Intelligence brief: Oil market 'free' for first time since pioneering days; UK costs, revenues down 30%
Upstream oil and gas news you need to know
IEA declares oil market 'truly free' for first time since pioneering days
The International Energy Agency forecast that the oil market will return to equilibrium in 2017, even as it admitted that “some certainties” that have guided past outlooks are now “not so certain at all”.
Oil demand is forecast to grow at an average annual rate of 1.2 million barrels per day, or 1.2%, through to 2021, breaking through the 100 MMbbl/d mark in 2019 or 2020, it said. Non-OECD Asia, led by China, will remain the major source of oil-demand growth with volumes increasing from 23.7 MMbbl/d in 2015 to 28.9 MMbbl/d in 2021.
On the supply side, light, tight, oil (LTO) output in the US will fall by 600,000 bbl/d this year and a further 200,000 bbl/d in 2017 before a gradual recovery in oil prices, combined with further improvements in operational efficiencies and cost cutting, allow a gradual recovery.
“Anybody who believes that we have seen the last of rising LTO production in the United States should think again; by the end of our forecast in 2021, total US liquids production will have increased by a net 1.3 MMbbl/d compared to 2015,” it said.
This year marks the first “truly free oil market” since the pioneering days of the industry, the IEA said in its annual Medium-Term Oil Market Report. The IEA is made up of 29 of the 34-member OECD bloc of developed economies, including four of the seven major non-OPEC oil producers: the United States, Canada, Norway and the United Kingdom. Mexico, also a major oil producer, is a member of the OECD but not the IEA.
“Just a few years ago such a free-for-all would have been unimaginable but today it is the reality and we must get used to it, unless the producers build on the recent announcement and change their output maximization strategy. The long-term consequences of this new era are still not fully understood,” the report said.
The IEA believes supply and demand will overlap in 2017 (Source: IEA)
The IEA also acknowledged that the prevailing wisdom of a few years – that oil prices would rise relentlessly as output struggled to keep pace with ever-rising demand – was wrong.
“Today we are seeing not just an abundance of resources in the ground but also tremendous technical innovation that enables companies to bring oil to the market. Added to this is a remorseless downward pressure on costs and, although we are currently seeing major cutbacks in oil investments, there is no doubt that many projects currently on hold will be reevaluated and will see the light of day at lower costs than were thought possible just a few years ago. The world of peak oil supply has been turned on its head, due to structural changes in the economies of key developing countries and major efforts to improve energy efficiency everywhere,” it said.
UK operating costs, revenues down 30%;
Operating costs fell from $29.30/bbl to $20.95/bbl in UK waters in 2015 and are expected to fall by an additional 20% this year, Oil & Gas UK’s 2016 Activity Survey has found.
Production of hydrocarbons on the UK Continental Shelf rose by 9.7% to 1.64 MMbbl of oil equivalent per day in 2015. This was the result of improved production efficiency, asset upgrades, and the first signs of production from new field start-ups, the industry body said.
Revenues fell by 30% to £18.1 billion ($25.6 billion) in 2015, a consequence of the oil price falling from $99/bbl in 2015 to $52.50/bbl and gas prices also falling 20%, it said.
Despite significant cost reductions, 43% of all oil fields on the UK Continental Shelf (UKCS) are likely to be operating at a loss in 2016 at prevailing prices, the report warned.
“While this represents about a sixth of total oil production, these fields collectively provide a significant proportion of the infrastructure used to transport oil and gas ashore. Were a number of these fields to cease production, their interconnectivity would mean many more could become sub-commercial, known as the ‘domino effect’,” it said.
“There are increasing signs that the UKCS is becoming super mature. Thirty years ago, the basin was producing more than double the current rate from around a quarter of the number of fields. Over the same period, the average discovery size has fallen five-fold and exploration has fallen to an all-time low.”