Oil prices saw a modest bump following exchanges between OPEC and U.S. shale producers at the annual CERAWeek Conference.
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- The IEA warned that the oil industry was not investing enough in new supply, a problem that could become clear in the 2020s.
- Spending on conventional oil fields jumped by 57 percent in 2017 to $112 billion, targeting 11 billion barrels of oil.
- But the figures are a small fraction of the pre-2014 investment levels, and could create problems beginning in the early 2020s.
Market Movers
• Chevron (NYSE: CVX) is looking to sell its stake in a Canadian LNG project. Petronas, which scrapped its own $36 billion LNG project on Canada’s Pacific Coast last year, could purchase Chevron’s stake.
• Ecopetrol (NYSE: EC) said it would look for assets to buy this year after bouncing back from deep budget cuts. The Colombian oil company said it plans on bidding on auctions in the U.S. and Latin America after posting a $2.2 billion net profit in 2017, the best results in four years.
• Plains All American Pipeline (NYSE: PAA) warned that U.S. steel tariffs would hamper pipeline construction. "We need some flexibility to be able to move forward," Plains CEO Greg Armstrong told the CERAWeek energy conference in Houston. "If you can't get what you need, you've got to go somewhere else. It's a thornier issue than I think is printed in the headlines."
Tuesday March 6, 2018
Oil prices rose on Monday and in early trading on Tuesday on news that Libya’s largest oil field was temporarily idled, as well as news that U.S. crude inventories may have posted a surprise decline last week.
OPEC appeals to shale producers in Houston. OPEC officials, along with energy executives and oil analysts, gathered in Houston on Monday for the annual CERAWeek Conference. On Monday, several OPEC officials downplayed what is often billed as a rivalry with U.S. shale. OPEC Secretary-General Mohammed Barkindo said there is a “common understanding” between the two sides and that “we all belong to this industry.” OPEC officials had dinner with top shale executives on Monday in an effort to increase dialogue. However, Nigeria’s oil minister was a little less diplomatic than Barkindo, arguing that shale companies need to share the burden with OPEC. “We need to begin to look at companies that are very active in these areas and begin to get them to take some responsibilities in terms of stability of oil prices,” Nigerian Oil Minister Emmanuel Ibe Kachikwu told Reuters.
Related: Shell Takes Major Steps Toward Energy Diversification
IEA: Shale to dominate; supply shortage in 2020s. The IEA published its annual Oil 2018 report on Monday, which detailed two broad conclusions: U.S. shale would dominate the supply picture for the next few years, leaving little room for OPEC to boost production. However, by the 2020s, the dearth of upstream investment over the past few years will finally start to bite, and with little spare capacity, the oil market could suffer from a supply crunch.
Oil storage signals decline. Genscape Inc. reported a drop in inventories at Cushing, OK last week, with storage levels already at the lowest level in four years. The bullish report stands in sharp contrast to expectations of a new wave of shale supply. “The trend in global inventories shows that the market is fundamentally under-supplied and that emphatically remains the case,” Pavel Molchanov, an energy research analyst at Raymond James, told Bloomberg. Still, overall crude inventories are expected to have increased last week.
Libya oil field restarts. Oil prices jumped on Monday because of the outage of Libya’s largest oil field, the Sharara. However, by Monday, output resumed at the 340,000-bpd field. Libya has been producing about 1.0 to 1.1 million barrels per day recently, before the outage, although a separate field was shuttered last week, temporarily knocking 90,000 bpd offline.
Jeffries: Oil M&A to fall. Jeffries analysts say that financial discipline in the oil patch could lead to another decline in M&A activity this year. In 2017, the industry only closed on $74 billion worth of deals, a drop of 23 percent from 2016. Jeffries sees that figure falling further in 2018 as shareholders pressure shale companies to focus on profits. Jeffries says that 8 out of 10 deals outside North America failed in the past two years. “Investors are really saying to these companies, ‘Hey you guys have been buying assets and accumulating acreage and stuff for the last decade; where are the returns?”’ Ralph Eads, chairman of energy investment banking at Jefferies Group LLC, told Bloomberg.
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Former shale executive warns of industry hype. Former CEO of EOG Resources (NYSE: EOG) was expected to tell the CERAWeek Conference in Houston that the heady shale production forecasts that predict massive gains in output could be overstated. Mark Papa, who now heads up the small shale driller Centennial Resource Development Inc. (NASDAQ: CDEV), says the shale industry will bump up against some limits, preventing it from realizing aggressive production forecasts. “The oil market is in a state of misdirection now,” Papa told the WSJ. “Someone needs to speak out.” Papa says the best drilling locations in the Bakken and Eagle Ford are already developed, and that supply chain constraints – labor, frac sand, etc. – will also slow development. “I have a minority opinion right now, but within the next year or two, I feel pretty strongly that it’s going to be proven out,” he said.
Total SA CEO: We don’t need shale. Total SA’s (NYSE: TOT) CEO Patrick Pouyanne said his company will focus on five core areas: Africa, the Middle East, the North Sea, deepwater and LNG. The list notably excludes shale. “Total today is the most profitable major company without any shale,” Pouyanne said on Bloomberg TV. “I prefer to play into my strengths.” Total has outperformed other oil majors, showing financial strength while others have lagged.
Related: China Is Single-Handedly Solving The Gas Glut
Vaca Muerta output to jump this year. Argentina’s state-owned YPF says that it expects its oil and gas production in the vast Vaca Muerta shale to rise by 35 percent this year, which the company’s CFO Daniel Gonzalez attributes to declining costs. Gonzalez says that costs have declined by half since 2015, from $3,050 per lateral foot to just $1,390 in the fourth quarter of 2017.
Eni/Shell corruption trial in Milan delayed. An Italian court delayed the start of the trial for executives at Royal Dutch Shell (NYSE: RDS.A) and Eni (NYSE: E) for alleged corruption in Nigeria until May. The trial had been scheduled to start on Monday. The case revolves around the alleged bribe paid by the oil companies to Nigerian officials to win concessions.
Exxon/Repsol eye Greek oil and gas. A consortium that includes ExxonMobil (NYSE: XOM), Total (NYSE: TOT) and Hellenic Petroleum (FRA: HLPN) expressed interest in two oil and gas blocks off the coast of Crete, according to Reuters. Repsol (BME: REP) and Hellenic submitted interest for another block.
By Tom Kool for Oilprice.com
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OPEC is wrong to appeal to US shale oil producers on production. It should leave them to dig themselves deeper in debts. Shale producers will continue to produce irrespective of costs so as to pay old outstanding debts and get new funds. In a way, they are like robbing Peter to pay Paul.
The International Energy Agency's (IEA) Oil 2018 Report has no credibility. It tries to project objectivity and farsightedness but unfortunately it fails in both accounts.
The global oil demand is projected to rise between 7.5-7.9 million barrels a day (mbd) between 2018 and 2023. US shale could provide something like 2.0 mbd or 25%-27% to global supply during that period, Iraq could add 2 mbd and other OPEC members including Kuwait, Saudi Arabia and Venezuela some 2.5 mbd totalling 6.5 mbd. From this total we have to deduct an annual natural depletion rate in global oil production estimated by the IEA at 5% or 4.8 mbd. So the net addition to global oil supplies by 2023 could be estimated at 1.7 mbd thus leaving a deficit of 5.8-6.2 mbd.
Norway, Brazil and Canada will struggle to maintain current production with all Brazil’s production going towards satisfying domestic demand.
OPEC and Russia will not maintain the cuts for ever. Once the global oil market has rebalanced completely during this year, they will establish a mechanism beyond 2018 which works as a barometer. The mechanism will trigger proportionate production cuts if the inventories start to build or raise production if there are signs of tightening in the market. So OPEC can’t lose.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London