Global growth in the oil and gas sector is expected to rise moderately at about 3.3% through 2017. High-income countries are likely to see growth of more than 2% next year while developing countries shall continue rising to 5.4% by 2017 (+1% higher rate of growth than in 2014). There are many different considerations to take into account that may impact the future demands for crude oil as well as the future price levels.
It would be interesting to consider certain observations.
Increase of oil production in North America as well as the recent announcement of major reserves found in Texas, USA has not led to a global oil price collapse as we saw previously.
The recent news about the privatisation of 19.5% of the largest Russian oil company – Rosneft – by the JV between Glencore and the Qatar Fund led to a bounce in oil prices as the shares of the company reached an all-time high. The future of oil production in Russia may not be so clear for many industry experts; we are seeing a reduction in the amount of oil processed in many Russian and CIS refineries. Hence, this leaves more for the export markets at similar levels of production.
A number of factors including the growing cost of production in some regions, the role of OPEC in coordinating the scope of production all around the globe and the volatility of the US dollar, may provide a basis for sustaining the current levels of oil prices in the mid term (see graph).
The continued rise in the global trade of oil is expected to reach a peak at about 37mbpd in 2017. The volume of oil refining and petrochemicals production is expected to increase in some regions while margins remain relatively high. Some regions may suffer from overcapacity, especially where construction is the most active, like Asia. The Middle East will continue to maintain its position as a major refining centre and the USA could also increase its export volumes once more new oilfields come into production.
The largest potential players in terms of spare capacity are Saudi Arabia and Iran; both countries are seeking significant investment to maintain and expand the existing level of production. The lifting of Iran’s sanctions has led to a significant change within the region. Iran could become one of the fastest growing economies in the region over the next five years as investment comes into the country (NIOC will need ~ $134bn for future upstream oil and gas projects by 2021). Potential growth is expected to be in the region of 5% in the period 2016 -2020.
The Iranian government gave approval for the new general scheme of Integrated Petroleum Contacts (IPC), and this is expected to support the development of the industry even more. Iraq’s oil ministry is postponing a bidding round for 12 small- and medium-sized oil fields across three provinces to the middle of 2017.
Other companies in the Middle East region are expected to reduce capital investment to continue the trend that was seen in 2016 where expenditure was cut by ~ 30 % in 2016 – more $200bn worth of projects were canceled or postponed.
Another important country is Iraq which produces about 4% of the global oil supply and is the second-largest producer in OPEC after Saudi Arabia. Iraq also possesses a potential for increasing its share in global oil supply since great amounts of proven reserves are still under-explored and the cost of oil production is lower than in many ME producing countries. In 2009, the federal government started awarding Technical Service Contracts (TSCs) to international oil companies: the government reimburses for the cost of oil production and CAPEX plus an agreed fee per barrel of production. The government has come to an agreement with BP, Shell and Lukoil to restart investment to increase output that will bring another 250,000bpd in 2017. ExxonMobil and PetroChina are also discussing their plans to boost production within the country.
But the limitations of Technical Service Contracts may impact Iraq’s medium-term oil sector expansion plans. The government plans to increase oil production capacity by 2020 via service contracts. Of course much depends upon future agreements between OPEC producers as to what level Iraq may reach.
Existing oil pipeline infrastructure, especially for export, will require upgrading if oil exports are to be substantially increased. Operators also face a deficit of drilling rigs and water resources. It is expected that there will be no more than 1.4% production increase for Iraq in 2017 due in part to the fact that the existing production facilities are reaching their peak capacity. Within these conditions it’s more likely that oil production in Iraq will reach only 6.5-7.0mbpd by 2020.
Ratification of OPEC’s production control agreement in late 2016 could lead to increased production of US shale oil and gas. The fall in production by OPEC countries could be substituted by at least 500,000bpd from shale sources.
US operators expect this year to be the plateau for oil prices and anticipate a slight increase in 2018, to raise shale production in the US to a substantial amount. The price of $60/barrel is considered to be the minimum required. OPEC is likely to monitor closely US companies as they invest and build wells in 2017 before the planned meeting in May – this will definitely impact the results of that meeting.
Another important factor to consider is the new president elect of the USA who is expected to bring to the White House an advocate for oil and gas drilling. US unconventional shale oil production is expected to decrease further in 2017 (since the peak of 4.9mbpd in 2015) before its possible revival of 11% in 2018, according to the US Energy Information Administration.
However if US oil companies continue to increase production, this will no doubt impact future decisions by OPEC producers regarding their own production levels and will inevitably result in pressure on crude oil price levels.
