OPEC’s refusal to curb oil production in response to the collapse in world crude prices is an attempt to find the most economic price for oil, not an attack on U.S. shale drillers, Exxon Mobil CEO Rex Tillerson said.
OPEC is engaged in “a classic price discovery exercise” after the revolution in shale oil production turned global crude markets topsy-turvy, Tillerson said Tuesday in a speech at the industry’s annual IHS CERAWeek conference in Houston.
The 10-month, 48 percent cascade in U.S. oil prices has crushed stock prices, eroded drilling budgets and cost tens of thousands of workers their jobs.
“I don’t take the view that they are in any way trying to threaten other suppliers,” Tillerson said. “I think they’re really kind of on a classic price discovery exercise, which is important for all of us as investors to know.”
West Texas Intermediate crude, the U.S. benchmark, dropped $1.12, or 2 percent, to settle at $55.26 a barrel on the New York Mercantile Exchange. It has averaged about $49 a barrel this year, down 47 percent from last year and an annual average not seen since Tillerson took the helm at Exxon in 2006.
“My expectation is this is going to be with us for a while,” he said. “We’ll have some false signals. We’ll have some false responses, where we get a little bump this way or that. But I do think people need to settle down for us to be in a different price environment for at least the next couple of years and then we’ll see how things respond.”
Although painful to endure, the market correction will be good for the industry in the long run as the lower oil price strips out excessive costs and forces producers to operate more efficiently, Tillerson said.
His pessimistic outlook for crude prices was echoed by Patrick Pouyanne, CEO of Total S.A., Europe’s third-largest oil company. Pouyanne, the successor to Christophe de Margerie, who died in a plane crash in Moscow in October, also sees chances to correct sloppy spending habits in the industry.
Tillerson, who oversees Fort Worth-based XTO Energy, the largest U.S. shale operator, also said crude output from shale fields may not abate, even as explorers slash spending, dismantle drilling rigs and scale back expansion plans. A similar slump in natural gas prices five years ago that failed to slow supply growth may hold a lesson for the energy industry, he said.
“Understanding how the resource really behaves in a reduced level of investment is something I think we will all learn in this downturn,” Tillerson said. “Clearly a significant decline in rig activity did not diminish the continued growth of natural gas capacity even in a very difficult price environment. Is that analagous to the tight oil? I think that’s what we’re all going to learn.”