ConocoPhillips’ Lance: Curtailment ‘necessary’ to balance market

When the COVID-19 crisis started to pick up speed in March and impact the oil and gas industry, ConocoPhillips' team began to look at the current oil prices and the expected economic recovery to decide how to handle future production.

"We were seeing what we felt were pretty depressed prices," said CEO and Chairman Ryan Lance. "We just weren't prepared to sell oil for that kind of price because we had a view that the recovery would come."

Although the selling prices would cover costs, ConocoPhillips made the decision early on in April to curtail production throughout its U.S. operations and in Canada. Having a strong balance sheet, Lance said, helped the company make the choice to defer production to a later date since the cash flow would not be the same during this period. Lance called this a "quasi-investment" choice, something to help balance the market during a time of uncertainty.

"We only took actions that we felt we could recover from," he explained. "The recovery looks a little different in all those assets when you're talking about Alaska, which is conventional oil; the heavy oil up in Canada; or the unconventional oil in the Lower 48. So we have a little bit of a mix of everything, but our view was that we could produce it at a later date for a higher price and make a return on that investment."

Curtailing production was, Lance said, "absolutely necessary" and a sensible decision for both ConocoPhillips and other producing companies in the industry. Had production continued at its previous rates, storage would have been over capacity and put the industry in what he called a "precarious position."

"U.S. producers reacted rationally to what we were seeing in the market. I think the question now is 'How fast and how rapid will this deferred/curtailed production come back to the market, and is demand picking up sufficiently and quickly enough to keep the market fairly balanced?' We don't see continued builds in storage, and we're concerned about that," he said.

Moving forward

Lance said ConocoPhillips plans to begin opening production back up over several months as the market starts to grow. He said the company is confident that there will be flush production in unconventional oil as facilities restart. By June, the company's China office was fully re-opened with others following suit soon after.

However, he noted there are concerns about market volatility as production begins to restart. He said there are still unknowns about the relationship between the demand and supply, and that the next few months could be "bumpy" as companies attempt to return to normal. Lance said suppliers will need to assess the situation and plan ahead for volatility.

"If the U.S. industry comes back too quickly [and] the demand's not there to absorb the extra supply, then the price is going to go back down," he explained.

Producers need to address several factors as the market comes back online. Focusing on creating and defining value propositions for investors is one factor and could initially cause a slower resurgence in shale.

The shape of recovery in the overall industry will determine how quickly production reaches pre-pandemic levels, and Lance said multiple factors cause that uncertainty. However, he is confident that recovery is starting to take place, and companies are taking the necessary steps to return to normal. The curtailment situation brought on by COVID-19 will provide lessons learned throughout industry, he noted.

"We'll step back when this is all done and say, 'What did we learn from it? What should we be doing differently?'" Lance said.