projection of $37bn. However, he stuck to the group’s prediction from a year ago that by 2017 its production would reach 4.3m barrels of oil equivalent per day, up from 4m b/d last year.
His comments are further evidence that oil suppliers’ response to the plunge in prices could take longer than many executives and analysts expected.
Exxon’s planned capital spending cut is in line with the reduction planned by Chevron, the second-largest US oil group, but smaller than the 20 per cent drop announced by BP. Royal Dutch Shell, Europe’s largest oil company, has said it plans to “curtail” spending over the next three years by $15bn, without specifying a target for 2015.
Exxon’s oil and gas production has been in decline since 2011, but the company plans to turn that around with growth of about 2.5 per cent this year and 3 per cent per year in 2016-17. Its gas production is expected to continue to decline until 2017, but oil production is predicted to rise by 7 per cent this year and 4 per cent per year for the next two years.
Mr Tillerson said the company could grow while spending less, thanks to cost savings from lower rates for drilling rigs and other services, as well as cheaper steel.
Mr Tillerson suggested Exxon’s financial strength would give it flexibility to acquire assets and companies at attractive valuations while industry profitability is under pressure, saying it could “capture bottom-of-cycle opportunities that are not available to more capital-constrained companies”.
The chief executive also hinted that he could be open to a large deal, saying his objective was to maintain financial flexibility and a strong balance sheet, “so that if there’s something really interesting that’s in front of you, you don’t have to pass because you didn’t have the financial capacity to do it.”
“There really is no limitation on what we might be interested in and considering” in terms of possible deals, he said. “Obviously people are approaching us”. However, he added, Exxon would only make acquisitions where it believed it could raise the profitability of the acquired business, by developing assets or cutting costs.
Exxon has some large projects that started up last year, including the Banyu Urip development in Indonesia, which will be increasing production this year. It also has new projects coming on line, including the Hebron development off Canada’s east coast.
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Exxon is also becoming an increasingly significant producer in the US shale oil industry, operating in the Bakken formation of North Dakota and the Permian Basin of west Texas. It has been driving down costs there, too, cutting the time it takes to drill a well in the Bakken by more than 30 per cent and the cost of bringing it into production by 40 per cent in the past four years.
A prolonged period of low oil prices would improve the relative position of Exxon, which is larger and financially stronger than any private sector competitor.
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