The Oil Supply Outlook in the New Oil Price Environment: The Long and Short Term Investment Cycles

Transcription

1 The Oil Supply Outlook in the New Oil Price Environment: The Long and Short Term Investment Cycles Bassam Fattouh Oxford Institute for Energy Studies OIES OIL DAY, ST CATHERINE'S, OXFORD, NOVEMBER

2 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Oil Demand Strong But Not Enough To Absorb Supplies Coming to Market Global Oil Demand, y/y change, kb/d EIA Estimates of Stockbuilds, mb/d Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 Q2 Q3 Q4 Following a period of low growth, oil demand has been stronger than initial expectations driven in part by cheaper oil prices Since 214, the oil market has been adding stocks every month with the EIA expecting this to continue well in Source: Energy Aspects, EIA, Reuters

3 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Rig Count in Some Countries Declined Sharply US Rig Count, Billion US$ Iraq Rig Count, Billion US$ The decline in the rig count in the US has been sharp as US shale producers cut capex and shift strategy from growth maximization to operating within one s means So has the decline in Iraq rig count as government faces financing pressures

4 But Supply is Inelastic in the Short Term and Response Yet to Follow Key Areas of Growth in non-opec, y/y mb/d.7.6 Key Areas of Growth in OPEC, y/y mb/d US Canada Brazil Russia In 215, the US remained the main source of non-opec supply growth but the areas of supply growth has become more varied (US shale, Canada Oil sand, Brazil deep offshore, Russia conventional) with very different investment cycles and business models.1 Saudi Arabia Iraq UAE Angola OPEC has been the major source of global supply growth in 215 with Iraq and Saudi Arabia leading the growth

5 Very Different Profiles of Production and Decline Rates Bakken vs. pre-salt well count (no of wells) rather than years. Second, the life of a shale oil well tends to be far shorter than that for a conventio well: its decline rate is far steeper. Figure 3 compares production data taken from a typical US sh well, in this case in the Bakken in North Dakota, with that from a Deepwater well in the Gulf of Mex (GOM). Daily production from the shale well declined by around 75% in its first year of production really steep rate of decline. The corresponding rate of decline for the GOM well was far slower. Figure 3 Sample Well Production Profile Sample well production profile Kboe/d Gulf of Mexico* Bakken Shale (right axis) Kboe/d Source: Wood Mackenzie *Subsalt Miocene Years. Bakken and pre-salt Brazil achieved similar production growth but the investment profile and the number of wells to achieve that growth fundamentally different These two characteristics short production lags and high decline rates mean there is a far clo So are the decline rates which are much more correspondence between investment and production of shale oil. Investment decisions imp prominent in the shale wells production far more quickly. And production levels fall off far more quickly unless investmen

6 The development part of the process has a more rigid timeline, but the lead times between final investment decision and first production for most types of resources span several years at least (Figure 4.11). This e tim span is unlikely to contract much The Investment Cycle is Different further; technology and streamlined sanctioning processes can reduce the amount of time required, but these have to be set against the generally increasing level of field complexity. Average lead times between final investment decision and first production for Figure different 4.11 oil resource Average types lead times between a finl investment decision and first production for different oil resource types Years Qatar Iran Saudi Algeria Nigeria Arabia Venezuela Norway Brazil Russia Canada 1 China Iraq United States Conventional onshore Tight oil Offshore shallow water Offshore deepwater Reserves developed (billion barrels) Extra-heavy oil and bitumen Notes: Analysis includes the top-twenty crude oil producers in 214. Bubble size indicates the quantity of reserves developed from 2 to 214. The average lead times for Iraq are brought down by three large rehabilitation projects in legacy The fields, investment each of which cycle was for reported US shale with is a one fraction year between of that investment of conventional approval fields and the start of production. This is not a representative finding for greenfield developments in Iraq.

7 The Bigger Picture US shale still constitutes a small percentage of total global oil supplies and what happens to the rest of the supply chain also matters

8 Key Questions for the Oil Day Set of questions 1 Which parts of non-opec supply are the most resilient to the current price environment? Will the sources of supply growth in 215 manage to grow again in? What are some of the implications of more varied non-opec supply sources on oil market dynamics? Are decline rates expected to accelerate in the current price environment? Has the decline in the oil price killed the prospects for new frontiers? Set of questions 2 Which parts of the OPEC supply are the least resilient to the current price environment? Will the sources of supply growth in 215 manage to grow again in or will new sources of supply emerge (i.e. Iran)? Will OPEC change its output policy or is OPEC helpless in this environment? More Fundamental questions Has the nature of the investment cycle in the oil sector changed? Does this induce more or higher volatility in the price? Has US shale taken the cyclicality element from the oil market? Are cost curves still relevant in this new oil price environment? Where does the marginal barrel lie in the current oil market structure? Is it still possible to talk of a supply crunch in the new oil order?