“We just don’t have that potential to grow U.S. production ever again,” Sheffield told CNBC’s Brian Sullivan on Tuesday at CERAWeek.
To be clear, this doesn’t mean no production growth. Many oil companies have outlined production increases as part of spending plans this year, though oil companies are now in an era of greater fiscal discipline, not shy about signaling they will favor shareholder rewards like stock buybacks over higher production levels. Sheffield expects growth to top out at a level that was already reached pre-pandemic.
“We may get back to 13 million barrels a day,” he said, which would match the record high average recorded in November 2019 by the U.S. Energy Information Administration. But he added it will be at a “very slow pace,” taking two and half to three years to match that previous record level.
For consumers, that means gas prices are more likely to stay within the current range, and pricing risk be tilted to the upside later this year.
According to the EIA, an average of 11.9 million barrels of U.S. crude oil were produced per day in 2022, below the record in 2019 of an average of 12.3 million barrels per day. The EIA is forecasting a new record for this year, but barely higher, at an average of 12.4 million barrels per day.
“We don’t have the refining capacity … if we all add more rigs, service costs will go up another 20%-30%, it takes away free cash flow,” Sheffield said. “And secondly, the industry just doesn’t have the inventory.”
The price of a barrel of oil has fluctuated between $75 and $80 this year, well off the $100+ prices seen this time last year. While the level of economic slowdown in the U.S. will be a significant factor as the Fed continues to signal its commitment to higher rates, Sheffield said he sees these current prices as “the bottom,” citing the demand boom expected alongside the reopening of China.
“The question is when do we break out? I predict sometime this summer to break fast $80, on the way to $90,” he said.
Occidental CEO Vicki Hollub told Sullivan at CERAWeek that the $75-$80 range for oil prices is a “sustainable price scenario for the industry to continue to be healthy.”
“I think gas prices at the pump are not so bad at this price, so I think it’s optimal,” she said.
The EIA forecast for gas prices is an average $3.57/gallon this year, down from the $3.97/gallon seen in 2022.
The White House has pushed oil companies to use their record profits to ramp up production instead of on buybacks or increasing dividends.
“My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends. Not now. Not while a war is raging,” President Joe Biden said at a press conference in October. “You should be using these record-breaking profits to increase production and refining.”
During his State of the Union address in February, Biden noted that “Big Oil just reported record profits…last year, they made $200 billion in the midst of a global energy crisis.”
Biden said U.S. oil majors invested “too little of that profit” to ramp up domestic production to help keep gas prices down. “Instead, they used those record profits to buy back their own stock, rewarding their CEOs and shareholders.”
Occidental, which was the No. 1-performing stock in the S&P 500 in 2022, completed $3 billion in share repurposes last year. In 2023, the company has already authorized a new $3 billion share repurpose authorization and a 38% increase to its dividend.
While Hollub told CNBC’s Sullivan on Monday at CERAWeek that the company does have the ability to produce more oil — it is forecasting 12% production growth this year — “We have a value proposition that includes an active buyback program and also a growing dividend and we always want to make sure we max out our return on capital employed.”
“So, we are very careful with how we structure our capital program on an annual basis to make sure we still have sufficient cash to buy back shares,” Hollub said.
She cited the lack of new oil capacity, which is still near the same level as it was pre-pandemic, and the contraction in the refining sector. “We’re still limited,” she said.
While the industry can balance the supply issues by importing more of the heavy crude handled by U.S. refiners and exporting more of its own light crude, and existing refiners can add capacity, Hollub said it’s not likely that many new refining complexes will be built.
Chevron CEO Mike Wirth told S&P Global vice chairman Daniel Yergin during an on-stage interview at CERAWeek that he has concerns about the exogenous events that can lead to an abrupt supply-demand imbalance in a world which has created new limits on the flow of oil to markets, including the ban on Russia oil in the EU and U.S.
“What concerns me is we have introduced new rigidities into these systems,” Wirth said. “Normally, it’s one big just-in-time delivery machine and demand grows slowly and production grows slowly,” he said. “There’s not a lot of swing capacity or inventory capacity. … The market is tight and the logistics system has been stretched in ways it normally isn’t.”
Hess CEO John Hess said on Tuesday at CERAWeek that “biggest challenge is investment and having policies that encourage that investment.”
“Energy has a supply chain, and the energy industry has a structural deficit in investment,” Hess said. “We have higher interest rates, we have tighter financial markets; all of this makes the mountain steeper.”