Saudi Arabia's Oil Minister Ali al-Naimi told struggling U.S. oilmen on Tuesday to either cut costs, borrow money, or exit the industry.
The world’s most powerful oilman brought a harsh message to Houston for executives hoping for a rescue from low prices: high-cost producers -- many of them sitting in the room -- need to either “lower costs, borrow cash or liquidate." For the thousands of executives attending the IHS CERAWeek conference, the message from Saudi Arabia oil minister Ali al-Naimi means deeper spending cuts, laying off more roughnecks and idling drilling rigs. "It sounds harsh, and unfortunately it is, but it is the most efficient way to rebalance markets," Naimi told the audience in Houston on Tuesday. As many as 74 North American producers face significant difficulties in sustaining debt, according to credit rating firm Moody’s Investors Service. Shale explorers from Texas to North Dakota will be “decimated” in coming months amid a wave of restructurings and bankruptcies, said Mark Papa, the former EOG Resources Inc. chief executive officer who helped create the shale industry more than a decade ago. The survivors will be more conservative, Papa, who is now a partner at private-equity firm Riverstone Holdings LLC, said during a panel discussion on Tuesday.
Saudi oil minister Ali Ibrahim Al-Naimi said Tuesday producers will hopefully meet in March to negotiate an output freeze, but production cuts will not happen. Last week, Saudi Arabia, Russia, Qatar and Venezuela proposed a freeze that would cap production at January levels. Russian Energy Minister Alexander Novak said Saturday the deal, which is contingent on other producers participating, should be finalized by March 1, Reuters reported. "Freeze is the beginning of a process, and that means if we can get all the major producers to agree not to add additional balance, then this high inventory we have now will probably decline in due time. It's going to take time," Naimi said. "It is not like cutting production. That is not going to happen because not many countries are going to deliver even if they say they will cut production — they will not deliver. So there is no sense in wasting our time seeking production cuts," he added. There is now less trust than normal among the world's oil exporters, he said.
"The next six to 12 months is going to be a decimation … bodies all over the place," Mark Papa, former chief executive of Houston oil company EOG Resources said at the CERAWeek conference, a gathering of thousands of world energy leaders. Beyond Houston, the oil minister's remarks reverberated across the markets, causing domestic crude prices to plunge 4.5 percent on Tuesday and Wall Street worries that the industry will be a drag on the global economy. Meanwhile, energy executives, stung by the minister's tough words, say they are preparing for the worst. Ryan Lance, chief executive of No. 3 U.S. oil producer ConocoPhillips, said his company is girding itself for a turbulent year. Over the past year, the company has cut 3,200 jobs, slashed billions in spending and reduced its shareholder dividend 81 percent. "We at ConocoPhillips are planning on the worst case," Lance said.