On the road to recovery: part 1
Published by Louise Mulhall,
Editorial Assistant
Oilfield Technology,
Douglas-Westwood’s (DW’s) soon to be released Upstream Investment Outlook offers insights into the principal challenges and opportunities for the industry. The report paints a picture of continuous oversupply in the near-term, driven by projects sanctioned prior to the downturn. The long-term outlook presents a more positive view, featuring key growth opportunities in the energy sector. The report also analyses the current commercial state of the oil and gas industry, supply chain evolutions, and external factors which may threaten future activity. The conclusions are unprecedented, illustrative of the current market dynamics, and provide a strong basis for business planning.
Late September saw unexpected OPEC discussions of a preliminary output cut, which has led oil prices to rally by US$2.94 to US$48.43/bbl on 29 September, according to data provided by the US Energy Information Administration (EIA). OPEC estimates its current production at 33.2 million bpd and is offering to curb output by 32.5 million bbl/d to 33 million bpd. Should the low quota of 32.5 million bpd be held, the oversupply could be almost eradicated in 2017. Assuming the high quota of 33 million bbl/d is likely to materialise in the near future, DW projects the implied oversupply to fall by just over 0.4 million bpd in 2017. With no OPEC output cut, oil demand is projected to increase by 1.4 million bbl/d in 2016, and production is forecast to grow by 0.5 million bpd.
Consequently, the implied oversupply is anticipated to fall by 0.9 million bpd in 2017.
However, given the number of onshore brownfield expansions in Iraq and Saudi Arabia, sanctioned in the boom years and expected to come onstream in 2017, the supply gap is likely to increase. This means that if OPEC is to commit to any production cuts, the actual reduction in output could be greater than a marginal 0.7 million bpd and will likely come from marginal members.
EIA data suggests that the oil price may have bottomed out in January 2016, reaching its lowest point at US$26.01 bpd on 20 January. Since then, the oil price has stabilised at above US$40/bbl, whilst experiencing short-lived increases to around the US$50 mark. This is due to a combination of factors, including supply outages, following the worsening of the security situation in the Niger Delta, outages in Canada due to wildfires, and OPEC discussions of a potential output curb. Nevertheless, 2016 remained a year with prices hovering at around the US$50 mark, and market recovery is also likely to remain slow-paced for the rest of the decade. Douglas-Westwood’s Upstream Investment Outlook Q3 2016 presents a ‘bottom-up’ (project-by-project) analysis of the market oversupply. The report offers a current, consolidated, and coherent view of the state of the upstream oil and gas industry. The presented analysis is supported by thousands of man hours of industry research and gives a granular and realistic evaluation of current and near-term activity in the sector.
Key oversupply drivers
A combination of onshore and offshore projects in the Middle East and Eastern Europe will be driving production gains in 2017. The most significant supply additions, amounting to almost 250 000 bpd, are expected from the Kashagan development off Kazakhstan. The widening of the supply gap is likely to be compounded by onshore brownfield work at Lukoil’s West Qurna field and BP’s Rumalia development in Iraq, coupled with ADNOC’s Upper Zakum field off the United Arab Emirates. These three expansions are projected to add a further 350 000 bpd to oil supply in 2017. Although to a lesser extent, 2018 is expected to be another year of production gains, assuming the unconfirmed OPEC cut does not materialise. Supplementary brownfield development work is expected to take place at the Halfaya and Badra fields in Iraq, and the South Azadegan and Yadravaran fields in Iran, accounting for 300 000 bpd of additional crude in 2018, compared to 2017 (or a 542 000 bpd total increase from 2016). Execution of these expansions is unlikely to be deferred, given that these developments currently account for the majority of most output in the region.
Originally published in the December 2016 issue of Oilfield Technology
Read the article online at: https://www.oilfieldtechnology.com/special-reports/28122016/on-the-road-to-recovery-part-1/
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