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BP Predicts OPEC’s Second Coming

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OPEC may face a few lean years ahead, but BP in the latest edition of its Energy Outlook 2035, says that the producers’ group, with its low cost output base will ride out the threat from US shale and ultimately raise its market share.

“I’m perplexed by the idea that OPEC has lost its power,” BP chief economist Spencer Dale said at the launch of the major’s latest long-term oil market outlook on 17 February. “I’ve read report after report about the impending demise of OPEC, but based on this outlook, my hunch is those reports are greatly exaggerated. OPEC remains a force in the market for the next 20 years.”

Surging North American production since early 2012, driven by the US shale and light tight oil boom, threw the 12-member producer group’s long term role into doubt. Both OPEC and OECD energy watchdog the International Energy Agency (IEA), in their respective monthly oil market commentaries over the past 12 to 18 months, have regularly warned that non-OPEC producers were on course to keep chipping away at OPEC’s market share.

The oil major sees OPEC’s market share recovering to 40% by 2035 – from around 33% in 2014, according to latest IEA data – following a slump over the coming few years.

US tight oil production growth will begin to slow significantly within the next five years however, as the plays begin to suffer from a combination of high decline rates, and falling well quality. This will leave the door open for OPEC to begin reclaiming some of its lost market share from 2020 onwards, BP says.

BP sees global demand for oil, biofuels and other liquids rising by almost 20mn b/d to 111mn b/d by 2035 – growth of 1.3%/year between 2013 and 2020, and 0.7%/year through to 2035. By the end of the forecast period demand for OPEC crude will exceed 2007’s record 32mn b/d, BP says.

In the early years of BP’s forecast period the increase in demand will mostly be met by unconventional oil supplies such as biofuels, tight oil, oil sands and natural gas liquids (NGLs) from outside OPEC, BP says. These supplies will grow by a total of 13mn b/d by 2035 (see chart).

The lion’s share of this boost will come from the US, Brazil and Canada, which together will account for 12mn b/d of the increase: US output will increase by 6mn b/d through the forecast period, with Brazilian and Canadian output growing 3mn b/d each. Conventional oil production in non-OPEC countries will remain broadly flat through 2035, BP says.

“[OPEC’s] Market share has dipped very slightly, but it retains a market share of around 40%, and accounts for 70% of total reserves,” Mr Dale says. OPEC will remain “a central force” in meeting world oil demand for decades to come, he adds.

OPEC supply is forecast to grow by 7mn b/d by 2035, according to the BP outlook. A 2mn b/d boost in Iraqi crude output and a collective 3mn b/d increase in OPEC NGLs provide the key increments.

BP’S FORECAST OF CHANGES IN GLOBAL DEMAND AND SUPPLY TO 2035 (MN B/D)enter image description here

INSTABILITY UP, PRICES DOWN

But BP sounds a warning over the recent increase in disruptions due to violence to MENA oil output. Total supply disruptions reached 3mn b/d in 2014, BP says, well above the historical average of 400,000 b/d: “Heightened levels of geopolitical risk and uncertainty suggest that supply disruptions may well remain elevated through the mid-term,” BP says.

BP now factors in average 1mn b/d supply disruptions over the coming 10 years, before returning to the historical average of 400,000 b/d by around 2025 – five years later than previously estimated.

The IEA also, in its latest Medium Term Oil Market Report (MTOMR), released last week, warns that this increased instability could badly derail future plans for supply growth, and set the stage for an oil shortage in the coming decade.

With the world banking on traditional Middle Eastern producers to meet a significant portion of post-2020 demand growth, this means “we now have a problem,” the IEA’s chief economist Fatih Birol said on 17 February while in Tokyo to address Japan’s Gas Industry Association.

“The security problems caused by Daesh [Islamic State] and others are creating a major challenge for the new investments in the Middle East, and if those investments are not made today, we will not see that badly needed production growth around the 2020s,” Mr Birol, who is set to replace Maria van der Hoeven as IEA Executive Director from September, said. “The appetite for investment in the Middle East is close to zero, mainly as a result of the unpredictability of the region,” he adds.

IEA analysis suggests that global upstream oil and gas investment will fall by a record 17% to $580bn for 2015.

Given the slump in world oil prices since mid-2014, this cutback in global oil and gas investment should come as no surprise, considering that oil companies from across the spectrum have slashed their capital expenditure plans for the coming 12 months. This is particularly evident in those with operations in some of the more costly oil producing regions.

But while some OPEC countries have scaled back their investment projects in response to the price slide, the biggest impact has been felt by non-OPEC countries – a fact which saw the IEA slash its forecast for non-OPEC supply growth to 2020 in last week’s MTOMR.

The IEA now sees oil supply from countries outside OPEC growing by 3.4mn b/d from 2014 levels to 60mn b/d in 2020, at an average of 570,000 b/d per year – significantly lower than the 1mn b/d annual growth experienced over the past five years (MEES, 13 February). Between 2014 and 2019, the period covered by its previous report, the IEA forecasts non-OPEC supply growth of just 2.93mn b/d, a massive 1.88mn b/d down on the forecast contained in last year’s report (MEES, 20 June 2014).

Total OPEC capacity meanwhile is estimated to increase 1.22mn b/d over the same period, representing an annual rate of around 200,000 b/d per year, down close to 43% from the 350,000 b/d annual growth the IEA estimated in its previous MTOMR. This is despite the group’s capacity contracting for a third straight year in 2015, as a direct result of the continued conflict in Libya, which the IEA sees reducing the country’s sustainable production capacity to just 500,000 b/d, from 850,000 b/d in 2014.

While the IEA pencils in growth in Libyan capacity to 980,000 b/d by 2020, the recent escalation of the country’s conflict, including the direct targeting of energy infrastructure, means there is a huge margin of error.

In addition to the Libyan wild card, another key ‘unknown’ is Iran. The IEA’s estimate for OPEC capacity growth through 2020 leaves Iran steady at 3.6mn b/d – ie it assumes that sanctions on Iran stay in place in their current form throughout the entire forecast period.

How Iran’s oil output capacity develops depends almost entirely on the outcome of the ongoing nuclear talks taking place between Iran and world powers, which are set to conclude by end-June 2015.

Should a deal be reached, and sanctions removed from Iran’s key oil and banking sectors however – an outcome which is still very much within the realms of possibility – this could prove a game changer for the Iranian oil sector, which for almost a decade has been starved of the newest technology and methods being developed by international oil companies in the West.

The reintroduction of such companies to Iran’s oil sector would set the stage for both the rehabilitation and revival of some of the country’s biggest and oldest fields, as well as the development of key projects straddling Iran’s borders in the south and west, which to date have been victims of repeated delays, thanks to a lack of both the required funding and expertise.

Stringent international sanctions have limited Iran’s output to around 2.8mn b/d for the past several years. But should sanctions relief eventually come, and projects be awarded swiftly, capacity could – fairly painlessly – rise toward 4mn b/d in the medium-term, and possibly beyond.

IRAQ, UAE LEAD

Within OPEC, the IEA sees Iraq taking the lead, accounting for 88% of the group’s total growth between 2014 and 2020 (see graph and table). Iraqi capacity is set to increase from 3.66mn b/d in 2014 to hit 4.73mn b/d by 2020, consolidating its position as the group’s second largest producer behind Saudi Arabia.

But given the huge challenges Iraq currently faces – namely the ongoing Islamic State (IS) insurgency, and the strong likelihood that it will continue well into this year and possibly next – the IEA warns of considerable downside risk to its Iraq forecast.

To date, the advance of IS has had little effect on Iraqi output. In fact, the country has shown impressive growth, with production, including volumes from Iraqi Kurdistan, surging to a 35 year high of 3.7mn b/d on average in December 2014.

In addition to the Kurdish region, gains have been concentrated on southern Iraq’s oil heartland. An end-2014 deal between Baghdad and the KRG – which may now be on the rocks – reopened an outlet for Iraq’s northern exports which had been shut in for nearly a year by Jihadist forces.

But despite these steps, infrastructure challenges and the elevated security risk – particularly in the early part of the IEA’s forecast period – are expected to limit the potential output growth from Iraq’s massive reserves.

After Iraq, the IEA sees UAE as posting the most significant medium-term capacity boost: a projected 310,000 b/d rise from 2.9mn b/d in 2014 to 3.21mn b/d in 2020. This comes as the country has vowed to press on with its oil production capacity plans, despite the fall in oil prices: “At a time of volatility in the energy market, our energy policy and investment decisions must be driven by long-term demand projects, and not delayed by short-term instability,” ‘Abd Allah al-Suwaidi, director general of Abu Dhabi state oil firm Adnoc says (MEES, 14 November 2014).

The largest additions to the UAE’s production in the coming five years is expected to come from the offshore Upper Zakum field – one of the world’s biggest – where it is looking to boost production by 250,000 b/d to 750,000 b/d. The $10bn ExxonMobil-led project is now scheduled for completion by 2017, having already been pushed back from 2015.

“While the oil price crash has made the low-cost reserves in the UAE look even more attractive, it has also led to corporate belt tightening that may make it difficult for foreign companies at work in this core Gulf producer to speed up capacity building,” the IEA says.

Algeria and Kuwait were the two OPEC members for which the IEA presented the most negative output prognosis in its previous MTOMR (MEES, 20 June 2014). Last year’s IEA forecast of a fall in Kuwaiti output to below 2.5mn b/d by 2019 elicited a sharp response from the emirate which is targeting 4mn b/d production by 2020 (MEES, 27 June 2014).

Perhaps mindful of the response to last year’s report, the IEA has sharply raised its medium term forecasts for both Kuwaiti and Algerian output, though these two are set to remain OPEC’s worst two performers over the forecast period, according to the IEA’s latest numbers.

The IEA forecasts a fall in Algerian oil production capacity from 1.17mn b/d currently to just 950,000 b/d, as a long period with no projects and very little commerciality continues to eat into the country’s oil capacity. Still, this is up from the IEA’s previous forecast, which put capacity in 2019 at 890,000 b/d.

This decline comes despite a $90bn oil and gas investment program, which Algiers says it is still planning to press on with, regardless of the sharp fall in oil prices. Prospects for growth in Algeria have been further hit by heightened security concerns, the IEA says, following the kidnapping and execution of a French tourist in September 2014, less than two years after the deadly attack on the In Amenas gas facility.

In Kuwait, while the forecast is similar, the reasons are somewhat different. The IEA in its latest outlook forecasts a 100,000 b/d decline in the country’s oil production capacity to 2.8mn b/d by 2020 – a fact worsened by Riyadh’s unilateral decision to close the Khafji oil field in the Neutral Zone, which it shares with Kuwait.

But while this is 30% below the government’s official target of 4mn b/d oil output by 2020 through investment of close to $50bn, it is an upward revision on the IEA’s previous forecast, which saw the country’s capacity fall to 2.58mn b/d by as early as 2019.

This revision comes on the back of Kuwait’s recent resumption of extensive drilling, well workovers and debottlenecking programs, which together with a planned water injection scheme at the giant Burgan field, is slated to boost production capacity.

Chief Executive of the state-owned Kuwait Oil Company (KOC) Hashim Hashim said on 16 February that Kuwait plans to deploy 120 oil and gas rigs by the start of 2016, up from 80 rigs now, in an effort to boost production capacity to 3mn b/d by early 2016. “We are continuing our program, building capacity, especially in the oil and gas program. We are not stopping… We are growing our activities on the drilling side.”

Kuwait this week ratified its latest five-year development plan, which calls for $116bn in total investment through to 2020.

OPEC SUSTAINABLE CRUDE OUTPUT CAPACITY – LATEST IEA FORECASTS (MN B/D)Table

This Article Was Published In The Latest Issue Of MEES. Read Two Full Issues With A Free Trial To MEES – A Weekly Publication That Focuses On Middle East & North Africa Energy News, Analysis And Data Since 1957.

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