HOUSTON—EOG Resources (NYSE: EOG) chairman and CEO William R. Thomas cleared the air a bit at a luncheon Feb. 10 at NAPE Summit, speaking about the U.S. role in global energy and the willingness of companies to, in essence, slash their own tires.

In short, the U.S. isn’t going to be the new swing producer. Deeper cuts in capex in 2016 may finally stop the oil output and save a few balance sheets. But rewarding production in an oversupplied market has been a large part of the problem.

Since the downturn began, EOG’s response has been to stop, drop and drill a lot less.

Thomas said going into 2015, EOG had been growing at a 40% compounded annual growth rate. In 2015, EOG set its sights lower: zero growth.

“We’re not going to grow oil into an oversupplied market,” Thomas recalled saying. “That made no sense to us at all.”

Thomas said it made even less sense to outspend cash flow in order to grow oil production.

“Why do you want to destroy your balance sheet and grow oil at low oil prices?”

Thomas also dismissed the notion that improving horizontal well efficiencies will keep the market oversupplied for longer. While lateral lengths had been a driver for production, he said the biggest improvements have run their course.

“Shale efficiencies are not the main driver,” he said.

Rather, what drives production now is the number of wells put to sale. “The U.S. will be either on growth mode or decline mode based on how many wells are completed,” he said.

Thomas said 2015 production didn’t fall as far as many thought in part because companies were unwilling to curb spending.

Until supply and demand equalize, pumping more oil will only hurt U.S. energy companies by continuing the glut of oil, Thomas said.

Even as commodity prices cratered through the end of 2015, the industry struggled to rein in production.

Thomas said the disappointing decline is tied to wages.

“Most everybody’s compensation factors are driven by reserve growth and production growth,” Thomas said. “You want to know why most of the industry outspent cash flow last year trying to grow production? That’s the way they’re paid.”

At EOG Resources, returns are the primary incentive for employees. That means reducing costs and getting more for less became the incentive.

Returns to Spender

If other E&Ps have gone on diets during the downturn, EOG has taken to fasting.

Internally, the company sees itself as much a technology company as an E&P.

“Like a lot of folks, we’ve benefitted off the service industry with tremendous cost reductions,” Thomas said.

But only one-third of EOG’s cost reductions were from service companies dropping rates. The other two-thirds were driven by technology and efficiency.

“We didn’t rely on the service industry,” he said. “We took it in house and we developed our own proprietary internal technology on how to complete wells, drill wells.”

The company has seen remarkable improvements through high density fracking, which clusters fractures within about 300 feet of the wellbore. In 2010, EOG’s fracking created about 540 events per 1,000 feet. In 2015, about 4,030 fracking events are created along the same distance.

The company is also hyper vigilant about cost: every nut and bolt, every process of the business is a potential place to slash costs.

Thomas said the company has also seen itself as growing organically. Though it executed some small bolt-on acquisitions in 2015, “we’ve never grown the company through acquisitions or mergers.”

Its vaunted position in the Eagle Ford, which stretches 120 miles across Texas, consists of 561,000 acres in the oil window.

“We paid $450 an acre for it,” Thomas said. “It’s some of the best rock in the Eagle Ford.”

The company has focused on maximizing its returns by drilling in its best plays: the Eagle Ford, Delaware Basin and Bakken.

But Thomas also told the crowd that companies should work together to swap out acreage to block up their positions.

“There’s a lot of things we can do to help each other get better,” he said.

Reset Button

The countdown starts at $60.

As oil begins to trend back up, Thomas sees that as the price to restart production growth—in the neighborhood of about 500 thousand barrels per day (MMbbl/d).

But it will take 12 months or more restore that production, he said. The biggest hold up will be the oilfield service industry.

“They’ve made a tremendous reduction in people so it’s going to take quite a while to get those people back in and get them back to the efficiencies we had before,” Thomas said.

“We don’t think it’s going to happen very quickly.”

EOG won’t be immediately ramping up production just because oil hits $60, at least not for a while. Thomas said the company will wait to make sure the market is in good shape, balanced and has a future.

“We don’t want to ramp it up and drive the price of oil back down again,” he said.

Frack Swing

EOG is one of the largest oil producers in the domestic oil industry. But as a whole, oil producers make up a massive global force.

And its momentum can make it roughly as nimble as an 18-wheeler in water.

The industry’s inability to turn production on and off on a dime makes it an unlikely successor to OPEC’s role as swing producer.

So far, the U.S. hasn’t reacted fast enough to thwart its own production.

“Some people think you can turn the U.S. off and on like a light switch,” he said. “That’s not going to happen.”

But Thomas said that the world will need U.S. horizontal oil growth, which has become a major source of new oil supplies.

Future oil demand will be supplied by the Arab Gulf states and the U.S., which is more expensive to produce but has seen marginal costs fall to $70-$80 per barrel.

“Conventional discoveries worldwide are few and far between,” Thomas said. “It’s difficult to find conventional sources of oil except in ultra deep water or some country you don’t want to be in.”

The future of the oil and gas business will be far more discriminatory going ahead at lower prices, Thomas said.

“Everybody can’t quite succeed at the same level,” he said. “At $95 oil it’s pretty easy. Everybody can do it and make money. At $30 oil almost nobody can.’

Very few operators can muster a 10% IRR at $40 oil, he said.

In the end, what still matters is the rock.

“Rock is the dominant factor in all productivity of these wells,” he said. “It’s highly variable in each play and each sweet spot.”

Each play has a small sweet spot, especially compared to the gas plays.

“So you better know geology, you better know your rocks and you better know your geochemistry when you start working with oil because it’s very, very picky,” Thomas said.

Darren Barbee can be reached at dbarbee@hartenergy.com.