In a wide-ranging interview with Petroleum Intelligence Weekly (PIW), Exxon Mobil Chairman and Chief Executive Rex Tillerson discussed the current oil industry downturn, highlighting some aspects that are similar to past downward cycles as well as pointing out one critical difference that is likely to delay recovery and make it much less predictable -- namely the easy access to capital in today's global financial environment. In addition, he described what he believes Opec is trying to accomplish, which he sees as consistent with its traditional market management role -- not an abandonment of that role. Among other topics, he also discussed the important and enduring role he sees North American shale and tight oil production playing in the global petroleum industry.
While the current oil price downturn looks in many respects like a rerun of the 1980s, it does have one wholly unprecedented and highly unpredictable feature -- relatively easy access to finance and financial instruments, which simply hasn't been available to the industry before. That easier financing is delaying the recovery and making it hard to determine when it will come, Exxon Mobil Chairman and CEO Rex Tillerson told PIW in the interview. Along with the stubborn supply overhang, this is one of the main reasons Exxon expects oil prices to stay lower for longer, and is planning its investments accordingly, he says. Tillerson explained his view as follows:
"The only new element that I see this time around that wasn't there in the previous cycle is the availability of financing. The low cost of money, large amounts of private equity money is easily raised because it doesn't cost anything at these low interest rates. And that is what you saw in the first pop-up earlier this year, a lot of the conventional players that were in pretty bad shape suddenly got an infusion. They were either able to raise some money from banks, or they were able to raise it through private equity markets, or they were able to issue shares. It stunned me. I think it's because we are part of this general environment in the global equity markets and investment climate of very low cost financing, so you can take a lot of risk, and that is what people are doing. There is a lot of cash looking for some place to go, and people say, 'Look at this. It is down 50%. It's got to be a good investment and the money is only costing me 2%-3%. Throw it in there.' That's the piece that [is] going to cause this to take a little while to get played out. When do people get burned enough that they say, 'I've had it'?"
While other observers have made this same point about the impact of easy money in the current cycle, including here in World Energy Opinion, the importance of it is further underscored coming from Tillerson (WEO Jul.16'15).
Regarding Opec, Tillerson does not believe that the organization, and Saudi Arabia in particular, has given up its oil market management role; rather, it has recognized the magnitude of the challenge created by current market conditions. He explains this point as follows:
"I don't think Opec has surrendered at all. I think they have recognized what they are dealing with. Their alternatives were to do what they have traditionally done when we have gone through these cycles, and that is manage their production to sustain a price band. They, too, rightly judged how out of balance this thing was and concluded that wasn't going to get them anywhere other than to really have to curtail their production. So, I think what they are doing is classic price discovery. It is largely the Saudis that have decided they need to undertake this. It is the future of the kingdom -- how they are going to manage their resources, what level of capacity do they need to maintain, and [whether] they have to continue to invest to maintain capacity that they cannot produce. This is something that that a lot of folks overlook. And I remind folks that when prices went out of whack, got up to the $140 per barrel range, the Saudis, [Oil Minister] Ali Naimi in particular, recognized that was not good. The world looked at spare capacity and it was gone, evaporated. The Saudis had on everything they could produce, so, the king authorized them to develop two million barrels per day of capacity with the intent of shutting it in. I tell policymakers in Washington, who bash these guys all the time, you don't understand, these are the best friends you've got. No other nation in the world would invest billions and billions of dollars to develop 2 million b/d of oil producing capacity to shut it in. They had to demonstrate to the markets that spare capacity had been restored. Otherwise they can't play that role. Now they've invested all that money, they've got all that spare capacity, and now they are asking themselves: boy, did we make a big mistake? All this North American stuff came on and they have to understand what the pricing structure is today in order to make decisions about how much spare capacity, if any, they need to manage in the future in order to continue to play their role. So, I don't think they have changed their view about what role they need to play and what role they want to play. It is rather: how do they play it? And that is not obvious to any of us. It is going to be very informative to all of us to understand the price discovery process. Just where are the marginal barrels and how elastic are they? A lot of people thought it gets to $60 and everything would become obvious. I never held that view. I commented early on that I thought people would be pretty surprised at just how resilient this thing is, which is what I told the Opec meeting when I spoke to them in June. I said, you need to be ready for this to take a while. I think the fact that we have gone through several of these price convulsions this year, shouldn't be a surprise to anyone."
Regarding the importance of North American shale and tight oil, Tillerson sees its impact as substantial and ongoing even at current oil prices. He describes it as follows:
"... the resource base has been well established. It is there, there's no question it's there, and we understand what it takes to develop it. People will continue to get the unit cost of that development down. It will compete. Will all of it compete at all pricing? No. A significant portion of it is competitive, even at today's pricing. We have a lot of resource holdings here in the unconventional in the US and they are profitable at today's prices ... not all of it is created equal, even within plays. There's higher quality portions of the Bakken, the Permian -- all of these. There are large, large resources in place that will compete. The unevenness of how all this emerges is more of a cash flow issue than it is the quality of the investment opportunity. People are just going to have their cash flows out of whack for a while until it irons out. But it's here, it's proven, it's reliable."
Tom Wallin is editor-in-chief at Energy Intelligence.