It Depends On The Definition Of "Swing Producer" -- February 25, 2016

I guess it depends on what the definition of a "swing producer" is. From a SeekingAlpha contributor:

There is some conjecture among analysts and market pundits as to who the next swing producer will be, given that OPEC has given up that mantel in favor of ruthlessly pursuing market share. It was originally thought that U.S. shale oil producers would fill this role but to date there has been no sharp decline in U.S. oil output and there are signs that the shale oil industry will keep the spigots open and pumping crude.

Now an emerging favorite among some pundits as a swing producer is Canada. Some analysts argue that the high costs associated with oil sands will cause Canada's oil sands companies to cease oil sands production with much of it uneconomic in the current harsh operating environment where oil or more specifically WTI is hovering around $32 per barrel.

In the past, when global crude supplies exceeded demand OPEC would act as a swing producer, cutting output and bring the market back into balance. But as we all know in 2014 as the U.S. overtook Saudi Arabia to become the world's largest oil producer the cartel or more specifically Saudi Arabia and its Gulf State allies boosted production in order to keep prices low.

I had always assumed a "swing producer" was one who could move the supply of crude oil quickly to move the markets in either direction, generally, to smooth out the volatility.

This linked article suggests to me that the contributor's definition of a "swing producer" is one who can quickly cut production when oil prices slump. I think a swing producer needs to be able to do it quickly in either direction.

My thoughts on the linked SeekingAlpha article, an in e-mail to a reader who sent me the link:

I agree with the contributor that Canadian oil is not going to be the next swing producer.

Until this guy wrote that, I don't think anyone thought Canada would be the swing producer. If there was going to be a swing producer, it would be Russia or Saudi Arabia .... except ... conventional wisdom is that now US shale oil will be the swing producer.

I'm not so sure. I still think Russia and Saudi Arabia are the swing producers. They may be producing near their full capacity but "swing producer" works both ways. Russia and Saudi Arabia have to agree to cut production if they want oil prices to go back up. Obviously, there is no "US national oil company" like Saudi Aramco nor a "one-man Putin" to call the shots for the 150 oil companies in the US.

The US still imports 5 million bopd. The supply of oil will start to plateau over the next 12 months (move up and down very little month to month). Russia will join Saudi Arabia as the "next" wing producer (moving the market one way or the other) only if they work together. The US shale industry would simply move up / down in a classical free market supply and demand pattern, reacting to the new Russian-Saudi Arabian cartel.

Perhaps US shale oil can help prevent a spike in oil prices (and even there, I have my doubts) but I don't think US shale can do the reverse, prevent a free fall. To me, "swing producer" means going both ways, up and down, and Russia and Saudi Arabia are the only ones, if they work together, who can do that.

As Russia's footprint grows larger in the Mideast, it may behoove Saudi Arabia to find a better working relationship with Russia. This business about Saudi Arabia and US shale "living together" is not the story. The story is whether two arch enemies, Russia and Saudi Arabia can coexist.

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Ultra-Majors, Ultra-Problems

Rigzone/Bloomberg is reporting:

This may not be the best time to be bigger than big. The $64 billion tie-up of Royal Dutch Shell Plc with BG Group Plc and the steady growth of Exxon Mobil Corp. are creating a new league of two: the ultramajors. Executives at smaller companies are even starting to joke that Chevron Corp., Total SA, BP Plc, ConocoPhillips and ENI SpA are merely the mid-cap sector of Big Oil.

But as oil and gas prices have tumbled, Exxon and Shell have been forced to retreat. With oil barely above $30 a barrel, they’re cutting spending, including some costly, high-risk mega-projects. Shell abandoned construction of the 80,000 barrel-a-day Carmon Creek oil sands project in Alberta, Canada, last year after having started to build it. Exxon is slashing investment by 25 percent this year compared with 2015.

“Scale was very important in the late 1990s and 2000s,” said Michele Della Vigna, the top oil industry analyst at Goldman Sachs Group Inc. “In the past there was scarcity of capital. Being big was an advantage. The last 15 years were about being bigger. Today is about being nimbler and lower on the cost curve.”

The problem for the ultramajors is that they’re so big that they need to put off more or bigger projects every year to make a difference in production. The scale of Exxon and Shell has reached a point that it’s creating its own problems, said Tom Ellacott, vice president of corporate analyst at oil consultants Wood Mackenzie Ltd. “You need much bigger projects to move the needle,” he said.

When oil was at $100 a barrel, the two companies had sought to move the needle through developing reservoirs in the roughest, deepest and coldest parts of the world, spending billions of dollars over up to a decade in places like Kazakhstan, the remote corners of Australia, off the shores of Angola and in the Arctic. But as companies adapt to an era of low oil prices, most of those projects may fail to deliver the 15-to-20 percent return the Big Two hope for, industry executives and analysts said.