HOUSTON – Oil prices will tumble to US$40 a barrel if Organisation of Petroleum Exporting Countries (Opec) doesn’t extend its pact later this year to cut output, according to one of the most prominent producers in the shale patch.
US shale drillers are keeping an eye on the second half of the year to see if Opec and non-Opec members extend their agreement, which lasts through June, to reduce production by 1.8 million barrels a day, Scott Sheffield, chairman of Irving-based Pioneer Natural Resources Co, said in an interview at the CERAWeek industry conference held by IHS Markit in Houston.
“If Opec does not extend, we will see US$40 oil,” Sheffield said. “That will have a major impact on future investments in the US shale business.”
The Permian Basin of West Texas and New Mexico, which emerged as the hottest region for drilling during the 2½-year downturn, would see a major curtailment of rigs at US$40 a barrel, while other shale plays in the US would become uneconomic, he said.
If all went well, though, production at the field would surge to a range of 8 to 10 million barrels a day over the next decade, from 2.3 million now, he said.
Vicki Hollub, chief executive officer of Occidental Petroleum Corp, said later in the day that she saw output from the Permian eventually growing to about 4 to 5 million barrels a day.
As of the end of February, both Iraq and Angola are lagging behind the cuts they pledged in November, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data. Angola had reached 78% of its target, and Iraq was at 58%.
Both members signalled a willingness on Tuesday to extend the group’s production curbs into the second half of the year as the global rally in prices shows signs of stalling.
Asked if Opec should extend its agreement on output cuts beyond the first half of this year, Iraq Oil Minister Jabbar Al-Luaibi said in an interview, “It’s likely we need to.”
Angola supported prolonging the deal as long as necessary, Isabel dos Santos, chairman of state-run oil company Sonangol, said in a separate interview at the conference.
After just the second day of presentations at CERAWeek, Sheffield said he’s seeing a profound thawing in the relations between Opec and shale producers.
“I’m seeing a series of meetings where Opec is reaching out and spending more time with US independents than I’ve seen over my entire career,” Sheffield said.
“I think the new thought process within Opec is that there are other places around the world that can supply crude around the world, and they want to definitely have an understanding of how fast it can come on.”
Sheffield dined on Sunday night with the head of Opec and 20 or so other US shale executives, including John Hess of Hess Corp, Doug Lawler of Chesapeake Energy Corp and Tim Leach of Concho Resources Inc, according to people who attended the event and asked not to be named because it was private.
Sheffield said he couldn’t discuss what was said over dinner.
“They’re trying to understand our business model,” Sheffield said of Opec officials.
“I think they’re trying to understand more about our ability to produce, what the cost structure is and what’s going to happen over the next several years.”
In return, shale producers are talking with Opec to learn about the members’ thought process towards the price of oil over the next several years, what supplies the different members have themselves, and whether inventories are falling, he said.
“It helps us plan long term,” Sheffield said.
While Opec hasn’t told him directly, Sheffield said his impression is that Opec would like to see oil stabilise between US$50 and US$60, with a preference toward the higher end.
“They’d like to see it in the out years go to US$50 to US$55, like it has been,” Sheffield said.
Sheffield said he hadn’t expected supply and demand in the global oil market to rebalance until next year. Only full compliance on production cuts from Opec and non-Opec members might speed that up to the middle of this year, he said.
That hasn’t happened yet: Although 90% of Opec’s 1.2 million barrels a day of agreed-upon cuts have been accomplished, another 600,000 barrels a day of reductions promised from non-Opec producers are at 50% compliance, he said.
“The rest of the non-Opec countries have to get onboard, especially Russia.”