Syed Rashid Husain
OUTPUT cuts are taking hold. Compliance with output cut agreement has been healthy - till yet. Markets too are reacting positively. Yet, the brightening US shale prospects continue to dampen crude sentiments. As per reports, the US is expected to see capital investment recover more quickly than other countries that have long-term oil investment cycles. And this could be a fillip to the US domestic crude output, undercutting the efforts of OPEC and Russia, analysts are now underlining.
Compliance pouring in from various quarters remains in the positive zone. Following up on its commitment, Saudi Arabia has already cut its oil output to the lowest level in almost two years. Making the announcement, Energy Minister Khalid Al-Falih said Saudi output had fallen below 10 million barrels per day - more than it had promised - and that Riyadh planned even deeper cuts in February. This is impressive - to say the least.
And in the meantime, defying skepticism, OPEC wildcard Iraq is also slashing exports. Baghdad’s Energy Minister Abdul-Kareem Al-Luaibi said Thursday his country has slashed crude exports by 170,000 bpd and was cutting them further by 40,000 bpd this week. Though he pointed out that “Iraq should have been exempted” from the output cut, yet he underlined his country was endeavoring to ensure the success of the market balancing efforts.
Kuwait too has cut its oil exports by more than 133,000 bpd, Kuwaiti Oil Minister Essam Al-Marzouq said. Algeria, which pledged to trim production by 50,000 barrels a day, has also started cutting output. As per the Algerian Energy Minister Noureddine Boutarfa, his country will reduce its output in January by 60,000 bpd. In an interview in Abu Dhabi last week, he underlined Algeria may cut as much as 65,000 bpd.
Russia has also begun cutting oil production in line with OPEC agreement, Russian Energy Minister Alexander Novak told reporters in Moscow on Thursday. Novak, however, declined to estimate by how much January output would be cut. He rather insisted the number would depend on the weather.
The overall prognosis thus remains encouraging. Yet, analysts are also keeping a very close eye on the growing positive sentiments in the US crude industry. US shale producers are not a party to the output cut agreement and could undermine the producers’ strategy by raising output. Some continue to stay worried on this count.
Recovery in oil prices could help stimulate oil activity in shale plays in the United States, analysts are underlining. US shale oil production is expected to grow by around 300,000 bpd in 2017 to around 4 million bpd, energy consultancy Wood Mackenzie is now projecting.
Last week the EIA too reversed its forecast of a decline in domestic US crude output, for 2017 and beyond. The new projection estimates that the US domestic oil production is set to increase slightly this year to 9 million bpd - from the current 8.8 million bpd. The figure was down to 8.6 million bpd in September 2016. The output is projected to expand further by 3 percent the next year. “The upward revision largely reflects assumptions of higher drilling activity, drilling efficiency, and well-level productivity than assumed in previous forecasts,” says the short-term energy outlook of the Energy Information Administration.
The Permian shale basin in Texas may be the greatest benefactor from improved prices. Total oil production from Permian this year should average around 2 million barrels per day. If WTI holds around $50 per barrel at least, Platts estimates production could grow by at least 75,000 bpd. Early indications already show a big jump in the rig count in the Permian Basin compared to a year ago. Then the rig count was standing at 209. As per Baker Hughes, today the number is surpassing 267.
Investments in the sector are also bound to go up. Energy consultancy Wood Mackenzie in a report says investments in the US oil and gas sector is set to record considerable growth during the first quarter of the year. Total spending in the Lower 48 states, the report said, is expected to grow by 23 percent to $61 billion.
Spending on exploration and production should also grow by 3 percent to $450 billion, though Wood Mackenzie’s report said that’s still 40 percent lower than the level from 2014 when oil was selling for more than $100 per barrel. Wood Mackenzie’s report said that, so long as oil prices stay above $50 per barrel, investments in the United States alone could increase by as much as 25 percent. Wood Mackenzie report also points out that deepwater US basins, will “spring back to life” in 2017, though that sector may require more long-term investment commitments. As per the EIA, much of the growth in production for this year is from production in the Gulf of Mexico.
Contributing rather adversely to the overall market balance is the growing efficiency of the drillers too. One consequence of this trend has been the stunning rise in output from an average US oil well. Energy companies working in US shale have been more resilient to the low price of oil than expected. An estimated 50 billion barrels of oil also lies off Brazil’s coast, a volume that’s expected to put the Latin American country on par with some of the world’s top oil producers.
One measure of productivity is known as estimated ultimate recovery (EUR), or the total amount of hydrocarbon extracted from a single well. In 2016, the EUR of the average US horizontal shale oil well was 736,000 barrels of oil equivalent, more than double the volumes four years ago, Rystad reported. Average drilling times too have fallen from 29 days to 20 days since 2013 as rigs become faster, Rystad report is confirming.
Drilling economics too has been a priority for oil companies, trying to break even with lower oil prices. In core areas of the Permian and Eagle Ford basins of Texas, the amount of crude produced per foot of pipe in the ground has risen between 70-120 percent from 2012 to 2016, with further gains to come in 2017, a Wood Mackenzie report highlighted.
“Nowhere is the mantra ‹doing more with less’ more evident than onshore the United States,” Wood Mackenzie analyst Malcolm Dickson said in a statement. “There has been a dramatic increase in efficiency in the sector, exemplified by the drillers, who are managing to complete wells up to 30 percent quicker.”
Courtesy, the output restraint arrangement, markets continue to firm up. That’s a good omen. Yet, how long is this sustainable – remains a big if? When seen from a shale perspective, the sentiment remains questionable.
