The last barrel

After more than a year of drastically lower oil prices, it should now be obvious that the current market downturn is just as severe as that of 1986. To those analysts and economists, who have tried to insist, through one dodgy set of calculations or another, that somehow the market conditions are different and, thus, this downturn is not as bad, I say, “sit down and shut up; the evidence has proven you wrong.” And let us not forget that the central character in both downturns remains Saudi Arabia.

In their Dec. 4 meeting, OPEC ministers opted to maintain the status quo on their collective oil production, as they made no decision to rein in output and go back to their last official quota of 30.0 MMbpd. On the other hand, neither did they vote to officially hike their quota to the actual, effective rate of production, which has averaged around 31.5 MMbopd over a number of months. Nevertheless, it means that the global market will continue to be oversupplied with crude, at about 1.5 MMbpd, or even greater, as stored Iranian oil, post-sanctions, hits the market. And that means that oil prices will now be stuck in the $40s/bbl range, or lower, for some time to come.

Meanwhile, the carnage among U.S. and Canadian operators, as well as Western European firms, continues. Hardly a day goes by without word of another personnel reduction, or a rumor of a potential merger between companies. Quite frankly, the OPEC attitude, led by Saudi Arabia, now goes beyond the market share preservation argument and takes on the feeling of economic warfare, aimed directly at the U.S., Canada, Russia, Norway, Brazil and Mexico, among others.

Looking back at 1986, the difference between annual, average U.S. output that year, and what it was in 1985, showed a net loss of 291,000 bopd. By 1990, the net U.S. production loss had ballooned to 1.62 MMbopd. Yet, the current loss, when comparing the April 2015 high of 9.585 MMbopd with the most recent month (October 2015) at 9.153 MMbopd (API number), is already greater than in 1986 at 432,000 bopd. So, how much is enough for the Saudis this time?

The good news is that U.S., Canadian and European operators, and service/supply firms, are beginning to realize that the market downturn may last for at least another year, and that they are going to have to adapt to new conditions. Accordingly, we are beginning to see some creative thought about how companies should run themselves today, and how costs can be contained. More importantly, we may be on the front edge of a wave of technical research and eventual breakthroughs, as companies look to technology to help lower cost structures.

The record has shown that it was no accident that the late 1980s were a period of some significant technical breakthroughs. Indeed, the annual commentaries by World Oil’s editorial advisors on pages 35 through 47 are filled with discussions of new practices and technical innovation, and we encourage you to read through them. They serve as a welcome, positive antidote to the hostile, destructive behavior of some OPEC members.

Obama’s final-year, anti-oil-and-gas agenda. Leave it to the Obama White House to once again release controversial news on the day before a major holiday, when officials think no one is paying attention. On Nov. 20, six days before the U.S. Thanksgiving holiday, the administration unveiled its semi-annual regulatory agenda, and there are plenty of hits that the oil and gas industry would take, if every proposed rule became law—mind you, these are items that supposedly do not require congressional action or approval.

This is not the first time that Obama has conducted a “holiday regulatory dump,” said James Gattuso, senior research fellow at the Heritage Foundation. In a Nov. 29 commentary, Gattuso noted that Obama’s list of politically timed, rulemaking agenda releases includes six other times in the past three years before either Memorial Day, the 4th of July, Thanksgiving or Christmas. A look at the agenda shows why the White House didn’t want it publicized,” explained Gattuso. “More than 2,000 regulations are being written (or proposed). Of these, 144 are deemed ‘economically significant’—that is, expected to cost Americans $100 million or more, each.”

An inspection of Obama’s agenda found that the Department of the Interior (DOI) has initiated more than 10% of all proposed rules, for a total of 224. Of these, just over 10% (23) apply directly to oil and gas. Another 85 rules are proposed listings of animals or plants as endangered species.

Not surprisingly, the EPA has proposed 115 new rules, or roughly 5% of the total agenda. Of these, six rules are directed targeted toward oil and gas, and they are major in scope. Due to unclear wording of other rule titles, it’s hard to tell how many more of EPA’s rules would affect oil and gas in a more minor fashion. Curiously, only about three of 86 rules proposed by the Department of Energy (DOE) would affect oil and gas directly.

A source of inspiration. Finally, all of us can draw a little hope and inspiration in these tough times from the unexpected Nov. 22 win by legendary Australian pro golfer Peter Senior, in the Australian Masters tournament, at the age of 56. In claiming his third Australian Masters title, 20 years after he won his second, Senior became the oldest player, ever, to win that tournament. Although he claimed to have “surprised” himself, Senior used a mixture of clever shot-making and cagey putting to pick up the two-shot victory. This editor would like to think that Senior’s gritty determination and innovation on the golf course, at an advanced age, can serve as a metaphor for the upstream industry to pursue its own technical innovation and operational creativity, in spite of many years of mature, built-up practices.

About the Authors

Kurt Abraham

World Oil

Kurt Abraham kurt.abraham@worldoil.com