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Which Oil Majors Are Most Exposed To The OPEC Deal?

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Analyses of the OPEC deal have now extended to how Big Oil would be affected (in theory) by the agreement that has yet to materialize (if ever).

OPEC agreed last week to cut collective production to 32.5 million bpd, making it contingent on non-OPEC producers reducing another 600,000 bpd in total output.

The oil price rally lasted less than a week as analysts and investors shook off the deal-induced euphoria and started assessing how plausible and possible potential cuts would be, given OPEC’s poor track record of sticking to pledges, most recent output figures which were near record highs, and expected natural and seasonal declines in production in non-OPEC nations.

According to data by Rystad Energy AS quoted by Bloomberg, in terms of highest exposure to OPEC, Russia and Oman production, BP, Total SA, Royal Dutch Shell, ExxonMobil, Eni SpA, and Chevron Corp take the top slots.

BP produces around 1.6 million barrels per day in OPEC nations, as well as in Russia and Oman—the nations who have pledged to cut. Total produces 670,000 bpd in those areas, Shell produces 586,000 bpd, Exxon 563,000 bpd, Eni 497,000 bpd, and Chevron 194,000 bpd.

How much Big Oil would really have to ‘sacrifice’ should the cuts materialize is questionable. It’s likely that there may not be production losses at all, or cuts so small they would be negligible compared to the majors’ daily outputs across the world.

In BP’s case, there could be some production lost, given the high exposure to operations in non-OPEC Russia and OPEC’s Iraq and Angola. Russia accounts for half of BP’s potential exposure, Rystad has estimated.

That said, Russia is the one country where BP would likely lose nothing as a result of the production cuts.

BP holds a 19.75-percent stake in Rosneft, and according to the UK group’s 2015 annual report, BP’s share of production of its equity-accounted entity Rosneft was 809,000 bpd last year. Related: The OPEC Effect? U.S. Rig Count Spikes Most In 31 Months

Still, Russia has so far pledged to cut 300,000 bpd gradually in the first half of 2017. Gradually is not outright cutting production by 300,000 bpd as of January 1, 2017. Russian oil companies discussed output cuts on Wednesday with energy minister Alexander Novak, and everyone was on board, Novak spokeswoman Olga Golant said, as quoted by Reuters.

But the details of how Russia’s production would be reduced have not been announced, and according to Vagit Alekperov, CEO at Lukoil – Russia’s second-largest oil producer after Rosneft – the energy ministry had not yet set recommended quotas for companies.

The earmarked 300,000 bpd that Russia has pledged to cut is a bit of a misnomer; Russia is repackaging routine seasonal decline and reducing output from 30-year-record-highs and passing it off as a cut—a grand and generous contribution to the 600,000-bpd non-OPEC cut that OPEC is asking for.

Russia’s output in November was 11.21 million bpd, the highest in a post-Soviet era month, and 500,000 bpd higher than August output. So Russia, while stoking the markets in the past two months with hints that it would first freeze at current levels and now that it would cut, has been bumping up production so it can maintain comfortably high volumes of crude oil (at higher oil prices) while showing OPEC on paper that it is cutting production.

According to Lukoil’s vice president Leonid Fedun, Russia traditionally suspends production by 150,000 barrels in the spring due to seasonal repairs. This seasonal cut equates to half of the gradual cut that Russia has promised to make in the first half of 2017. Related: Saudi Arabia Cuts Oil Deliveries To U.S.

As such, Rosneft and BP are unlikely to feel the sting of production cuts.

The majors are also exposed in Iraq, which, after having threatened to go rogue and demanding an exemption, agreed to cut 210,000 bpd, the highest figure for a pledged cut other than the cartel’s de facto leader and largest producer Saudi Arabia.

BP’s net crude production in Iraq stood at 123,000 bpd in 2015, the oil major’s annual report shows. According to Rystad’s vice-president for analysis Espen Erlingsen, BP’s production this year would be 457,000 bpd, based on the UK group’s shareholding in projects in Iraq. The BP-operated Rumaila field is a likely candidate for cuts, Erlingsen said.

A big question here is, could Iraq really afford to cut that much from possible revenues at higher prices when it is fighting a costly war against Islamic State?

The OPEC nation that has committed to the third-highest nominal figure of cuts, the UAE with 139,000 bpd on the chopping block, is a market in which France’s Total produces 240,000 bpd. The French giant is also pumping 288,000 bpd in Angola, Rystad figures show. Angola, for its part, is committing to reduce supply by 78,000 bpd.

Total would see its production in OPEC countries shrink by 2-3 percent if OPEC cut around 700,000 bpd, Total’s CEO Patrick Pouyanne had said before the deal was announced.

It is likely that the majors already have a contingency plan to account for the OPEC deal, regardless of how it plays out.

By Tsvetana Paraskova for Oilprice.com

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