Flooding the market has quickly emptied the kingdom’s checkbook
In case you missed the past three years, on Thanksgiving Day 2014, OPEC announced it would not cut oil production in the name of gaining customers and growing market share for its members (widely interpreted as Saudi Arabia).
That announcement set off a two + year global commodities price downturn that sent oil from triple digits all the way down to $26 and fostered two years of pain and indigestion in the shale beds of North America that companies are just now getting past.
In early 2014, hundreds of companies were drilling at full speed in U.S. shale plays. Some of the wells were eating up $8,000,000-$10,000,000 each for horizontal drilling and completions, but at $100 per barrel oil prices, there was plenty of revenue coming back out of the ground. Until Thanksgiving Day 2014 when that revenue went on a path that would cut it in half and more. Drillers slammed on the brakes in 2015 and the shale boom took a break.
The low oil prices combined with highly leveraged oil company balance sheets generated a rash of E&P bankruptcies and launched a two-year wave of acreage consolidations. It also spurred new horizontal drilling and completion technologies that would allow drillers to get more oil and natural gas from their deposits—oftentimes 25 percent or more. As the companies learned how to drill better, faster and smarter, wells that once took 30-45 days to drill and complete were being drilled in two weeks or even one week. Pad drilling took off. Completion formulas evolved to a high level, making it possible for companies to produce more oil and gas from the same rock.
It’s fair to say that E&Ps working in many formations found a way to be profitable drilling and producing hydrocarbons with oil at half the price it once was. In the latest round of reporting—Q1 2017—a lot of shale drillers reported a profit.
But not the Saudis.
OPEC pays the price: Saudi decision slashed OPEC revenue from $1.3 trillion in 2012 to $433 billion in 2016
The EIA released its estimates of OPEC’s net oil export revenues, outlining the price the group paid for its “flood the market” strategy. Related: Is This The Beginning Of The End For Gasoline In Asia’s Largest Markets?
According to the EIA’s estimates, OPEC made $433.4 billion in revenues from oil exports in 2016. While this is significant revenue, it represents a significant drop from pre-downturn revenues.
From $1.3 trillion to $433 billion: ouch
As a whole, OPEC’s revenue peaked in 2012, when the group made $1.13 trillion in revenue. Revenue declined slightly in 2013 and 2014, as oil prices dropped somewhat. The group’s decision not to cut production in late 2014 sharply decreased oil prices, and revenues suffered. OPEC’s $433.4 billion in 2016 is a mere 46 percent of its 2014 revenue, and only 38 percent of the peak 2012 revenue.
(Click to enlarge)
Source: EnerCom Analytics
Libya’s revenue way down: from $42 billion in 2010 to $2.3 billion in 2016
Libya was particularly hard-hit, as continued unrest combined with low oil prices pushed national revenue to unprecedented lows. According to the EIA, Libya received only $3.2 billion and $2.3 billion in 2015 and 2016, respectively. These are the lowest export revenues since at least 1994 (the earliest year for which the EIA has estimates). For reference, in 2010, before the Arab Spring and overthrow of Gaddafi, Libya received $42.6 billion in oil export revenue.
(Click to enlarge)
Source: EnerCom Analytics
15 percent of Aramco needed to make up for Saudi Arabia’s downturn losses
It is widely assumed that one of the main motivations for Saudi Aramco’s IPO is to raise money for the kingdom, which has seen revenues decline like all other OPEC countries. The kingdom is seeking to sell 5 percent of Aramco, for a total price of $100 billion, according to analysts.
An IPO at that scale would not immediately erase the lost revenue due to the downturn which the Saudi leadership self-inflicted.
In 2014, Saudi Arabia received $297 billion in export revenue, which is below the record $352.9 billion in 2012, but still the 5th-best year since 1994. In 2015 and 2016, by contrast, Saudi Arabia made $157.3 billion and $133 billion, only $290.3 billion combined.
Compared to 2014 revenues, the kingdom has lost $303.7 billion over the past two years. $100 billion in IPO proceeds at the 5 percent scale wouldn’t make much of a dent in refilling Saudi coffers.
In fact, if the $2 trillion valuation of Saudi Aramco is correct, Saudi Arabia would need to sell about 15 percent of Aramco to replace its lost revenues.
Saudi Arabia may have other problems as well. Founder of Petrie Partners Tom Petrie told EnerCom “The giant Ghawar Field is probably now in irreversible decline. There are four or five other large fields, but not like Ghawar. The other fields are maybe 15 percent of the size of Ghawar, and that’s what they have to overcome.” First production from Ghawar was in 1951, so declining production at this point would not be unexpected.
At $50 oil, OPEC revenues recover slightly
It’s not all bad news for OPEC, however. The recovery of oil prices from 2016 bottoms has allowed revenues to begin to recover. The EIA believes that Brent will average $53/bbl in 2017 and $57/bbl in 2018, which will boost oil revenues. These assumptions lead the EIA to predict OPEC earnings in 2017 and 2018 of $538.8 billion and $595.3 billion. While nowhere near the pre-downturn highs, these revenues would at least exceed 2015 and 2016 levels.
Saudi Arabia, Russia support cuts through March 2018
Saudi Arabia and Russia, the largest producers to agree to cuts last year, have both expressed their support for extension of the production cuts. Ministers from each country announced on Monday that the production cuts currently in place should be extended through March 2018, giving markets another nine months of reduced production. This would provide further opportunity for oil markets to rebalance, as inventories have not decreased as quickly as expected. Related: Iraq Agrees With Deal Extension, But Boosts Oil Exports To Record Levels
OPEC will meet on May 24th and 25th to discuss the idea of extending lower production levels.
Meanwhile, U.S. shale producers are boosting output.
Many companies saw first quarter production exceed pervious guidance, and typically predict further growth. Devon Energy’s first quarter production, for example, exceeded guidance by 5 MBOPD, and predicts full-year production growth of 13 percent to 17 percent. WPX expects to grow total year production by about 20 percent, while EOG has targeted 18 percent growth. Some companies are seeking even more growth, like PDC Energy, which expects 42 percent yearly growth, and Sanchez Energy, which is seeking 50 percent growth.
Saudi Arabia may attempt its own unconventional development, according to Petrie. “The deputy crown prince, with the charge from the king, has communicated ‘don’t fight [unconventional development]. Find a way to embrace it.’
“Back in 2011 and 2012, the Saudis said ‘if breaking up source rock is the issue, let’s go do it. We’ve got plenty of source rock, many times thicker than what the Americans have,’ and so they thought they would see flowrates that were many times larger as well. What they found though was that you drilled much more expensive wells because of the thickness, but when you break up the source rock, if you don’t have the right brittleness, it’s not going to work.”
“I have to believe, in an oil province as prolific as Saudi Arabia, you can find rocks with the right kind of brittleness, but they haven’t so far. Making unconventionals work will be a priority, though. If they can make it work, shale development in Saudi Arabia could be somewhat successful, although, it’s not clear to me that it will be as successful, proportionately, as it has been in North America, especially the U.S.”
If the Saudis succeed in making unconventionals work, the oil dynamic could shift from U.S. unconventionals vs. OPEC conventional to unconventional vs. unconventional. It remains to be seen who would win in such a contest, but American shale producers have already shown a resiliency and innovative spirit that will serve them well in the future.
By Oil and Gas 360
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