Meandering Thoughts On Crude Oil Rebalancing -- January 24, 2017

We will start with this:

Yesterday, I happened to get into a discussion with a reader who thought global demand for crude oil could overtake supply of crude would occur sooner than later.

Over at this post, I opined:

What I get from [the HAL 4Q16 earnings conference call]: no one is even thinking about decisions to go back to deepwater until late 2017, and reading between the lines, it sounds like even then (late 2017) there will be no one making decisions. So that puts us well into 2018, maybe later, where the majors say, "Hey, let's look at deepwater."

At best, 2018, they "pull the trigger" -- agree to go back to deepwater. It would be slowly; not a lot of activity. A year to gin up, that puts us into 2019. Depending on the approval process, etc., we are well into 2020 I think before we start seeing return to deepwater and it would not be a boom by any stretch.

We're at $50 oil; the comments above said "how much further commodity prices have to go to bring some of these .... highly complicated ... or longer duration projects to the front of the queue...."

"$50 oil is WTI/ Brent is about $53. "...how much further..." he didn't say but it certainly suggests well above high 60's and probably in to the $70s. It will be interesting to watch (from other sources) what folks think the price of oil needs to get to see projects off-shore.  

The reader's argument was that the combination of OPEC cuts and delay of major deepwater projects since 2014 could result in supply/demand imbalance sooner than later. I suggested that we won't see that until 2020 until the earliest. The reader thought is would occur sooner.

I tend not to get into back-and-forth discussions on the blog, simply moving forward with new stories as they get released.

I thought that the supply/demand discussion we had yesterday was over and we would move on to something else today.

Then out of the blue, via Twitter from Oil & Gas Journal: an update on the Thunder Horse South expansion project.

But before going in to that, get yourself up to date by checking out the wiki site on Thunder Horse.

But note: the wiki site on the Thunder Horse is really, really slanted (sad to see on wiki) and has not been updated.

For more on Thunder Horse, then, check out these articles:

• BP starts up water injection project at Thunder Horse, Oil & Gas Journal, May 25, 2016
• Overview, undated, but an old article -- the URL still has the original name for this project; nice article for background, Offshore Technology
• Thunder Horse: first of a generation in the GoM, Offshore, December 1, 2009, 
• BP's Thunder Horse to under-perform in the wake of the Deepwater Horizon blowout, The Oil Drum, April 30, 2010

Okay, now that you are caught up, here's the incredible news that broke overnight, via Twitter, from Oil&Gas Journal, linked above. Data points:

• Thunder Horse South expansion project
• came in early; under-budget
• located about 2 miles south of the existing Thunder Horse platform
• a system of collection points for wells connected to the platform by two 11,000-ft-flowlines installed on the seabed in late 2016
• this is the first new well
• tapped into  the highest amount of hydrocarbon-bearing sand seen to date at Thunder Horse field; 500 feet of net pay
• 15% below budget; 11 months ahead of schedule
• will result in production increase of 50,000 boe/d gross
• elsewhere, but not in this article, this expansion project is to add 800,000 bope/d to Thunder Horse production
• From Rigzone staff, data points:
• here it is: yes, the expansion goal is to add 800,000 additional boe/d of new production by 2020
• BP: 11 months ahead of schedule; $150 million under budget
• BP: "These facts demonstrate that deepwater projects can be executed in a cost-effective way while keeping a relentless focus on safety" 

********************************

Crude Oil Production

BP analysis, 2015: world oil production growth in 2015 significantly exceeded growth in oil consumption for a second consecutive year:

Production grew by 2.8 million b/d, led by increases in the Middle East (+1.5 million b/d) and North America (+0.9 million b/d). Production in Iraq (+750,000 b/d) and Saudi Arabia (+510,000 b/d) rose to record levels, driving an increase in OPEC production of 1.6 million b/d to 38.2 million b/d, exceeding the previous record reached in 2012.

Production outside OPEC slowed from last year’s record growth but still grew by 1.3 million b/d.

The US (+1 million b/d) accounted for all of the net growth of production outside OPEC, and remained the world’s largest oil producer.

***********************************

Crude Oil Demand

There are many, many articles suggesting crude oil supply will fall behind crude oil supply and that it will happen sooner than later. This from The Wall Street Journal, August 11, 2016.

It should be noted that this article was written before the Thunder Horse South expansion progroject was brought on-line 11 months early and $150 million under budget.

**************************************

Outrunning Change -- Saudi's Existential Dilemma

We will come back to this graph in a stand-alone post. It's been posted previously:

********************************

Gedanken Graph

The graph does not exist, but in your mind, imagine this graphic: overlaying the "US tight oil forecast" graphic above with a current Gulf of Mexico crude oil graph.

***********************************

OPEC Goal To Cut Production

From Bloomberg:

Bringing about a crude-supply deficit of 760,000 barrels a day in the first half of 2017 would require OPEC to fully implement its 1.2 million barrel-a-day cut, a goal that is challenged by rising production from exempt members Libya and Nigeria. Among non-OPEC producers, it would be crucial that Russia completely follows through on its pledge to gradually curb output by as much as 300,000 barrels a day.

Full compliance with the deal would mean OPEC crude supply in the first half is about 400,000 barrels a day lower than demand, the data show. If the 11 non-OPEC nations stick to their pledges, their combined output would be 17.97 million barrels a day over the period, almost 360,000 barrels a day lower than the IEA’s current forecast.

OPEC pumped at records going into the 2017 cut. The OPEC production numbers are alloover the chart: OPEC has their official numbers; the industry relies on secondary sources for more reliable data; etc., etc.

But when I look at the Bloomberg article above, I see cuts of less than 2 million bopd, and that comes after record production going into 2017. But let's say OPEC was even able to cut 3 million bopd. Let's say they even cut an unbelievable 5 million bopd.

Put that figure, 3 million bopd cut, or even 5 million bopd, in your mind.

Now go back and look at these three graphs or data points:

• the US tight oil forecast graph above
• the recent announcement that Thunder Horse South could add 800,000 boe/d to global supply
• the Gedanken Graph

Three more thoughts:

• Kashagan: finally on-line; economically can't afford to pump/transport oil at $50/bbl, but it could be capable of producing upwards of 1 million bopd; the consortium is desperate to start getting a return on its $53+ billion investment
• Bakken: unfettered could quickly grow to 2 million bopd (from 1 million bopd); one obstacle, takeaway capacity, could be coming to a head with DAPL, Trump presidency
• western Canadian oil sands: Keystone XL would make a huge difference (same link); as recently as today, CNBC talking heads said Keystone XL could "flood" US with oil (heavy oil which US refineries on Gulf Coast need

Finally: deepwater projects begun before the Saudi Surge (2014) will start coming on line 4 to 10 years from that time, thus we should see production from these projects coming on line 2018 (in fact, Thunder Horse came on line 11 months early, in 2017) to 2014.

Two last thoughts:

• First: go back and look at the HAL earnings conference call. 
• Second: this article from oilprice.com today

Last week the IEA warned that rising non-OPEC production could put an end to the OPEC-fueled price rally that began in late November after the cartel’s agreement to cut production. With oil production bouncing back in the shale patch and a handful of other large-scale offshore projects set to come online, global output could prove resilient despite OPEC’s best efforts. That raises the prospects of a new trading zone for crude oil, trapped within a narrow band between $50 and $60 per barrel. OPEC’s cuts of 1.2 million barrels per day, plus the non-OPEC reductions of almost 600,000 bpd, will put a floor beneath crude at $50. The cuts ensure that the market will not be excessively oversupplied going forward, perhaps blocking another potential downturn in oil prices.

On the other hand, the swift rebound in shale drilling could put a cap on prices, killing off any chance of a sustained price rally. Anytime prices try to rise beyond the $50s per barrel, more shale production will come online and push prices back down. There are plenty of signs that suggest that both of these forces are playing out. OPEC officials are striking an optimistic tone in regards to compliance with the promised cuts. Over the weekend, Saudi energy minister Khalid al-Falih said that OPEC and non-OPEC countries have already complied with 1.5 million barrels per day of cuts since November, although those figures are still preliminary. The figures that al-Falih provided to the media did not include an overall collective output figure, nor did they include rising production from Libya and Nigeria, countries exempted from the Nov. 30 deal. So they should be taken with a grain of salt.