so lets have a overview on it.
the downturns are happening quicker. This downturn is what I call a double black swan. We had a price war between Saudi and Russia coupled with COVID-19 pandemic. And this downturn is different, we’ve never seen a loss of 20 million barrels a day plus in the demand side of the market.
So all the previous downturns, we had some loss in demand, demand eventually came back fairly quickly, but that’s the big question in this environment is,
how fast will demand come back? And then we had the president of the US get involved for the first time, in fact he called up Mohammed bin Salman, the the Crown Prince in Saudi Arabia and he called up Putin and got them to strike a deal after their falling out on March, 6th in Vienna.
And so we’ve seen oilprices recover quickly, but not to what I call a,it stabilized the market, at least we’re not seeing minus $37, which we did the last week of April. We’re back up into 36 to $40 range. It’s not gonna create a lot of activity, but it definitely hasstabilized the market.
At least people will survive. I don’t think there’llbe as many bankruptcies, when you see 35 to $40 oil, but we’re not gonna seea lot of new activity, whether it’s drilling. But the big unknown question .we can discuss later is demand,
how fast will demand come back? Most people have demand back up to about 90 millionbarrels a day in a market of about 100 million barrels a day, so we’re back to 90. The big unknown factor is, how are people gonna changetheir lives with COVID-19? Are more companies gonnaallow their employees to work from home and drive less? Also, what’s going to happento the airline industry? They use 8 million barrels a day, the world’s 100 million barrels a day.
And how fast are we gonna feel safe in flying back as countriesopen up over time? – Scott, thank you for that. Now relative to you and Bruce, I have much less experience in the industry and slightly less gray hair, but after the last downturn, what I noticed is thatthe industry responded with a sharp focus on driving operational productivity and driving out costs. This led to a leaner, meaner, more globally competitiveUS oil and gas industry. Do you believe that there’s further running room with this trend of improving operational productivity?
And if so, what do you think needs to continue or change relative to the workforce and thetechnology that the industry uses to improve this? – Yes, John, that’s a great question. As we know, in late 14 Ali Naimi, the Saudi Arabian oil ministerin Saudi Arabia decided to flood the market in late 14 and he wanted to stop shale oil, he wanted to stopexploration around the world, he wanted to stop oilsands in Canada growth. the thing he did not stopwas the oil shale growth. And so the independence alongwith a couple of majors, began doing things differently.
we moved to what we calla slick water design in most of the frack areaswhere there’s the Bakken or the Permian or the Niobraraplay or the Eagleford. We also started going outto 10,000 foot laterals, up to 12,000 foot laterals versus 5,000. We started changing to what they call a plug and perf design. So there’s some things thatwe learned how to adopt to a $60 oil price market. So before we were in an 80to 100 dollar price market, so we learned how to makemoney in a $60 price.
Now we’re in a $40 oil price market. So the question is what’s left? Now, it’s already understood that the type curvesalready have peaked out. We are not making better wells in regard to the oil production in all the various shell basins. So I think people arestarting to drill closer and closer, too close on their spacing. And so that’s one issue.
We’re not seeing improvement in the type curve, but we are seeing stillimprovements in drilling and completion technology.
For instance, we averaged, lastyear drilling a 20,000 foot, 10,000 feet down, 10,000 foot horizontal, in roughly about 20 to 21 days, we’re now down to 16 days. We’ve drilled our last five wells in less than 10 days, 20,000 foot. And so, we’re setting goals, we’re putting up each ofthe drilling contractors. We have a competition going, we’ve got better communication, we’re using geosteering. We have our geologists workingwith the drilling engineers. So all of that, I stillsee significant improvement on the drilling and completion technology, which means we’re gonna spend less capital to get the same amountof production over time.
So I’m optimistic, we’re inthe sixth inning in my opinion, in regard to those things efficiencies. – You mentioned this before, but the industry’s gonethrough painful processes of consolidation, restructuring, renewal, after all these downturns.
What might the world look like this time? The upstream sector,downstream, midstream, and even the service sector? – In the past down cycles, I think the one where wehad the most consolidation was in 98 to about 2001. We had, essentially half of the major oil companies disappear. Our company that we both started with Amoco disappeared, ARCO disappeared, Mobile disappeared, Texaco disappeared. And so we’d gone through other downturns and so we got this double black swan. The issue with the consolidation, the biggest issue is the fact that, there was too muchleverage in the industry.
So the industry got blindsided with this double black swan. And so even though oilhas come back to $40, but when you look at the ratios, the debt to cashflowratios of most independents and the majors are theirhighest they’ve ever been. And so it’s hard to consolidate, with a company that hasa worse balance sheet. So that’s why we haven’t seen much. The second issue we’ve dealt with is from the investor issue. The equity markets wereopen in 2014, 15, 16, 17, the equity markets for theindependents have been closed, 18, 19, are closed now.
And so the investors do notwant any oil and gas company to go to the equity markets. They’ve changed their model, so it’s gonna take time. And so when oil prices do come back, I think the independents aregonna try to reduce leverage.
I think most people needto combine themselves, they need to consolidatebecause what’s really changed, the S&P 500 weighting of energywas 30% in the early 80s, 10 years ago, it was 15%, today, it’s down to three to 3.5%. And in fact, at the bottom of the market, just a few weeks ago, it wasdown to 2.5% of the S&P 500. So, Exxon just 10 years ago was the world’s largestmarket cap company, today, I’m not even surethey’re in the top 20. So things have changed andwe gotta change our mindset.
There will be consolidationin the service sector, that’s happening already, I think that will definitely happen. Consolidation needs to happen, but it’s gonna take timefor it to happen Bruce. – Scott, maybe pulling onthat thread a little bit more around the competition for capital, as you mentioned over the last few years, investors have seemingly lost favor with oil and gas industry. Additionally, we’ve seen large amounts of capital flowing intofunds and companies seen as having an advantage or less risk related toenvironmental, societal, and governance issues.
For you, what do you believeneeds the industry needs to do to regain favor with investorsand retain that favor? And then additionally, what does the next generation of competitive, differentiatedoil and gas company look like and behave like? – about 18 months several large investors had meetings with several CEOs in the industry.
They wanted to change the model. Stop focusing on production growth. We all know we added 8million barrels a day, in the US, it all came from shale. And we went from 5 million barrels a day to 13 million million barrels a day, we peaked in February of this year. And so we added, we competed with OPEC, we competed with OPECplus including Russia, and that’s what’s causedsome of the downturns in 14 in this year is the growth of US shale.
The investors want us to focuson a free cashflow model. They want to have verylittle growth in companies. And in fact, if you look atwho owns energy stocks today, there’s nobody in the growth sector owns energy stocks anymore, there’s nobody in the growthmutual funds that want to own energy stocks. It’s the value, it’s thedividend funds that want to buy, they’re the current ownersof all of our stocks that are public. And so the focus is on free cash flow.
So I see the industry resetting growth from the days of 10, 15, 20, 25% per year, down to something like about 5% per year. They want a good basedividend around the average of the S&P 500, maybe 2%. And then eventually the big question is, and I’ve been discussing with investors, whether to create a variable dividend? A variable dividend reason is ’cause our commodityprice fluctuate so much. It’s hard for us to increase our base. So the majors kept increasingtheir base over time. And now you’ve gotExxon at a 7% yield now. And so your base gets up too high, the independents can’t do that.
So we’re discussingcreating a variable dividend so when oil gets backto 60 or $70 someday, we’ll take that excesscashflow for that given year and take away our base dividend, which we pay out on a quarterly basis. And then we’ll pay that excess cash flow as a variable dividend. And I think that’s gonnabe the future model. Secondly, we have to cleanup and be great stewards of the environment. So ESG, there’s been a bigmoment on ESG around the world and looking at fossil fuels. We know what’s happenedto the coal industry.
So, I’ve been a big advocate in regard to, reducing flaring in the Permian basin. As we all know the Bakkenand the Permian basin are two of the biggest flares, in US shale activity, primarily due to lack of gas pipelines. We have to do a better job of planning, getting gas pipelines connected, getting processing plants built, but we can’t sit there and have a big black eye inregard to a flaring intensity.
So I’ve been an advocate toreduce flaring significantly in all of our shale plays, because that’s gonna affect whether or not investors will come backinto buying these stocks at some point in time. –
We’ve talked a lot about oil, let’s talk about natural gas for a minute. Is there a differentoutlook for natural gas in your opinion? – Yes, I still thinknatural gas is gonna be a, it has a better growthstory longterm in the world, and probably still a little bit in the US. We still use about 20% ofour electricity from coal. I predict that number will continue to go down substantially, natural gas will probably, should capture half of that, alternative energy we’llcapture the other half. And so we still have thatpotential in this country. It is a cleaner fuel, in the US, it’s a cleaner fuel worldwide. And so the adoption ofnatural gas worldwide still has a bright future. That leads to LNG demand. We’re gonna have tocontinue to export LNG. We have the ability today to export up to nine to 10 BCF a day.