In a report released on Aug. 8, “OPEC, Flaring, Offshore Drilling and More,” DrillingInfo offered an outlook on current trends impacting the energy market, namely the lack of interest in offshore drilling, OPEC’s compliance and gas flaring issues in the Permian.
Since the U.S. shale revolution began, the industry has seen onshore oil and gas account for most U.S. production. The report noted that non-major operators are more comfortable drilling onshore because production comes online sooner and drilling can be turned on or off depending on market conditions.
“Onshore drilling just has better economics currently [and] cycle times also play a key role in offshore projects versus onshore drilling,” Sarp Ozkan, DrillingInfo’s director of energy analysis, said.
Aside from shale’s allure, the lack of interest in U.S. offshore projects was shown by the Bureau of Ocean Energy Management’s (BOEM) Lease Sale 250, a part of a lease program enacted by President Donald Trump to open up U.S. offshore areas for drilling. The sale brought in bids on 815,000 of the 77 million acres offered, according to the BOEM.
“The reason why some offshore projects don‘t have a huge draw is because you have to commit a lot of capital upfront, but get first oil two years from now,” Ozkan said. “Your project economics require you to have somewhere in the tune of $55 to $60 to get an acceptable rate of return over the life of the project.”
The report noted that because offshore drilling projects are capital intensive, pursuing them has become less attractive when oil and gas prices are in a downturn. Ozkan did note that there will be a growing need for oil majors’ presence in onshore shale projects within five to six years.
DrillingInfo’s report shows that multiple offshore projects in the Gulf of Mexico (GoM) will come online in the near term. Shell, Apache and LLOG have deepwater GoM projects that are expected to start in 2019, according to the Energy Information Administration’s July 18 Short Term Energy Outlook.
But, Ozkan forecasted that in the long-run without more global, long lead offshore projects—and U.S. shale production plateauing—there may be a supply short fall within five years due to the lack of investment.
In terms of natural gas, the report finds that its production in the GoM has been on a steady decline since 2005. Though DrillingInfo predicted GoM dry gas production will increase to roughly 3.3 billion cubic feet per day (Bcf/d) by 2023, it is still a long way from the 10 Bcf/d seen in 2005.
But, the story is quite different for GoM crude production. DrillingInfo’s GoM Crude Production chart shows that crude has been on a positive route since 2015 and will continue that way. The company expects GoM crude production to reach about 2.2 million barrels per day by 2023 once projects from operators like Shell, Apache and LLOG come online.
“They chase crude oil because natural gas production just hasn’t been as prolific in the Gulf of Mexico,” Ozkan said.
OPEC is also playing an important role in shaping the global supply and demand outlook. DrillingInfo analysts said that if OPEC returns to 100% compliance, the U.S. continues in its current path and demand follows the IEA’s forecast then the market will run into an oversupply situation.
“Bringing on an additional 600,000 barrels a day of production back into the market is going to have a damaging impact on the global supply and demand picture today,” Ozkan said. “Putting that much supply back into the market will mean that our inventories are not going to decline as fast as they were once before and we could potentially see building inventories towards the back-end of the year.”
Reuters reported Aug. 8 that the producer group met to discuss an output policy in June, and after months of underproduction, agreed to return to 100% compliance—which means an output increase of nearly 1 million barrels per day.
“The recent slowdown in the pace of inventory declines shows that this [oversupply problem] has already started,” the report noted.
Still, geopolitical factors like the continued decline in Venezuelan oil, Libyan and Nigerian production fluctuations, and/or OPEC countries bringing spare capacity back online could reverse the course of an oversupply, the report’s analysis predicted.
“The geopolitical factor is really what happens with Iran’s exports with the sanctions being reinstated and OPEC’s wildcards which are Venezuela, Nigeria and Libya,” he said. “What happens with them is really going to pave the way to whether or not we have that oversupply or not.
“When Saudi Arabia and Russia bring additional production back and sort of get back to that 100% compliance level for the quota-caring countries, it’s definitely going to put additional supply back in the market. The United States will continue to grow production at these price levels, and even at lower prices, if need be—with Iran the sanctions are likely to have some impact on their volumes, but given other political factors like the trade war and potential tariffs, that could cause China to look Iran’s way for their oil exports.”
Ongoing infrastructure issues and lack of demand for natural gas everywhere has raised a gas flaring problem, specifically in the Permian. Though still small in terms of volume, DrillingInfo predicted that flaring’s current trajectory in the basin could indicate a potential problem in the future.
“We’re going to keep a very close eye on [gas flaring] to see if the infrastructure bottlenecks, natural gas demand and regulations will actually flatten out Permian production,” he said.
Mary Holcomb can be reached at firstname.lastname@example.org
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