Updates on global oil production – cuts from outside OPEC, expectation of missing OPEC targets, and declining China output

Expect to see more of those soon. By the way, room for several more pump jacks on that site. Photo by James Ulvog.
Expect to see more of those pump jacks soon. By the way, there is room for several more wells on that site. With all those storage tanks on site, there are going to be a lot more wells there eventually. Photo by James Ulvog.

This oil situation getting more complicated:

  • Saudi Arabia is going to diversify their economy. By moving into refining?
  • Consensus is only half of the OPEC cut will be realized
  • Non-OPEC producers agree to 588K bopd cut
  • Output from China is in natural decline – 300K bopd drop in 2016 and another 200K bopd in 2017

What diversification?  12/1 – Wall Street Journal – Saudis Wager On Higher Oil Prices to Drive Economic Diversification – The new leader of Saudi Arabia has a long-term plan to transition the economy away from exporting crude oil towards an entrepreneurial economy. According to this article, the first major step in diversifying the economy is a major push into refining and mining.

Maybe it’s just me, but I don’t think that expanding from exporting crude oil to refining crude oil is much of a diversification. Likewise, it is not a big jump to extracting minerals from the ground when the current focus is extracting oil from the ground.

Next step of the value chain after crude oil comes out of the ground is to refine it into gasoline, diesel, a wide variety of plastics, and a whole bunch of other things that are critical to modern life.

The diversification effort will also involve starting major new mining projects in the country.

The king visited several locations this week where there are multi billion-dollar projects underway in petrochemical and mining.

Somewhere down the road in the follow-on round of diversification the country will then jump to manufacturing along with tourism and financial services.

12/6 – John Kemp at Reuters – OPEC expected to deliver only half of target production cut – Consensus among 260 energy professionals in a survey is that OPEC will only realize a 0.6M bopd drop in production instead of the announced target of a 1.1M bopd cut.

12/9  The American Interest (formerly Via Meadia) – OPEC Cuts Not Expected to Change Much – Short version: US IEA is predicting oil prices to stay in the range of $50 in 2017. This is not even close to what OPEC was hoping for and desperately needs. The impact will not be to increase oil price, but instead market share will move away from OPEC countries and towards US producers.

12/10 – Wall Street Journal – Oil-Producing Countries Agree to Cut Output Along With OPEC Russia agreed to cut oil production 300K bopd. Total cut for 11 non-OPEC countries is 588K bopd.

This is on top of the 1.2M bopd cut from OPEC members, making for a promised reduction of 1.8M bopd.

Odd thing is the cuts will be phased in over the next six months. Part of the deal is that expected and natural production decline rates from certain fields or locations are allowed to be counted as part of the cuts.

In other good news for US drillers…

12/12 – Bloomberg – Deepest Oil Cuts in World’s Top Market Didn’t Need OPEC Deal – (Hat tip Million Dollar Way.) Due to natural decline rates, high prices making some wells uneconomical, and many fields maturing, China’s oil output has dropped about 300K bopd this year. Article says production from China will drop another 200K bopd next year.

That would put next years production cuts at:

  • 1.2M bopd – OPEC
  • 0.6M bopd – non-OPEC
  • 0.2M bopd – China
  • 2.0M bopd – total

Next year is looking really good for U.S. shale companies.

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