Hess CEO John Hess, in a discussion with energy leaders at the annual IHS Energy CERAWeek Conference, said that during this period of low oil prices Hess is guided by three principles: preserve our balance sheet, preserve our operating capability and preserve our long-term growth options.
Hess was joined on the “Navigating the Storm” panel by Miguel Matias Galuccio, President and CEO of YPF, Narendra Verma, CEO of ONGC Videsh and Daniel Yergin, IHS Vice Chairman and Chair of the CERAWeek Conference who moderated the panel. They discussed the impact of the oil price environment on their companies and the industry.
Hess told the audience that for Hess Corporation, a strong balance sheet and financial liquidity are the company’s key strengths as it endures ‘the storm.’ They provide resiliency and enable the company to preserve its core operating capabilities.
“Half our company is unconventional, half conventional; half U.S., half international; half onshore and half offshore. Very few things make sense (when oil is) at $30 (a barrel). They barely made sense at $50, and it’s better to leave your oil in the ground and run your company for value, as opposed to volume. In the Bakken, where we’re one of the leading oil and gas producers, we have taken our drilling and completion costs in the last four years from $13 million a well to about $5 million a well,” Hess said.
“We’ve gone from 17 rigs two years ago to eight rigs last year to two rigs now. One of the key points for us is to preserve our operating capability and that’s why we’re running two rigs. It’s going to be very hard to perpetuate that low-cost operation if we lay all the people off,” Hess said. “It’s very important to us to keep that capability.”
Hess then addressed the question of whether the U.S. shale industry is a swing producer: “I think the only country that is a swing producer—and I'll let the minister speak for himself tomorrow—is Saudi Arabia. There’s a million to two million barrels a day of surplus capacity in Saudi Arabia. I won’t say it’s a flick of a switch, but pretty much in a short order they can be the swing. And obviously they’ve used that swing in the past at times that we needed it,” Hess said.
“I would call shale a short-cycle producer. And that’s a new element. We’re still learning what that means. But there’s usually a year- to two-year lag from the first investment decision to first oil. It’s a big logistical undertaking when you're doing a shale operation. To get the rig mobilized, to get the people mobilized, to also get the services there as well you need permits in the United States.”
Hess then discussed the company’s commitment to its long-term growth options. “The majority of our spending is actually on our long-term growth prospects,” he said. “Those have to be funded through the cycle. You need a strong balance sheet to do that, and you have to stick to it.”
Hess said the company has long-term growth prospects that it will continue to fund through the down cycle, including expansion of the North Malay Basin project in Malaysia, the Stampede deepwater project and further exploration in the deepwater Gulf of Mexico and the Stabroek Block offshore Guyana where Hess and its partner Exxon encountered high-quality oil-bearing sandstone reservoirs last year.
Members of the panel agreed that the industry has been hit hard by the oil price environment which has resulted in financial challenges; debt markets are frozen and some smaller operators have gone out of business.
“A lot of money that companies were counting on to come from the debt markets to fund their deficits is no longer going to be there,” Hess told the audience. “People have cut their CapEx as much as they can, their OpEx as much as they can, their dividends as much as they can. They’re trying for asset sales, but there are not many buyers. What’s left is the debt market, but now that’s not there, so equities are being pressured, as well,” he said.
Hess added: “About three weeks ago we did an equity issuance of $1.6 billion to fortify our balance sheet. Our balance sheet was strong before. It’s even stronger now, so we can weather the storm, but also so we can have the cash and financial flexibility to fund those growth projects I talked about earlier.”
Leaders at CERAWeek agreed that down cycles in the industry have historically lasted three years and that the current cycle is about half complete.
Hess explained that to meet the world’s energy demand for oil, a lot more investment will be needed, and that it will come from multiple supply sources, from shale to deepwater to OPEC to heavy oil in Canada.
“The impact on investment has been devastating for the global oil and gas industry. The investment for the industry two years ago was $700 billion for oil and gas. Last year it was $550 billion for oil and gas, and this year it’s $400 billion,” he said.
“It’s a massive decrease, and when you think $2 out of every $3 is to hold production flat, obviously we’re below that watermark. We’ve been disproportionately hurt in the United States where the rig count has gone from 1900 to almost 500 today. This investment is going to have a supply impact that I think is going to be far reaching.
“That said, the seeds for a slow recovery are in place,” he said. “You ride out the storm and that is exactly what we’re doing now.”