ConocoPhillips’ Ryan Lance sees conflict in transition

US independent ConocoPhillips has emerged from the Covid-19-induced crude demand downturn as a major producer in the prolific Permian basin with a multi-step emissions reduction plan. Chief executive Ryan Lance spoke to Tom Fowler at the Argus Americas Crude Summit in Houston on 24 January. Highlights follow.

After two years of investors demanding greater financial discipline from the industry, what are you hearing now?

We actually espoused this back in 2015 and 2016, when we really recognised the volatility of this business and recognised the lack of returns on capital. Investors rightly put pressure on the rest of the E&Ps to follow suit because you cannot just spend 100-120pc of your cash flow in unlimited growth in a very mature industry.

Now you have gone through a pandemic to where you get demand starting to recover and supplies not keeping up, which has caused the prices that we see today. I think you are going to see some modest growth returning out of the US E&P sector because these kinds of prices are basically the market saying: "We need the oil from the US."

Are you concerned investors will push back if you start to produce more?

If they are not getting a return on their capital, they will. We have said we are going to give 30pc of our cash flow back to our investors off the top, and we are going to grow and develop our company on 70pc of our cash flow, no matter what the price of oil is. At these high prices you can afford to even give more back, but I think investors will be okay as long as the returns on capital are consistent.

There is room to grow, but I do not think we are going back to double-digit kind of growth. People have learned how hard that is in this business to go do that, but the market right now is calling for some modest growth from the US sector. The question is: can it get carried away? Because the private exploration and production companies are getting carried away. There is going to be some pretty significant growth from entry to exit this year, in the order of 800,000 b/d.

Will inflation be a significant problem in 2022-23, or will it be transitory?

It is going to be with us for a while until supply chains readjust and overall activity picks up. If you are a pure play Permian company, you are probably seeing double-digit inflation. We see it in our business, but we still see some deflation in parts of our business, like Asia and Alaska. So globally it is not a big deal for the company, but it is picking up and it is going to be with us for a while. We are a large, globally diversified company. We will invest our money in other places that are not experiencing this kind of inflation and we can move our capital around. So we are looking at this with a hyper-focus on returns. So if we start diluting our returns on our capital, then we will do something different.

How hard has the Biden administration been to work with?

To credit [US energy secretary Jennifer] Granholm, she did participate in a National Petroleum Council call to say that they are supportive of what the energy business is doing and that we need more supply. The problem is, at the same time they want the supply, they are attacking the industry from all fronts. So there is this conflict in terms of what they are saying and what they are doing. They want it all, and you are just not going to get it all. And that is what is upsetting about the energy transition message. It is not going to happen the way they are approaching it. It is not conducive to an organised, well-thought-out transition.

We have chosen a messy path, and it is because everything is done to attack just the supply side of the equation. That was my disappointment coming out of [UN climate summit] Cop 26, they were only talking about "How do we shut in oil and gas production? How do we take it out of the system?" But, if you take it out too fast, there is nothing just about a cliff transition. There was no comment about the demand side. How do you put a cost of carbon so consumers understand they are making choices and those choices have implications on the planet and where they get their energy?

But coming from the supply side, how do you convince them to take your concerns about addressing the demand side seriously?

I think we have to keep talking about it. We have to take care of those three issues the industry has of flaring, methane and orphan wells in order to talk credibly about it. But I also go back to every company and point out they need to have a plan on their Scope 1 and Scope 2 emissions to reach net-zero and be Paris compliant by 2050. It is not only our industry, but every company in the world needs to have that. And that is how we talk credibly about ‘what is yourplan?'

We have a very transparent, credible plan with near, medium and long-term targets and goals. And it goes to my compensation, it goes to every employee's compensation, our ability to meet those targets. So I think we need to keep talking about that. What are we doing? How are we going to get there? What progress are we making? [The language] needs to be consistent with how the scientists of the world are talking about it.

The Permian is getting more scrutiny for fugitive emissions and Texas regulators are considering moves to reduce a growing number of earthquakes tied to wastewater disposal. Are these of significant concern to your operations?

The industry knows this is a very solvable problem. You just slow down the injection of water into disposal wells to keep the pressure down. That is what we learned in Oklahoma, so, no, I do not think it is going to have a material impact. You are going to have to move water around to other places in Texas and avoid putting it into areas that have a little more seismicity, so it is a fixable problem.

Our industry has three problems — we have got to deal with flaring, methane and orphan wells. So we are taking that head-on. We supported the extra regulations coming out of the EPA [on flaring] because the industry is already doing that. And we have a goal to be compliant with the World Bank's methane initiative.

Occidental sees its legacy businesses giving it a route into carbon capture in a meaningful way. Does ConocoPhillips have any similar entry way?

We put what we call a low-carbon team in place a couple years ago looking at things that have adjacency to our skill. [Carbon capture and storage] is very adjacent to our skills, and we have said hydrogen is adjacent to our skill. And we are one of the largest owners of wetlands in the US, so we are interested in nature-based solutions as well, which we think can be cheap ways to mitigate carbon.

People naturally jump to ask, "Are you going to build wind turbines and solar farms?" No, we are not. Not that it is not a good thing, but we are not doing that. We have looked at it, and it is dilutive to our returns. Investors should not want us to do that. And there are other people that are willing to do that. God bless them, they need to do it, but it does not fit our company. But that should not put us on our rear foot at all. We are leaning in. You do not put your head in the sand on emissions created from the end use of your product, you try to help with these methods like CCS and hydrogen and others. We invented the LNG business back in the 1960s, and it looks a lot like how the hydrogen business could go.