May 2016

First oil

Slow improvement appears in offing for balance of 2016
Kurt Abraham / World Oil

Your humble editor’s contention, that the global E&P industry is finding a bottom to the oil price decline, may be gaining some traction, based on a recent conference. Last month, The International Research Center for Energy and Economic Development (ICEED) hosted its “Forty-Third International Energy Conference.” A gathering principally of energy economists, with some operator and service/supply executives, bankers and related analysts thrown in, this gathering has always been noteworthy for the internationally diverse attendance that it attracts beyond U.S. participants, including Canada, Mexico, the UK, Norway, Saudi Arabia, Venezuela and Japan, among others.

“Although we do have a wide variety of opinions represented here, I would say that the overall consensus coming out of this year’s conference is that we will begin to see very slow progress in oil price recovery,” said ICEED Director and conference co-chair Dorothea El Mallakh. “But how long this will take is anybody’s guess, and to what level price will recover remains to be seen.”

Lending support and additional detail to Dr. El Mallakh’s comments was World Oil’s own contributing editor, Dr. Anas Alhajji, who is chief economist at Dallas-based NGP Energy Capital Management. “To understand the current market, you have to remember that increased U.S. oil production from shale plays originally was a stabilizing influence on world prices, when we were having supply disruptions in 2011 and 2012,” noted Alhajji. “But as time went by, the resulting decline in U.S. imports of light crude split OPEC into two halves—those who lost market share, and those who did not.” Those who lost market share then felt obliged to increase output, even if it meant drastically lower prices.

Indeed, as mentioned by Ms. Amrita Sen, founding partner and chief economist at Energy Aspects, combined Saudi and Iraqi output is still up, year-on-year, about 500,000 bopd while Iran is slowly ramping up production. “But for how long can OPEC production stay up, as spending cuts bite,” mused Ms. Sen. “The financial pressures on OPEC members are rising rapidly, even for the few that have increased output.” Yet, the Saudi strategy appears to be working, as non-OPEC supplies “take on the baton” of rebalancing the crude market in 2016. With U.S. tight oil falling more rapidly, she predicts that 2016 will see the first U.S. crude output decline since 2008.

So, the facts seem to support a slow price recovery. Meanwhile, a couple of wildcard factors are at play. Drew Venker, a V.P. and lead analyst at Morgan Stanley, said that going forward, DUCs (drilled-but-uncompleted wells) represent a faster, more capital-efficient way to add production in the U.S., and that operators are likely to accelerate completion of DUCs, as prices ease up into the $45-$50/bbl range. “We estimate that a drawdown of discretionary DUCs would add about 230,000 bopd during year-one of a recovery,” noted Venker. He added that the DUC inventory in the five largest U.S. plays totaled 3,593 at the end of 2015, including 918 in the Eagle Ford shale, 848 in the Bakken, 725 in the Midland basin, 625 in the Delaware basin, and 477 in the Niobrara shale.

Last, but not least, another wildcard is the EU energy policy, as detailed by another of our long-time World Oil contributing editors, Øystein Noreng. Some years back, the EU bet on assumptions that hydrocarbons would become scarcer, that climate change would become increasingly serious and that decarbonization was the way to go, featuring renewable energy. But as Noreng told the conference, “By 2016, the EU energy wager does not appear as a success. Low world market oil and gas prices raise the cost of the EU energy strategy, impairing industrial competitiveness. The rest of the world does not take the climate issue equally as serious, and acts accordingly in energy policy.”

Noreng said that for economic reasons (too much low growth), a reassessment of energy policy will be a necessity for the EU. Hence, “reduced protection for renewables is likely to favor natural gas.” wo-box_blue.gif 

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Kurt Abraham
World Oil
Kurt Abraham
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