Oil is setting up for a turbulent year.
By Haley Zaremba, Oil & Energy Insider:
In an industry that is always full of contradictions, 2018 has been a particularly complicated and divisive year for the global oil markets–and it looks like it won’t be letting up any time soon.
For months, the Organization of Petroleum Exporting Countries (OPEC) has been pushing for a dramatic decrease in production in the interest of bolstering prices at the pump. They’ve even managed to get major OPEC outsiders like Russia and the oil cartel to agree to production cuts. While the original deal is due to expire at the end of March, 2018, OPEC has just extended the production caps to the end of the year in an attempt to counterbalance the global glut of crude oil.
However, despite OPEC’s best efforts, some countries are not stemming the flow of crude, and some are even ramping up production and even opening new major oil fields. Nigeria, for example, is talking out of both sides of its mouth, promising compliance with OPEC in the same year that it has pushed its output to the highest level in more than two years and is set to start up production in a new large-scale oil field by the end of the year, their first in half a decade.
Now, another major issue has arisen. British Petroleum (BP), which has long expected their mature oil fields to naturally plateau and then decrease in production, has now announced that their legacy fields are increasing output, to the great surprise of experts in the field and BP executives alike. An astonished Bob Dudley, BP’s chief executive officer, told an interviewer at the CERAWeek by IHS Markit energy conference in Houston that he, “cannot remember ever in my career having seen a negative decline rate.”
This unprecedented increase from mature fields adds another problem to OPEC’s plan on top of the already major issue of the shale boom. And BP isn’t the only supermajor contributing to the problem. Shockingly high results from legacy fields have also been observed by mega-producers including Shell Plc and in areas like Norway, the North Sea, and Russia (all regions highlighted by the International Energy Agency (IEA) for their remarkable recent output) creating a major headache for Saudi Arabia, who was shouldering the major brunt of OPEC cutbacks, cutting a jaw-dropping 1.8 million barrels per day in a desperate attempt to recalibrate the market price of oil.
While BP has had the most dramatic turnaround by a wide margin, other companies have still reported some pretty impressive findings, creating quite an upset for OPEC’s master plan. While mature oil fields’ production did drop last year, it was the smallest drop in a decade of collected data at just 5.7 percent, according to figures from the IEA.
The slowing decline in these fields is a huge surprise in any scenario, but it’s made all the more confounding by the fact that the oil industry radically decreased spending during the pricing downturn of the last three years–a downturn that they were just finally coming out of. Since mature wells are usually a huge money pit in terms of maintenance, OPEC had been extremely hopeful and even dependent on the expectation that mature wells would decline significantly without major investment–especially since these legacy wells still account for more than half of the world’s oil production.
According to some supermajors, however, the economic downturn had exactly the opposite effect. As explained by Wael Sawan, the executive vice-president focused on deep water at Shell, thriftier times have called for a re-strategizing and getting back to basics. This means focusing on existing wells and mature oil fields instead of drilling and prospecting in a short-term effort to get more oil more cheaply and efficiently.
It’s all a response to the same issue — low oil prices — but with exactly the opposite approach from OPEC, setting oil up for a turbulent year as income-boosting strategies clash. OPEC is trying to keep its eye on the horizon, with long-term goals to increase global oil prices not just for this year, but going forward, but all of the production cuts are for naught if private companies continue to act in their own short-term best interest, increasing their income by putting more and more oil into an already saturated market. By Haley Zaremba, Oil & Energy Insider
The US natural gas production is on a roll. And this is just the beginning. Read… Momentous Shift in US Natural Gas, with Global Consequences
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Ever-decreasing returns on ever-increasing investments.
I’m incredulous that anyone thinks/believes OPEC would honor any of its own proposed production cuts. How many times have we been down this road?
Gone too are the days when the KSA, and its OPEC brethren, could increase/decrease production to affect oil prices at will. Now they are on the same production treadmill as every other oil producing nation or private company. Talk about a level playing field. The greater Equalization is yet to come.
The lower the oil prices, the faster companies/countries pump out their legacy fields attempting to boost profits with volume, (literally). The Industry is in a mess right now doing just that. Profits are paper thin and any price increase is met with production surges. The article states this so well.
regarding statement: “While mature oil fields’ production did drop last year, it was the smallest drop in a decade of collected data at just 5.7 percent, according to figures from the IEA.”
A 5.7 decline rate of existing elephant fields is staggering, as almost no new replacements of supply have been found beyond Shale, and unconventional substitutes such as Heavy Oil Sands ,Bio, and NG liquids. Every so often a large conventional oil discovery is announced, and then when the numbers are crunched one soon realises the new production touted = just 1-2 months of world supply requirements, doled out over the time needed for development and production of the field.
Apparently, the physical decline of oil fields is not exponential, nor does it really matter. Long before an existing field reaches 0 the economcs fail to work and production is abandoned. Think of a store that fails to stock shelves. There comes a point where a company saves money by closing the doors. A 5.7 decline rate is huge for conventional oil. A 70% decline over 3 years for a Shale well is a real hamster wheel exercise in surviving and finance.
My son works in the Oil Sands (Alberta) as an industrial electrician so I follow the industry as close as a layman can. It is very hard to see through both the Industry hype, and the doom and gloom of the naysayers ‘sky is falling’ crowd. All I know is that he has just been contracted for a new development project that is very lucrative and interesting. He works 2 weeks on and 2 weeks off and earns close to $200,000/year. He also receives transportation to and from Vancouver Island and housing is supplied. The demise of the Oil Age, and the Oil Sands in particular, is greatly exagerated. There are many substitutes for petroleum products, but for transportation needs that requires range, nothing beats gasoline or diesel. EVs are fine for short distances provided one can recharge at work or home overnight, but the loss of flexibility makes transit a real option to owning a private vehicle.
The article said two interesting things for me. One, “setting oil up for a turbulent year as income-boosting strategies clash.”
And this little gem…(cough cough),
“but going forward, but all of the production cuts are for naught if private companies continue to act in their own short-term best interest, increasing their income by putting more and more oil into an already saturated market.”
Okay folks, have any of you ever experienced a company, any company that did not act in their own best interests either short or long term? Plus the saturated market is only at 1 to 1.5% excess. If this was housing we would call it 0% vacancy. (of course it’s not, but…..)
The fact that oil around $60 US is considered marginal and something to hurry up and produce into shows just how shaky things are in this Industry. Companies that do not produce a profit, die. This goes for State owned enetrprises as well. Considering our entire way of life is virtually based on petroleum, these are very worrisome times, indeed.
“Considering our entire way of life is virtually based on petroleum, these are very worrisome times, indeed.”
In that case, perhaps it’s time to revisit the economic principle of substitution and to seriously reconsider the wisdom of basing your entire way of life on petroleum. Despite what you may have been taught, it really does not have to be. Mine certainly is not.
To this end, it would be very helpful to objectively analyze the drawbacks to dependence on fossil fuels which after all are vastly more substantial than mere financial considerations taken alone. Many people have not found this to be any kind of a challenge at all, much less a difficult one, but that will depend entirely on your choices.
In another century I am sure the change will be implemented already. It takes time for science to hit the next break through, and once it is found it takes time to change over a system supporting BILLIONS of people already. Robotics is the current wave of change, and I don’t see oil and gas being removed anytime soon. Battery packs for support systems is coming but renewables are going to be a step behind robotics and AI.
I don’t quite understand what you’re worried about? Canada has centuries of oil and gas in the ground – regardless, the transition toward renewable energy is accelerating. These are good problems to have. It’s rising economies like China and India that must worry about running out of oil.
Hopefully your son is saving a portion of his fat salary and investing it in a renewable future.
Good comment. I would add that most of what of left is residual oil. In Russia, in such giant on-shore fields as Samotlor, there is still some 60% left, which you can recover using the same methods as for shale development (i.e. fracking and horizontal well), but with much larger yields. The US oil services companies had started to move their equipment from the US into Siberia after they saw the first results of that drilling. Then the US government banned them from doing that… But this is true only for a handful of fields. I do not buy this “mature field revival” and the only reason for that has been what oil companies call “efficiency improvements”, such as less down time for maintenance at their oil platforms, meaning that they produce more within a certain time period, but it also means that they are deleting their residual reserves faster and that the production rates are likely to collapse much faster in the future.
And yes, 5% decline rate makes about 5 mbd of lost production that need to be recovered somewhere, not counting increases in demand. So far growing production in the US and Canada have been offset by declines in Venezuela, Mexico, Columbia and Equador.
But the more oil companies ramp up in shale , the more their operating costs (trucking, fuel, oil field services, water and sand, etc.) grow and their break-even point moves higher, but they would not know that until they report another loss.
Oil sands in Alberta is a despicable disaster – screw the money!
Any idea where on the EROEI curve these BP Oil fields would be?
Does it take two pennies to make a penny?
No it takes 97 Penny’s to be worth 3 Penny’s.
The declines in legacy fields are slowing for the moment, not reversing.
These decline rates are variable, just as likely to increase as decrease. The overall trend is exhaustion as once the oil is pumped, it is gone forever.
As always there is microscopic examination of the extraction side when the real problems are all on the consumption side: those being the absence of any real return on the ‘use’ (annihilation) of a non-renewable, irreplaceable resource, only vanishing ‘utility’ (entertainment).