From Financial Times

Conoco’s step back from Permian Basin is temporary, CEO says

Lance predicts short-term pipeline bottlenecks will not curb US oil production growth

ConocoPhillips chief executive Ryan Lance: ‘We’re not trying to chase the cycle up’

US oil production can “comfortably” continue its strong growth over the next few years, in spite of hold-ups caused by a shortage of pipeline capacity in Texas, the chief executive of the country’s largest exploration and production company has said.

Ryan Lance of ConocoPhillips attracted attention when he told a conference last month that Conoco was looking at redeploying resources out of the Permian Basin of Texas and New Mexico, the heart of the new US oil boom.

But talking to the Financial Times, Mr. Lance made clear that he saw it as only a temporary delay, caused by the fact that Conoco had been taken by surprise by how quickly the pipelines for taking oil out of the region had filled up.

The US could continue to add about 800,000-1.3m barrels a day of additional production each year, he said.

“Production has come on quicker in the Permian Basin, because the rigs were ramped up a lot faster than we would have thought maybe a year or a year and a half ago,” Mr. Lance said.

Conoco had expected pipeline constraints to hit Permian production about a year from now, but instead they are biting already, forcing oil in the region to sell at a steep discount to benchmark US crude. On Friday oil at Midland in west Texas, the heart of the Permian region, was selling at a discount of almost $12 a barrel below oil at the Cushing hub in Oklahoma.

Conoco does not have firm commitments for pipeline capacity to take its oil from the Permian to refineries or export terminals, and has had to book space on pipelines as available, or use trucks and possibly trains to carry its oil.

It is those challenges that have prompted the company to think about slowing down the rate at which it is drilling and completing wells in the Permian. “We have other opportunities to go spend our capital,” Mr. Lance said. “And I am not sure it makes sense to drill into that headwind.”

The decision is a complicated one, however, because Conoco also wants to keep working in the Permian to learn about how to operate there, so that “when we’re ready to go into full manufacturing mode, we’re there and we’re optimised”, Mr. Lance said.

If Conoco does redeploy resources, they would not go out of the US, but to other shale oil regions: the Eagle Ford formation of south Texas or the Bakken of North Dakota, where the company has transport facilities booked and can secure better prices for its production.

Activity in the Permian could be ramped back up again as new pipelines are built, adding about 1.5m-2m of new takeaway capacity by early 2020, some of which Conoco has booked for its expected production.

Despite the run-up of crude prices, the company is not planning to step up its capital spending. It is retaining its policy of approving new investments only if they can make money with oil at $50 a barrel, even though prices are now comfortably above that.

Benchmark Brent crude was over $79 a barrel at the end of last week. “To get into the capital allocation game in our company, you need a cost of supply that’s below $50 and probably closer to $40 a barrel,” Mr. Lance said.

“We’re not trying to chase the cycle up, so as prices go up dramatically you won’t see us adding a bunch of capital,” he said. “And equally on the downside, we’re not intending to have to chase the market down.”

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