The Crude Oil Market Will Re-Balance This Year -- Rystad -- March 22, 2016

Updates

March 23, 2016: Outlook for The US Offshore Industry Is Darkening.

After enunciating an energy policy in March 2012 that was based on the concept of an “all of the above” resource strategy, President Barack Obama has abandoned it in his recent energy policy actions. First, he rejected the construction application for the Keystone XL pipeline, and now he is ditching the Atlantic Lease 260 sale from the proposed five-year offshore oil and gas lease sale program for 2017-2022.

Even more recently, President Obama has directed that the government tighten air pollution standards for offshore drilling. The removal of Atlantic Lease 260 is a reversal of President Obama’s previous policy calling for opening up the East Coast offshore to oil and gas exploration. This is the second time that acreage in the Atlantic Ocean has been bumped from proposed five-year lease sale programs. The first time was in 2010 when President Obama was siding with including an Atlantic lease sale in the 2012-2017 sale program, only to withdraw his support after the Macondo accident and resulting oil spill.

It should be noted that many of the media stories about the proposed Atlantic lease sale reported that the previous drilling off the East Coast some 40 years ago resulted in no successes. The reality is, as one story we read pointed out accurately, there were 51 wells drilled and hydrocarbon resources discovered, but they were not in sufficient quantities to be developed commercially.

The key in conducting more exploration would be as an aid in determining if there were sufficient resources that could be developed commercially.

While we watch the evolution of our offshore oil and gas leasing program, it is important to understand that there are other ways the offshore oil and gas business is being attacked in an effort to hamper operations and boost operating costs in U.S. waters. If successful, the efforts will reduce offshore activity and resource development. That outcome would go against two of President Obama’s key energy policy tenants – to produce economic and employment growth while also boosting U.S. energy security. 

Original Post

 

I think it's pretty well understood that in three to four years there may be a relative shortage of crude oil based on current data and current events. Most people are not looking that far out; most are trying to figure out what might happen in the next six months or even less.

It wasn't too long ago that Goldman Sachs was suggesting that oil would decline again, falling back as low as $20/bbl. I don't hear much of that talk any more, and it seems most folks think we're in a new trading range.

It also seems that most folks think that crude oil will be in the $40 - $60 range by the end of year.

But it seems even $40 - $60 may be on the very low side. Rystad (see below) has suggested that the market would "re-balance" by the end of the year. For me, $40 - $60 oil is not re-balanced. Others will disagree. Be that as it may, but Rystad's forecast is certainly in line with what Saudi Arabia has said. Saudi has based its budget on an average of $60-oil this year. I don't see how we get there from here, but that's what Saudi is basing their budget on and Rystad is pointing in the same direction.

I don't know if anyone has defined what is meant by "re-balancing" but before Saudi "opened the spigots in October, 2014," with supply and demand supposedly "balanced," oil had been in the $100 range. 

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BloombergBusiness has a most interesting article that continues the them: drillers are not replacing reserves.

For oil companies, the legacy of $100 crude is starting to run dry. 

A wave of projects approved at the start of the decade, when oil traded near $100 a barrel, has bolstered output for many producers, keeping cash flowing even as prices plummeted. Now, that production boon is fading. In 2016, for the first time in years, drillers will add less oil from new fields than they lose to natural decline in old ones.

XOM and Shell both made news in the past few weeks when it was reported that neither replaced reserves this past year.

With regard to reserves, BloombergBusiness is reporting that Shell posts worst performance on oil reserves since the 2004 scandal:

Royal Dutch Shell Plc said it depleted its oil and gas reserves much faster than it replenished them with new resources in 2015, its worst performance since an accounting scandal that engulfed the company 12 years ago.

Shell said its reserves replacement ratio -- the proportion of oil and gas production during the year that was offset by the addition of new resources -- was minus 20 percent. The company not only failed to replace any of the 1.1 billion barrels equivalent it pumped in 2015, but also wrote off another 200 million barrels to account for the plunge in oil prices.

Back on February 21, 2016, it was also reported that XOM failed to replenish its reserves (in 2015) for the first time in 22 years. Exxon Mobil’s so-called reserve-replacement ratio fell to 67 percent in 2015, much, much worse than Shell, if I read the numbers correctly.

Note the dates in the BloombergBusiness article:

“There will be some effect in 2018 and a very strong effect in 2020,” said Per Magnus Nysveen, Rystad’s head of analysis, adding that the market will re-balance this year. “Global demand and supply will balance very quickly because we’re seeing extended decline from producing fields.”

But look how minuscule some of these projects really are:

Royal Dutch Shell Plc is scheduled to start the Stones project in the Gulf of Mexico’s deepest oil field this year after approving it in May 2013. Benchmark Brent crude averaged $103 a barrel that month compared with about $41 on Monday. Stones will add about 50,000 barrels a day to Gulf of Mexico output at a peak rate, according to Shell.

50,000 bopd is trivial.

[Two other deepwater projects] will help boost production in the Gulf of Mexico by 8.4 percent this year to a record annual average of 1.67 million barrels a day, according to the U.S. Energy Information Administration.

1.67 million bopd is a record, but it's not much of an increase (8.4%) considering how fast other fields are declining.