World needs oil, gas for another 20-30 years, and the time to invest is now: Hess CEO

The world is enthusing about the Energy Transition, but it will still need oil and gas for another 20 to 30 years and the time to start acting upon demand is now since actually getting production onstream could take years to bring to fruition, Hess CEO John Hess said June 2.

As countries open up after the coronavirus pandemic, a number of forces are combining to tighten oil supplies, Hess said in webcast remarks at the Bernstein Strategic Decisions conference in New York.

"Two years ago in April global inventories were about a billion, 200 million barrels above pre-COVID levels; now they're 400 million barrels below pre-COVID levels," he said. "People are flying more -- we're down 10% from pre-COVID levels; it was down 20% a year ago. More people are driving, and China's lockdowns are opening up."

On top of that, Russia's invasion of Ukraine in February knocked about 1 million b/d off the market, and the European Union says it will ban probably another 2 million to 3 million b/d by year-end, Hess said.

"The world needs the oil, and I think more people should accelerate" activity, he said. "If they want to add rigs, they should [do it] now. Rigs are really tight, and either people or equipment aren't ready to go to work" and require time to get everything and everyone in place.

Supply is having a hard time keeping up with demand. World demand is now about 98 million b/d, and "we think by year-end it will be 101 million b/d," Hess said.

While upstream operators have raised their capital budgets by low-double digit percentages in 2022 year on year, much of the increment will go to cover inflation which was thought to be about 10%-15% this year but may end up being more like 20% or even more. E&P operators, particularly large-caps, appear content to keep their capital budgets at near-maintenance level, increasing oil and gas output in the low single-digit percentages year on year.

Copious free cash flows

This strategy, coupled with the relative high price of oil starting around, second-half 2021 has yielded generous cash flows which have allowed producers to reward shareholders by giving copious amounts of their free cash to investors. Hess, for example, has targeted 75% of its free cash flows to shareholders each year.

The company now has the wherewithal to do that given its pared-down portfolio of Bakken Shale and targeted US Gulf of Mexico production in the US, growing development in Guyana with two producing offshore projects, and offshore gas production in the North Malay Basin.

Guyana, for example, has more than 11 billion boe of recoverable resources, and Hess is partnered with China's CNOOC and ExxonMobil, which operates the Stabroek block in that country where partners have announced 26 discoveries since May 2015.

The trio continue to explore on the block and believe more multibillion barrels of resource are likely to be found.

There were three oil cargo liftings in Guyana in first-quarter 2022, each a million barrels each. Seven liftings are slated for Q2, and eight liftings each in Q3 and Q4. Guyana oil receives Brent pricing, said John Hess. ICE Brent fetches a little more than WTI; it settled at more than $118/b June 2.

The Guyana producing developments have each taken about three years to develop. The three partners have two more Guyana Stabroek developments under construction and are working on a fifth, which John Hess said could be sanctioned by year-end 2022 and a sixth by the end of 2023.

Newbuild US Gulf hubs take years

That contrasts with greenfield construction in the US Gulf of Mexico, for example, which involves building a producing hub and takes about five years, he said.

Hess Corp. recently said it would bring a fourth rig later this year into the Bakken Shale, but that won't yield production this year but rather in 2023.

"Really, from the time you make an investment decision to first oil, it's 12 months," John Hess said. "They call it [shale oil and gas development] short-cycle, but it's not."

"We took the decision to add a fourth rig [to the Bakken] in March," he added.

Moreover, inflation represents a big unknown amid a booming oil and gas sector, Hess said. For example, a Bakken well cost $5.8 million last year; it currently is running at $6.2 million, up 7%, he said.

"I'm very worried that we will have a harder landing as we look forward, simply because we have to get inflation under control," Hess said. "The only way to do that is to raise interest rates high enough to slow things down. And we probably overshot the runway in getting the economy back on its feet. Now I think we're going to have to take ourselves off the adrenaline rush the world's having, and that could make the landing a little bit harder."