CERAWeek by IHS Markit

Naimi no comfort for shale oil producers but pioneer Papa says sector will benefit in long term

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Saudi Arabia's oil minister declared Tuesday that he was not at war with shale oil drillers, but it's clear the U.S. industry is still under siege.

At the annual IHS CERAWeek energy conference in Houston, the global energy industry has been meeting against a backdrop of the worst oil downturn in years.

Industry executives at the 35th annual conference painted a picture of an industry cutting costs, trimming capital expenditure, holding off on long-term projects, shutting down less efficient operations and facing a tighter financing environment.

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"It's hard to predict where it's going to go. As companies we have to plan for the worst case," said Ryan Lance, CEO of ConocoPhillips. Conoco recently slashed its dividend for the first time in 25 years, the first big company to do so in an industry where the payout is sacrosanct, and others are expected to follow.

Mark Papa, partner with Riverstone Holdings and a pioneer of the shale industry, predicted that the bloodshed would not stop any time soon, though he does expect a new, reorganized industry at the end of the crunch.

Both men doubted the likelihood that a proposed production freeze led by Saudi Arabia and Russia would help rebalance the market.

"In the next six to 12 months you're going to see a disintegration of the industry…a lot of bankruptcies, bodies everywhere," said Papa.

As chairman and chief executive of EOG Resources from 1999 to 2003, Papa helped create the unconventional oil business in the U.S.

"Never in our wildest did we think we'd find enough oil or the industry would find enough oil that we would upset the global demand balance," he said.

But the balance was upset with a new gusher of U.S. supply and , as Saudi Arabian oil minister Ali al-Naimi explained during his appearance at the conference, non OPEC producers refused to cooperate to hold back production, so in November 2014 OPEC adopted a new policy of letting the market set prices.

Since that time, the price has fallen even further, hurting high-cost producers that OPEC targeted with its policy – shale among them.

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Naimi also told the conference that he was "not banking" on production cuts. "There is less trust, why worry about cuts," he said.

He said that hopes for a freeze had helped the market and that even a marginal cut would help prices more than no cut at all. But he emphasized that producers would not agree to cut production, a disappointment to an industry that was hopeful talks of a freeze were early signs that a real reduction in output could be close at hand.

"Not many countries are going to deliver, even if they say they will cut production, they will not deliver. So there is no sense in wasting our time seeking production cuts," Naimi said.

Naimi declined to comment to CNBC on whether he thought the freeze would continue to be supportive of oil prices.

Oil fell sharply after the Saudi oil boss's remarks, with West Texas Intermediate settling down 4.5 percent at $31.87 per barrel.

Naimi said there would be a meeting on the freeze in March, but cautioned that complete cooperation promised to be difficult. The oil minister from Iran, which is adding barrels to the market, called the freeze "a joke" shortly before Naimi spoke.

But Naimi did have some positive words for shale, saying that the shale sector could provide additional barrels to the world market at a time of rising demand, and that he was pleased that the U.S. dropped am export ban on oil, allowing for more flexibility. But he also warned that high-cost producers would have to find ways to lower their costs or liquidate.

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Naimi said Saudi Arabia could coexist with $20 oil but did not want to. Oil recently reached a low of about $26, a 70 percent from its mid-2014 high.

Papa, meanwhile, said he expected the market to find balance in six to 24 months, and shale would rise again after the industry restructured.

"I can see a case where the largest oil producer in the world in [2021/2022] is U.S. shale producers," said Papa. He said he could imagine a scenario where the U.S. could be producing 13 to 14 million barrels a day. The U.S. currently produces about 9.1 million barrels a day, down from 9.6 million barrels in April.

"The future could be a lot brighter than people think, if you look out four or five years and assume that demand will grow by one million barrels a year," he said.

Lance said the U.S. industry will come out of the crisis with a stronger use of technology and cost efficiencies, in a world where "margin is going to be king."

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