Archives for category: Oil Demand

Venezuela has the world’s largest proven oil reserves and is one of the founding members of OPEC. Despite this, their 2.5m bpd of oil production accounts for only 3% of global output. Venezuelan oil production declined over the last decade owing to complex geology and a difficult investment climate. However, several large IOC-operated gas fields offshore Venezuela could now offer some positivity.

The Hydrocarbon El Dorado

Venezuela’s 300bn bbl of oil reserves account for 18% of current global reserves. But 220bn bbls of these reserves are onshore in the Faja, or Orinoco heavy oil belt, which has produced around 1.3m bpd in recent years. Venezuelan heavy oil grades are a key part of world oil supply: many US refineries were designed to take its heavy grades of oil together with lighter Arab crudes, meaning the country is also important for the tanker market. But production from the Faja is expensive and technically challenging, and heavy crudes sell at a discount.

Making Heavy Work Of It

After the election of Hugo Chávez in 1999, Venezuela’s oil industry came under strain as social policies were funded by oil revenues, and reinvestment declined. After the 2003 general strike, 19,000 PDVSA employees were fired and replaced with government loyalists. Furthermore, in 2007, the government looked to capitalize on the high oil price environment by nationalizing international oil companies’ (IOCs’) assets.

Offshore production was always the minor fraction of Venezuela’s output (23%). However, lack of investment in maintenance hit it hard. This was particularly true of the very shallow water production in Lake Maracaibo, which has seen drilling for more than a century. Issues of pipeline leakage and even oil piracy on the lake helped production there decline. In total, output from the Maracaibo-Falcon basin (not exclusively offshore) fell 35% between 2008 and 2015. In total, offshore production is estimated to have dropped by about 38% to 0.57m bpd.

A Brighter And Lighter Future

The current political and fiscal situation in Venezuela offers little suggestion that it will be easy to arrest decline. However, a more permissive attitude to foreign investment may help. In October, agreements were signed to allow Chinese and Bulgarian investment to fund repairs offshore Lake Maracaibo. Perhaps more significant is the promise of gas, where greater IOC participation is permitted.

Trinidad, Venezuela’s very close neighbour, tripled their offshore production from 1998-2005. Venezuela has begun to make moves in the same direction, firstly via the Cardon IV project. The first field here, Perla, started up in 2015 run by an Eni-Repsol joint venture. As the graph shows, this has already had a small, but visible effect on Venezuelan gas output. Perla has reserves of 2.85bn boe and by Phase 3 is set to be producing 1.2 bcfd. This is likely to be added to from 2019 by up to 1 bcfd of output from the long-delayed Mariscal Sucre fields.

So, Venezuela has vast reserves but production has been falling. The political situation, combined with low oil prices, is likely to hinder any rapid turnaround in oil output. However, although progress has been slow, IOC involvement has at least provided some positive impetus for gas production offshore Venezuela.

OIMT201706

A few weeks ago, OPEC and other major oil producers agreed to extend 1.73m bpd of production cuts until the end of Q1 2018. Despite this, oil prices have continued to slide, with Brent failing to close above $50/bbl this week. While a range of factors have contributed to this trend, perhaps the most important is US tight oil production. So what is going on in the shale patch? And why does it matter to shipping?

How Unconventional!

If nothing else, US tight oil production retains the ability to surprise. As was noted after the OPEC meeting in May (SIW 1,273), “it remains to be seen if shale production quickly offsets” the cuts. Well, if the early signs are anything to go by, this is clearly not an impossibility.

Tight or shale oil is oil extracted from otherwise almost impermeable geology via “fracking”, a process wherein fluids mixed with sands are pumped at pressure into well bores, creating fractures in the rock through which oil and gas can flow. In terms of oil price dynamics, the key aspect of shale projects is speed: they can have lead times measured in weeks and so are very responsive to changes in oil prices. But in turn, as tight oil production ramps up, it can put pressure on prices, as recent history shows.

Remarkable Resilience

The US tight oil sector really took off in 2011, with production more than tripling from 1.70m bpd to reach a peak of 5.47m bpd in March 2015, as the graph shows. At this point, tight oil accounted for 6% of global oil supply (96m bpd) and equated to 55% of the net growth in supply from 2011. Such rapid supply growth had not been priced into markets, a key factor in the 2014 oil price plunge. A partial revival in mid-2015 was smothered as US drilling was stimulated again. And, since the US land rig count hit a new low of 380 units in May 2016, activity has again been on the up; the November 2016 OPEC deal accelerated this and the land rig count now stands at over 900 units. Tight oil production growth now equates to around 35% of the OPEC cuts. Its resilience (via cost deflation) in the face of lower oil prices continues, it seems, though it may prove self-defeating yet again. Even so, tight oil could now be a long term part of the oil price context. A few years ago, forecasters saw US tight oil production peaking circa 2020. Revised projections taking into account new technologies and updated resource surveys do not see US tight oil output peaking before the 2030s.

More Surprises?

The negative and positive implications for shipping of higher oil prices were covered in detail previously (SIW 1,273). The converse applies to lower oil prices, with offshore suffering from reduced E&P activity but the merchant fleet perhaps seeing benefits from cheaper bunkers and crude oil trade growth. Tight oil also has implications for trade flows. For example, now that export restrictions have been lifted, around 0.7m bpd of crude oil was exported from the US via tankers in Q1 2017.

So a factor that was barely on the radar a decade ago has become a key determinant of oil prices, potentially for the long haul. Moreover, tight oil has a range of ramifications for shipping that merit close monitoring. Once again, shipping appears inextricably linked to a key facet of the global economy. Have a nice day.

SIW1276

Global oil prices were buoyed in Q4 2016 by OPEC’s decision to cut production. Perhaps more surprising still was the extent of compliance with quotas, for an organisation with a past track record of over-production. At their recent meeting, OPEC overcame some members’ objections and agreed to extend the cuts until March 2018. How will this affect the oil price and how does it impact the shipping industry?

Cutting To The Quick

Twenty years ago, OPEC had substantial control over the supply side of the oil market. Today, the rise of shale oil has created doubts that OPEC retains the power to influence the market in a lasting way. This question is still to be resolved, though it is true that the cuts have allowed shale producers a new lease of life in terms of spending (up c.50% in 2017) and drilling (the US land rig count is up 120% y-o-y). However, OPEC are making the most concerted attempt for more than a decade to control supply. As the Graph of the Month shows, past quota compliance has been poor, and indeed for a decade this was effectively acknowledged by the lack of a formal quota.

Cutting Down

The difference recently is that OPEC has actually succeeded in cutting to below the level of the quota, despite allowing some members (such as Iran) to avoid formal cuts. The collective reduction has partly been down to outages (notably in Nigeria and Venezuela). However, it also reflects Saudi Arabia shouldering a lion’s share of cuts (c.0.75m bpd or 55%).

Expectations of an extension to cuts boosted oil prices in the run up to the announcement (though after the meeting, prices fell as investors took profits). Higher prices have a range of ramifications for shipping. One consequence is higher fuel prices, increasing shipowners’ costs unless they can pass this on. Previous periods of high fuel costs pushed owners to slow steam. This mitigated the problem, to some extent, but few ships sped up when prices came down. So currently this would be a difficult trick to repeat.

Cut And Run?

The cuts could also affect tanker demand, either via lower crude and product exports (27% of seaborne trade), or lesser import demand if high prices moderate demand growth. So far, price increases have been moderate, and it seems as if the Saudis in particular have been doing their best to curtail domestic oil usage to protect long-haul export customers (more than 18m bpd, of 47%, of crude trade is exported from the Middle East Gulf).

Perhaps most obviously, the OPEC cuts have brought a modicum of more bullish sentiment to oil companies’ E&P investment decisions. This has helped offshore markets a little, notably through a small upturn in tendering and fixing activity for drilling rigs (Clarkson Research’s average rig rate index is up 2% since end-2016). However, there has been little to no effect on rates in related markets such as OSVs, and most would acknowledge the extreme fragility of any improvement.

So, the widely-trailed extension to OPEC production cuts boosted oil prices during May, although it remains to be seen if shale production quickly offsets this. Oil price dynamics have a mixture of positive and negative effects for shipping, but certainly remain crucial given the key role of oil both for shipping and for the wider economy. Have a nice day!

SIW1273

In 2011, Nigerian oil production stood at 2.55m bpd (of which 71% was offshore), accounting for 7.1% of total OPEC oil production (and 40% of West African offshore oil production). Since then, Nigerian oil production has been eroded by exposure to political risk factors and weaker commodity prices, dropping to just 1.54m bpd in 2016. What, then, is the outlook for Nigerian oil production in 2017 and beyond?

A Rose-Tinted Past?

Nigeria has been an oil producing country for almost 60 years and its first producing offshore field came onstream in 1965. In the following decades, Nigerian offshore E&P was focused almost entirely in the shallow waters of the Niger Delta. Even today, there remain 104 active shallow water fields in Nigeria producing via 263 fixed platforms with an average age of 25 years. It was in the late 1990s that Nigerian E&P began moving further from shore, as oil companies sought new reserves to offset decline at mature shallow water fields. Deepwater fields were also less vulnerable to the militant activity plaguing the Delta for much of the 2000s. The first deepwater discovery in Nigeria was Abo, in 1996, which was the first such start-up too, in 2003. As of March 2017, 40 fields in water depths of at least 500m had been found off Nigeria, of which 10 had been brought onstream via a total of seven FPSOs and 253 subsea trees.

A Risky Proposition?

However, were it not for deleterious influences on Nigeria’s upstream sector in the last 10 or so years, deepwater E&P in the country could now be more prevalent still. The foremost difficulty has been the Petroleum Industry Bill (PIB), which was first introduced to the Nigerian Parliament in 2008 and which has yet to be passed. An especially contentious issue is mooted changes to deepwater fiscal terms, which IOCs argue would render deepwater projects (where breakevens tend to fall in the $60-90/bbl range) unviable. An uncertain investment climate has been compounded by court cases arising from alleged improper practices, for example at OPL 245, host to the stalled ZabaZaba project(100,00 bpd). So there have been few deepwater FIDs and just three such field start-ups off Nigeria since 2009 (versus 20 off Angola). There has thus been little deepwater oil production growth to offset onshore or shallow water field decline.

Stability Or Volatility?

Uncertainty about the PIB remains, but in 2016, disruption caused by militants, notably the Niger Delta Avengers, came to the fore: attacks on oil infrastructure saw oil production dip below 1.25m bpd at times in 2016. Moreover, weaker oil prices have hit government finances and so its ability to dampen unrest. Production recovered slightly in Q4 but conditions in the Delta remain febrile. And if oil production does continue to ramp back up to over 2.0m bpd, it could imperil gains in the oil price that followed the OPEC deal (Nigeria is exempt from quotas). If prices cannot climb above $60/bbl, there is little prospect of Nigerian deepwater projects (of which there are 13 with a total oil production capacity of over 0.81m bpd yet to be sanctioned) hitting FID any time soon.

So in the short term, Nigeria could prove a key factor in the global oil price equation. And in the long term, undoubtedly the country has a great deal of deepwater potential; however, before this is likely to be realised, numerous challenges need to be overcome. Nothing is certain.

OIMT201703

To much fanfare and accompanied by voluminous industry coverage, Mexico recently concluded Round 1.4, the country’s first ever deepwater licensing round. However, Mexico’s shallow waters may yet have a future too: Bay of Campeche reserves remain considerable and indeed, the country’s third shallow water bid round is ongoing. It is therefore worth reviewing the current state of shallow water E&P in Mexico.

Veering Off Course

Mexican offshore oil is currently produced entirely from shallow water fields, as has always been the case. The key sources of Mexican offshore oil have been several large field complexes such as Cantarell and Ku-Maloob-Zaap. As these fields and others came online, the country’s offshore oil output grew with a robust CAGR of 6.6% from 1980 to 2004, reaching a peak of 2.83m bpd in 2004. As the graph implies, four complexes accounted for 93% of this production. Decline set in thereafter at ageing fields (production at Cantarell began at the Akal field in 1979). Pemex – the sole operator of Mexican offshore fields prior to 2014 – tried to halt production decline, but with little success, given budget and technical constraints. Thus by 2013, offshore oil production at the four key field complexes had fallen to 1.31m bpd, accounting for 69% of Mexico’s offshore oil production of 1.90m bpd.

Getting Back On Track

This situation prompted President Peña Nieto’s government to initiate energy sector reforms in 2013, opening up the country’s upstream sector to foreign companies for the first time since 1938. Pemex was granted 83% of Mexican 2P reserves in “Round Zero” in 2014. The first shallow water round, Round 1.1, followed in December 2014. Only two of 14 blocks were awarded though, reportedly due to unfavourable fiscal terms inhibiting bidding by oil companies. The authorities then improved terms before launching Round 1.2 (shallow water), Round 1.3 (onshore) and Round 1.4 in 2015. Round 1.2 was better received than 1.1: as per the inset, 60% of blocks were awarded (75% of the km2 area on offer). One of the round’s victors, Eni, has already been granted permission to drill four appraisal wells on Block 1.

Turning Things Around?

In light of these positives, there are high hopes for Round 2.1, a shallow water round launched in July 2016. Indeed, 10 out of the 15 Round 2.1 blocks are in the prolific Sureste Basin, home to the Cantarell complex. Eight of these ten areas are unexplored, so there is sizeable upside potential, and have been mapped with 3D seismic, so operators could begin drilling promptly. Moreover, the surface area of the blocks in Round 2.1 are twice that of Round 1.1. It should also be noted that according to a 2016 IEA study, Mexico’s shallow waters still account for 29% of the country’s remaining technically recoverable oil resources. Finally, with rates for a high spec jack-up in the GoM assessed at about $85-90,000/day in January 2017, down 45% on three years ago, some oil companies might be tempted to make a move on a round that could offer a relatively low cost means to grow oil reserves and production.

So arguably, Mexican shallow water E&P is on the road again. There are potential hazards of course, such as oil price volatility or Mexico’s relationship with the US. But it is not implausible to think that Mexican shallow water oil production might speed up again in the coming years.

OIMT201702

The expansion of European settlement in North America – the pushing westwards of the frontier – has come to be seen as a defining part of American culture, spawning a whole genre of films and books set in the historical “Wild West”. That same pioneering spirit seems to be alive still today, at least in the US Gulf of Mexico (GoM), where 49 ultra-deepwater field discoveries have been made in the last decade.

Once Upon A Time In The Gulf

Offshore E&P in the US GoM began in the 1930s, picking up pace in the 1950s. By the end of 1975, a total of 444 shallow water fields had been discovered in the area and 256 of these had been brought into production. Gas fields predominated, accounting for 75% of discoveries and 31% of start-ups. Early E&P in the area made extensive use of jack-up drilling rigs and lift-boats. Fixed platforms were the favoured development method, with 86% of the 256 start-ups using fixed platforms. Thus were the first pioneering steps taken in exploiting the US GoM.

For A Few Dollars More

However, compelled by the need to find new reserves, oil companies active in the US GoM began pushing outwards, into deeper waters: the first deepwater discovery in the area was made in 1976. The frontier has now moved quite a way onwards since those early days. The average distance to shore of the 129 offshore discoveries in the area since start 2007 is 145km, while 72% (93) of these fields are in water depths of 500m or greater. The focus has also shifted from gas to oil: 58% of the 129 finds were oil fields, including 81% of the 93 deepwater finds. The US GoM has been dubbed one corner of the “Golden Triangle” of deepwater E&P and (supported by high oil prices until 2015) it has accounted for 16% and 19% of deepwater and ultra-deepwater finds globally since 2007. As shown by the graph, this was in spite of a slowdown in the wake of Deepwater Horizon. Floater utilisation dipped to 80% in 2011 but recovered, and a peak of 54 active floaters in the area was reached in January 2015 (26% of the active fleet).

Manifest Destiny?

So US GoM exploration was a major beneficiary of a high oil price. But how might it fare in a potential “lower for longer” price scenario? The outlook for jack-ups is bleak, with utilisation in the area standing at 24% as of December 2016. Simply put, the shallow water GoM is gas prone, and gas fields in the area are generally not competitive with onshore shale gas. At the US GoM (ultra-)deepwater frontier though, things do not look quite as bad as might be expected. On the one hand, over the last two years, floater utilisation has gradually fallen to 70%, as owners have struggled with rig oversupply, and dayrates are severely pressurised. On the other hand, there have been large finds made since 2014, such as Anchor and Power Nap, and wells are underway or planned for potentially major prospects such as Dawn Marie, Warrior, Castle Valley, Hershey, Hendrix, Sphinx and Dover. Many oil companies see the US GoM as a core area, and are prepared to invest to bolster oil reserves, even via drilling of, for example, costly HPHT reservoirs in the Lower Tertiary Wilcox formation.

As in the Wild West, at times things can be tough at offshore frontiers. Rig owners (and others) are experiencing this in the US GoM. But with some oil companies taking a long-term view, the pioneering spirit may not have been snuffed out yet.

OIMT201611

The African continent accounts for 16% (490) of active offshore fields and 17% (535) of offshore fields that are either under development or are potential developments globally. It is also home to key offshore exploration frontiers. However, the nature of E&P activity varies widely across the continent, as is clear from analysing the offshore areas into which Africa can be divided: North, South, East and West Africa.

North Africa: Old Fields?

A total of 217 oil or gas fields are located offshore North Africa, of which 112 are in production (95% in shallow waters). In this mature area, offshore oil production is projected to stand at 0.34m bpd in 2016, down 37% on the area’s peak of 0.54m bpd in 1991. Bar the possible restoration of offshore oil production lost in the “Arab Spring”, decline is set to continue. However, North African offshore gas production still has significant growth potential, forecast as it is to grow with a CAGR of 8.4% from 4.29bn cfd in 2016 to stand at 8.86bn cfd in 2025. This projected growth is driven by gas projects such as Zohr Ph.1 ($3.5bn; 1bn cfd) and Ph.2 ($10bn; 7bn cfd). The Zohr field, a frontier find in a water depth of 1,450m in the Levantine Basin, exemplifies the ongoing rise of deepwater E&P in the area.

South Africa: Few Fields

South African offshore production is minute in a global context. The area is home to just 17 offshore fields (only seven active, two having shut down in 2013). Although not without potential, E&P in the area has stalled in the downturn, as IOCs have cut and reprioritised E&P spending.

East Africa: New Fields

Unlike North and West Africa, East Africa has little history of offshore E&P: 88% of the area’s 41 offshore fields were discovered after 2009. The average water depth of these “frontier” finds is 1,570m and 92% are gas fields (with total reserves of more than 168 tcf). Offshore gas production in the area is projected to hit 2.82bn cfd in 2025 (from 0.13bn cfd in 2016) as fields are developed as part of LNG projects such as Coral FLNG Ph.1 ($7bn; 0.433bn cfd). However, further FID slippage at these frontier projects is a risk in the weaker energy price environment.

West Africa: Costly Fields?

West Africa constitutes one corner of the ‘Golden Triangle’ of deepwater E&P: of the 368 active fields in the area, 83% are in shallow waters (in the Gulf of Guinea and Angola) but 43% of 364 potential developments are in depths of more than 500m. The area has major deepwater production growth potential, even though it already accounted for 17% (4.35m bpd) of global offshore oil production in 2015. However, West Africa is a key offshore ‘swing’ region in terms of CAPEX and production: planned FPSO hubs such as MDA (Angola) tend to have high breakevens (c.$70/bbl+), so project FIDs have been scant since 2014. Frontier finds from Ghana up to Mauritania (39 since 2009) could yield more viable production growth though, and exploration in these waters has continued in the downturn.

In conclusion then, the African continent is home to a range of offshore field and project trends. Although there are some similarities across the continent in terms of “frontier” E&P, water depths and other factors, to get a grip on African offshore E&P, it is necessary to take the full range of available data and “drill down” into it.

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