Oil Production Shows Signs of Flagging
As U.S. and OPEC pump out crude, other producers cut back
ENLARGE
Trucks rumble through an oil field near Fort McMurray, Alberta. Sinking energy prices have led some producers to curtail development projects.PHOTO:BEN NELMS/BLOOMBERG NEWS
By
NICOLE FRIEDMAN
Updated July 13, 2015 5:24 p.m. ET
The U.S. and the Organization of the Petroleum Exporting Countries have flooded the world with crude oil, sending prices tumbling. But the abundance has overshadowed declining production in areas—from Colombia to Norway to northern China—that experts consider vital to long-term supply growth.
Confronted with the plunge in prices, companies in these regions are delaying and canceling projects. Across the world, just six major oil projects received the green light in 2014, compared with an average of more than 20 a year from 2002 to 2013, according to Deutsche Bank AG.
The International Energy Agency said Friday that growth in supplies from outside OPEC would “grind to a halt” in 2016, with output due to fall in Russia, Mexico, Europe and elsewhere.
Oil companies need to replace between 5% and 8% of crude output each year just to offset shrinking production from old wells, analysts estimate. Currently, that amounts to at least five million barrels of daily output. Falling production in areas that have been outside the spotlight in recent months could send prices shooting up in the coming years, hurting consumers and damping economic growth, once the market works through the current overhang, investors and industry officials say.
Six Faces in the Race to Pump More Oil
The world is awash in oil. OPEC, in the past, would throttle production to bolster markets. Now, it has opened the spigots. Among the world’s top producers, Russia, Iraq, Canada and China are now pumping flat out, too. Take a look at some of the prominent people behind the boom.
“When you start cutting exploration budgets and you stop developing the next frontier…the seeds have been sown for the next bull market,” saidVirendra Chauhan,an analyst at London consulting firm Energy Aspects.
Global oil output grew 5.5%, or by 4.9 million barrels a day, from 2011 to 2014, according to the IEA, a Paris-based energy watchdog. Most of that growth came from U.S. shale-oil fields. In much of the rest of the world, output was flat or declined, despite average prices of nearly $100 a barrel. The supply statistics include crude oil, natural-gas liquids and biofuels such as ethanol.
With global oil prices now hovering below $60, the outlook for launching large-scale projects and exploring for new oil fields is bleak, especially outside the U.S. and the Middle East. Companies around the world have cut $130 billion on oil exploration and drilling for 2015 alone, according to consulting firm Wood Mackenzie.
Major oil companies includingRoyal Dutch ShellPLC andChevronCorp.have postponed or suspended projects in Nigeria, Norway and the Canadian Arctic. In June, Brazil’s state-run oil company cut its 2020 domestic-production target by 33%, to 2.8 million barrels a day, and Colombia’sEcopetrolSAcut its long-term forecast by several hundred thousand barrels a day.
“The investment cycles outside the U.S. are much longer. When you start to make cuts initially, it’s very hard to quickly reverse those decisions,” saidPoppy Allonby,a portfolio manager at BlackRock Inc., which oversees $4.8 trillion. “It’s clear that prices are currently too low to encourage significant investment.”
Ms. Allonby’s fund has added exposure to oil producers in recent months. Global production growth is “one of the things we’re watching the most closely,” she said. “It actually makes us more positive on the longer-term outlook for the energy market.”
In the thick boreal forests of Canada’s northern Alberta, the hamlet of Anzac witnessed explosive growth in recent years as multinational energy companies spent tens of billions of dollars developing projects to tap that country’s oil reserves, the world’s third-largest.
But local businesses say they already have begun to feel the impact of low oil prices, as the number of workers declines and those who remain spend less. Most oil-field operators in northern Alberta have canceled or deferred development of new oil-sands projects. Those hitting the Anzac area hardest are decisions earlier this year by Nexen Energy ULC, a unit of Chinese state-ownedCnoocLtd., to pare back all engineering and design work at its newest project, called Kinosis 1B, and byConocoPhillips,which has slowed the pace of development at its huge Surmont oil-sands project.
The Canadian Association of Petroleum Producers in early June cut its forecast for the country’s 2030 oil production by 17%, or 1.1 million barrels a day.
“We’ve seen a 10% to 15% dip in our sales” since last fall, when oil prices began to plunge, saidLaura Cote,the manager of Anzac’s only grocery store.
ENLARGE
The IEA said in its Friday report that it expects non-OPEC production outside the U.S. to decline by about 300,000 daily barrels next year. The global market is likely to remain oversupplied in 2016 due to robust OPEC production, the agency said. The major forecasting agencies, including the IEA, don’t forecast OPEC production. The 12-country group is currently producing more than its target of 30 million barrels a day. The IEA also hasn’t released forecasts for beyond 2016.
Other analysts say demand could catch up with supply more quickly than that.
“If you go country by country, it’s not hard to roll off 2.5 million barrels [a day] of production” in the next 12 to 15 months, saidSteven Kopits,president of consulting firm Princeton Energy Advisors.
Investors are keen to not be caught off-guard again, after many failed to foresee last year’s nearly 50% plunge in oil prices. U.S. oil futures have rebounded since hitting a six-year low in March, but the recovery faltered last week on concerns about continued supply growth in the U.S. and OPEC.
The market’s direction in the next five years could depend on the 47% of global supplies outside the U.S. and OPEC. Accurate production records can be tricky to obtain from some of those places, heightening the uncertainty.
“Everyone seems to be staring at the demand numbers. Everyone seems to be staring at every supply number they can get their hands on. I am, too,” saidJohn Dowd,portfolio manager of the $2.2 billion Fidelity Select Energy Portfolio. “I just don’t know how to gain confidence from any of the data. All of it’s extraordinarily subject to revision or it’s extraordinarily volatile.”
Even in the U.S., which industry experts say publishes the most current and accurate data in the world, production estimates have consistently been revised higher in recent months, surprising traders.
One big question mark is the long-term outlook for U.S. shale-oil production. Not all market watchers think large investments in the Canadian oil sands or Arctic drilling are necessary. A Goldman Sachs Group Inc. report in May lowered its forecast for Brent crude prices to $55 a barrel in 2020. The bank said U.S. and OPEC supply growth would be sufficient to meet demand in the next five years, and possibly the next 10 if productivity improves. On Monday, Brent crude settled at $57.85 a barrel. U.S. oil was at $52.20.
But others say that, at less than 6% of the global market, shale-oil production is too small to keep up with demand in the long term.
“There is an inordinate amount of attention paid to U.S. shale producers,” saidDan Pickering,chief investment officer at TPH Asset Management in Houston, which oversees $1.3 billion. “There’s going to be supply declines in a lot of places around the world.”