ConocoPhillips CEO Ryan Lance on US Shale Growth, Energy

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00:00How do you see U.S. shale evolving in terms of production, given the prices?

00:05Yeah, the current price deck, you have to do ask the question, what's going to be the sustained

00:09kind of price? And look, if the prices are going to remain in the 50s on a sustained basis for a

00:15period of time, U.S. shale is probably going to start to slowly decline. If it stays in the

00:2060s range, it's probably going to plateau a bit. If it goes back to the high 60s and the 70s,

00:25we're probably back on a growth trajectory for a couple of years. But shale is maturing. Those

00:32that don't have tier one acreage like our company does, we'll start to see some of that deteriorate

00:37and you see plateauing production probably later this decade in the U.S.

00:42Do you think U.S. shale production has peaked?

00:44No, I don't. When we look at our inventory, we've got decades of low-cost supply inventory that's

00:51pretty durable over the long haul. And there's a number of companies like our company that have

00:55that similar situation. So if we see prices recover back to a mid-cycle and above kind

01:00of price in the mid to high 60s or 70s, then I see you see some moderated growth coming back

01:05in the U.S. shale.

01:06I know on stage you told me it looked like this downturn actually in oil prices is different

01:11to what we saw in 2015 and 2020. What's so different about it?

01:15Well, I think it's the, what's different is we're seeing an expectation of demand falling off

01:22with some of the trade and geopolitical things that are going on today. So people are, some are

01:27talking about recession, some aren't. We don't believe a recession is coming, but we have seen

01:31global GDP back off a little bit. And there's a pretty tight correlation due to oil demand growth

01:37and global GDP. So there's an expectation out there that things are going to slow, which has caused the

01:42price to go down. That combined with extra supply coming from OPEX Plus has put some downward pressure

01:47on the price. So this one does feel a lot different than 2015 or 2020.

01:53I know tariffs and actually trade wars have settled somewhat, but what kind of impact

01:58have you seen on the industry longer term?

02:02You know, it's been just a smaller impact. For U.S. companies today, most of the impact is in steel

02:08and aluminum, which is about 15% of the well cost. But the overall deflation coming as a result of

02:14lower prices is overwhelming. The increased cost maybe that we're experiencing due to some of the

02:20turmoil on supply chains and tariffs today. So overall, the lower price is causing deflation.

02:27Rig rates are coming down. Frack spreads are coming down. Rigs are coming down. Yet there is a bit of

02:32stickiness sitting in sort of steel and aluminum. And it's those big high quality projects that are

02:37valves and things that aren't manufactured in the U.S. that we have to import from outside the U.S.

02:42Right. And how do you see the LNG market actually developing? You have huge also infrastructures here

02:47in Qatar. Yeah, I think it's going to be a remarkable. Our owner in-house view is a lot of

02:53growth in the LNG coming, probably one to two percent compound annual growth, a 400 million ton

02:58market growing to over 700 million tons over the next decade and beyond. The U.S. is blessed with a

03:04tremendous amount of gas resource. We can fulfill our domestic demand. We can keep prices low

03:09into an export channel in probably that $350 to $4 million BTU. So U.S. will probably set the floor

03:15for prices around the whole globe. And we're pretty bullish and constructive on what the LNG markets

03:21are going to be, not only from a security supply perspective, but really from a climate and from a

03:27reducing emissions lifecycle perspective as well. If you look at the oil prices, do you worry about

03:33capex actually in your industry that not enough will be invested in either renewables, but also

03:39just finding? Well, certainly at the lower commodity prices, the cash flow coming into our companies is

03:44less and you've got to reduce the capital. You want to keep your returns back going to the investors.

03:50That's important. This business, it is about return of capital and return on the capital that

03:55you're investing. So yes, lower cash flows result in lower commodity or lower capital that we can

04:01reinvest in the business. But again, we take a very long-term view of that. And the balance sheet

04:05in the industries are much, much better. So we have the ability as an industry and certainly as a company

04:11to withstand some of these cycles that we're going through and the one we're in today.

04:14As a company, where will you invest most and in what time frame?

04:17You know, we're pretty scattered around the whole globe. We're in 16 different countries around the

04:22world. North America, the unconventional get a lot. We have a large project up in Alaska that we're

04:27executing. We're trying to grow the LNG business both in the US, here in Qatar. So we're trying to

04:33grow and leg into an expanding LNG business. So we're all about low cost of supply, wherever it's at,

04:39gas, oil, US, or globally. So we're spending about, you know, 12 and a half billion dollars annually

04:45right now, trying to grow and develop the company over the long haul. So we take a very constructive

04:50view of what this business is going to look like. And we're leaning in to longer cycle investments

04:54today and investing in our shorter cycle shale investments as well.

04:58I mean, if you look at increasing LNG production in the US, what does it mean for countries like

05:03Australia and Qatar? Well, you know, I say it's, you might think we're competing, but we're really

05:09cooperating a lot because the natural market for the US LNG is primarily into the European

05:14markets. And then Qatar is equidiscally blessed. They can go to the Asian markets and the European

05:20markets. So they're supplying some of the Asian markets while the US is supplying the European

05:24markets. So really, it's about a partnership and working together. I think an amazing stat,

05:28you look over the next decade and beyond between the US and Qatar, we'll probably be supplying

05:3350 to 60% of the world's LNG needs going forward. Now, I hope Australia gets better. I mean,

05:39now we're talking in a place of all about export control sitting in Australia.

05:43So it's really an amazing sort of juxtaposition of what's happening today.

05:47You know, I hope Australia wakes up and does something different going forward as well.

05:52President Trump has been very clear that he wants, you know, lower oil prices,

05:56or at least at these levels. How much does it complicate it for a country like Qatar that

06:01has a link to LNG to oil prices, which, for example, US producers don't?

06:05Well, you know, it's interesting. You can link LNG to whatever you want to. You know,

06:08just basically, it's going to take a certain price to get a competitive rate of return

06:13on the infrastructure that you're building. Qatar likes to oil link their prices. In the US,

06:19it's typically linked off of Henry Hub plus some margin uplift. But at the end of the day,

06:23it almost doesn't matter because it takes a certain price to incentivize us to build this infrastructure,

06:29build the ships required to transport it, and then get a competitive return on those investments.

06:33So I don't see that as a lot of competition. And if you have lower prices, you need a higher

06:40slope in an oil-linked contract. Or in the US, you know, we need a certain margin to get

06:45incentivizing investments in the capital.

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