The message could not be clearer: Worldwide investment in oil and gas is insufficient to meet demand growth and supply demands.
"We have experienced three years of a bear market and low prices -- $40-$50 (per barrel of oil) -- and some people would actually say it was lower for longer," said John Hess, CEO of Hess Corp. "It actually felt lower forever. And the real impact of those low prices was investment."
Specifically, according to the International Energy Agency, meeting the demand growth requires approximately $540 billion in annual investment.
"Last year, that number was $400 billion. This year, it's about $420 billion. And the only area of growth in that was shale, which is short-cycle," Hess said, speaking on a panel titled "Investing in a Changing Energy Future" at CERAWeek by IHS Markit, held recently in Houston.
The impact of this level of under-investment will become evident within "the next several years," Hess added.
As oil prices went down, Hess noted, American ingenuity went up in costs, technology and financial markets.
"Most operators in the last five years have been able to reduce their drilling times by half and cut their drilling and completion costs in half," Hess said. Technology has also played "a huge role" in improving productivity with the application of well spacing, data analytics, frack stages and other technologies.
Productivity per well in most cases is up by 50 percent in the past two years, Hess said, making shale much more resilient in a low-price environment.
"But as oil fundamentals have recovered to $60 per barrel, oil equities have not recovered," Hess said.
Though the price of oil increased by 20 percent in 2017, oil equities went down by 10 percent.
Hess believes there is a worldwide obsession with shale.
"It is irrational exuberance in the United States, and it is irrational fear in the rest of the world," he said, noting shale currently accounts for about 5 percent of the world's oil supply and will probably grow to about 10 percent of the world's oil supply in the next five years."
About 90 percent of shale investors are American independents," Hess continued.
Beyond shale's impact on investments, another consideration is offshore deepwater, which is long-cycle, Hess said, adding a third factor is investors themselves, with "sentiment in the capital markets" being the chief driver of some of the financial discipline being exerted on the industry.
Discipline on the industry is healthy
"When you add this all up, we're seeing a skeptical market among investors to invest in oil," Hess explained. "They're demanding you to be cash-flow generative, and once you are at $50 investor growth, they're also demanding you return some of the capital."
Hess believes this resulting "discipline on the industry" is healthy.
"But what it shines light on is price," Hess said. "And the only way you're going to encourage more investment is to get a stronger price."
While the industry lives in "the $60 per barrel world," Hess said, it will experience its share of volatility.
"But you need to have at least that price to attract investment, not just in short-cycle shale but also in long-cycle offshore deepwater and in OPEC itself, to get the world more in balance so that supply can keep up with the demand growth," Hess concluded.
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