Gareth Hector, Douglas-Westwood London
+44 (0)1795 594726 or [email protected]
Whilst 2016 has so far seen much discussion surrounding the oil price, oversupply and the almost daily mini-rallies that appear as fickle as my two-year old’s breakfast selection, not a great deal of attention has been paid to the gas outlook.
From 2016 production levels, Douglas-Westwood currently forecast a 16.2% increase in global gas production to 2020 compared with just a 3.3% increase for oil during the same period. Is this simply a case of stronger demand or is there more to it?
As a geographic spread we see 95% more countries increasing YoY gas production during 2017 as those reducing, this compares to just 44% for oil. The production spread (difference between the largest increase and the largest decrease) between the 59-61 countries covered within theDW D&P report shows a spread of 703 kboe/d for oil and 826 kboe/d for gas during 2017 decreasing to 383 kboe/d for oil and 443 kboe/d for gas in 2020.
So not only will gas see a more rapid relative production increase but it will also experience a slower decrease in YoY production post-2017. However, DW expects to see YoY gas production continuing to increase to the end of our current forecast period in 2022, whereas oil is expected to start showing negative production growth from 2021.
The oil supply glut will return in 2017 thanks in large part to the ramping up of Iranian production and already committed Canadian oil sands projects coming online, offsetting large drops from the likes of the USA –207 kboe/d and Nigeria –121 kboe/d. The South Pars field in the Arabian Gulf along with new shallow water gas projects in Australia supported by the demand for LNG/CBM feedstocks are significant, although demand-based, contributors to the gas outlook.
With the recent lifting of sanctions on Iran and the growth of South Pars there will almost certainly be opportunities for well-placed and well-informed Western OFS providers.
So 2017 really is the wildcard year, or perhaps more appropriately, the production Twin Peaks. The question is surely not if, but how high.
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Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b
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At some point in 2019, crude production in Venezuela will dip below the 1 mmb/d level. It might already have occurred; estimated output was 1.15 mmb/d in November and the country’s downward trajectory for 2018 would put December numbers at about 1.06 mmb/d. Financial sanctions imposed on the country by the US, coupled with years of fiscal mismanagement have triggered an economic and humanitarian meltdown, where inflation has at times hit 1,400,000% and forced an abandonment of the ‘old’ bolivar for a ‘new bolivar’. PDVSA – once an oil industry crown jewel – has been hammered, from its cargoes being seized by ConocoPhillips for debts owed to the loss of the Curacao refinery and its prized Citgo refineries in the US.
The year 2019 will not see a repair of this chronic issue. Crude production in Venezuela will continue to slide. Once Latin America’s largest oil exporter – with peak production of 3.3 mmb/d and exports of 2.3 mmb/d in 1999 – it has now been eclipsed by Brazil and eventually tiny Guyana, where ExxonMobil has made massive discoveries. Even more pain is on the way, as the Trump administration prepares new sanctions as Nicolas Maduro begins his second term after a widely-derided election. But what is pain for Venezuela is gain for OPEC; the slack that its declining volumes provides makes it easier to maintain aggregate supply levels aimed at shoring up global oil prices.
It isn’t that Venezuela doesn’t want to increase – or at least maintain its production levels. It is that PDVSA isn’t capable of doing so alone, and has lost many deep-pocketed international ‘friends’ that were once instrumental to its success. The nationalisation of the oil industry in 2007 alienated supermajors like Chevron, Total and BP, and led to ConocoPhillips and ExxonMobil suing the Venezuelan government. Arbitration in 2014 saw that amount reduced, but even that has not been paid; ConocoPhillips took the extraordinary step of seizing PDVSA cargoes at sea and its Caribbean assets in lieu of the US$2 billion arbitration award. Burnt by the legacies of Hugo Chavez and now Nicolas Maduro, these majors won’t be coming back – forcing Venezuela to turn to second-tier companies and foreign aid to extract more volumes. Last week, Venezuela signed an agreement with the newly-formed US-based Erepla Services to boost production at the Tia Juana, Rosa Mediano and Ayacucho 5 fields. In return, Erepla will receive half the oil produced – generous terms that still weren’t enough to entice service giants like Schlumberger and Halliburton.
Venezuela is also tapping into Russian, Chinese and Indian aid to boost output, essentially selling off key assets for necessary cash and expertise. This could be a temporary band-aid, but nothing more. Most of Venezuela’s oil reserves come from the extra-heavy reserves in the Orinoco Belt, where an estimated 1.2 trillion barrels lies. Extracting this will be extremely expensive and possibly commercially uneconomical – given the refining industry’s move away from heavy grades to middle distillates. There are also very few refineries in the world that can process such heavy crude, and Venezuela is in no position to make additional demands from them. In a world where PDVSA has fewer and fewer friends, recovery will be extremely tough and extremely far-off.
Infographic: Venezuelan crude production:
Headline crude prices for the week beginning 31 December 2018 – Brent: US$54/b; WTI: US$46/b
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