EIA's Predictions Questionable - OPEC Call is the Fudge Number!

Just How Accurate Are The EIA’s Predictions?

  

• Mahjoub Mohamed Salih, WNN news

  

The EIA recently published the February edition of their Short-Term Energy Outlook. If you follow this month to month, and we do, you will notice their prognostications change a little every month. And over several months those small changes can add up to some rather dramatic changes. Nevertheless, below are several charts with their current oil production projections.

The EIA STEO only gives monthly data for total liquids. All C+C data is quarterly and annually. The monthly projected data begins in February 2016. Projections for quarterly and annual data begins January 2016.

The EIA says Non-OPEC total liquids dropped .5 million barrels per day in December and another .36 mbd in January. But then, other than another short drop in the first quarter of 2017, they see things leveling out for the next two years.

For the total world, the EIA expects far better production numbers than just for Non-OPEC. They expect new highs to be reached in 2016 and again in 2017.

They see US total liquids dropping in 2016 then they begin a slow rise through 2017, but not overtaking the peak in 2015.

Apparently the EIA thinks Russia has had it. They see a drop in December 2016 then a huge drop in January  2017. We have no idea why. However the scale here makes the decline seem greater than it really is. From January 2015 to December 2017 the decline is only 400,000 barrels per day.

Adding the other FSU nations to the mix, mostly Azerbaijan and Kazakhstan, only exacerbates the decline, making it half a million bpd between January 2015 and December 2017.

Looking at just Crude + Condensate you get a better picture of what the EIA really expects in the next two years.  They expect Non-OPEC C+C to drop 580,000 bpd in 2016 and another 170,000 bpd in 2017 for a total of 750,000 bpd over the two years.

They are expecting far better things out of OPEC's gang.  They have the OPEC gangs total liquids up 1,010,000 barrels per day in 2016 and another 870,000 bpd in 2017. They do not project OPEC C+C.

But taking a closer look at their US Projections:

The EIA expects US C+C to drop 740,000 barrels per day in 2016 and another 230,000 bpd in 2017 for a total decline over two years of 970,000 barrels per day. 

  

However they have US total liquids faring much better then just C+C. They have total liquids declining by only 490,000 barrels per day in 2016 and increasing by 100,000 bpd in 2017.

What this means is that US “Other Liquids”, that is NGLs, biofuels and refinery process gain must show a very impressive gains while everything else is going to pot. They show other liquids increasing by 250,000 bpd in 2016 and another 330,000 bpd in 2017. 

Most of this increase has to come from NGLs as biofuels are only a minor input and refinery process gain pretty much follows C+C consumption. But…

 

Using their projections for Dry Gas production we find that gas production increased more than other liquids increased in 2015. However they say gas production will increase by only .4 percent in 2016 while other liquids increase by 4.6 percent, and a similar story in 2017 though not quite as dramatic.

Bottom line: We find the EIA’s past production data very accurate. However their projections appear to be pretty lame. This observation is proven out by the fact that those projections are constantly changing. Also, those “Other Liquids” projections seem to make no sense whatsoever. It appears to be mostly a fudge.  

But the very biggest problem with the EIA’s projections are with OPEC. That is because it is not a projection at all but an estimate of what will be needed to meet world demand. That is they estimate Non-OPEC production, then they estimate world demand, and the difference between the two will be the “Call on OPEC”. That is, they will simply expect OPEC to make up the difference, whatever that difference may be.

Lately, however, OPEC seems to be producing a lot more than their call asked them to. That is, they appear to be ignoring their call. And they will likely do likewise when they are expected to produce more to meet demand. They are all currently producing flat out and if there is a call on them to produce more, it will very likely go unanswered. 

WE thus  expect the “Call on OPEC” is a running joke between OPEC nations.

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OPEC January Production -

• Mahjoub Mohamed Salih, WNN News (Arabia)

The latest OPEC Monthly Oil Market Report is just out. The the data is “Crude Only”production and do not reflect condensate production.

Also the charts, except for Libya, are not zero based. I chose to amplify the change rather than the total. The chats do not include Indonesia. That will be added within the next few months when I am able to get better historical data for Indonesian crude only production. 

All Data is in thousand barrels per day.

OPEC production, not including Indonesia, was up 130,700 barrels per day in December.

OPEC uses secondary sources such as Platts and other agencies to report their production numbers. These numbers are pretty accurate and usually have only slight revisions month to month. 

Algeria peaked in November 2007 and has been in a steady decline since that point.

Angola has been holding steady since peaking in 2008 and 2010.

Ecuador appears to have peaked last year. It is likely production will be down, but only slightly, in 2016.

Sanctions were just lifted, in the middle of January, on Iran. I expect their production to be up by about half a million barrels per day by year’s end. However I believe Iran will be the only OPEC nation with any significant production increase in 2016. Most other OPEC countries will, I believe, be flat to down slightly.

Iraq increased production more than any other OPEC nation in 2015. However I believe their increase in 2016 will be very moderate, if any.

I expect Kuwait will continue its slow decline from its peak in 2013. 

Libya is struggling with their own Arab Spring. There is no way of knowing when, if ever, peace will break out there. I think it extremely unlikely they will produce as much as 1,000,000 bpd within the next 5 years or so.

Nigeria is struggling with their own political revolution. But it appears they are in decline regardless of their political problems. However they had the largest increase in January, up 74,000 bpd.

I believe Saudi is producing every barrel they possibly can. They will be lucky to hold this level for much longer.

Qatar has lots of natural gas but their oil production has clearly peaked and is now in decline.

From 2005 through 2010 the oil rig count in the UAE averaged around 12. In November their oil rig count stood at 48,  4 times their average. They have managed to increase their production about 11% above their 2008 peak. I believe UAE production is about to follow Kuwait’s lead and rollover. The UAE’s rig count stood at 44 in January.

Not much can be said about Venezuela. Their conventional oil is in decline but their bitumen production is keeping production relatively flat. They took a hit in January however, down 34,500 bpd.

The combined production of OPEC, less Saudi Arabia and Iraq, peaked in January 2008 at 19,931,000 bpd and is down 2,778,000 bpd since that date 17,153,000 bpd.

Since the combined production of the other OPEC 10 nations peaked in January 2008, Saudi and Iraq have increased their production by 3,625 bpd, from 10,850,000 bpd to 14,475,000 bpd. That is 33,000 bpd below their peak in June 2015.

Again, none of this data includes Indonesia. Historical crude only data for Indonesia is not available. I will include Indonesia in OPEC charts when I can calculate those numbers.

OPEC average crude only production in 2015 was 31,152,000 barrels per day. In January their production was 31,628,000 barrels per day.

OPEC expects Non-OPEC liquids production to be down 720,000 barrels per day in 2016. If OPEC manages to hold production relatively flat from January, their 2016 production will be up 475,000 bpd. That is their gain would be about 250,000 bpd short of Non-OPEC’s decline.

However I expect OPEC to be slightly up this year due to Iran increasing production. But the increase will be modest as the rest of OPEC will likely be down. However I believe Non-OPEC will be down a lot more than 720,000 barrels per day.

China, the world’s fifth largest oil producer, has peaked and will suffer a sharp decline in 2016.

Why Declining Chinese Oil Production Is Good for Global Prices

China’s role as a big oil consumer has become a crucial factor in energy markets in recent years. Now, its role as a major producer is gaining attention as well.

China is among the world’s top five oil producers, but its fields are growing depleted and are increasingly expensive to pump. The country’s leading companies are choosing to leave more of their oil in the ground and some analysts now say Chinese oil output may have peaked.

Cnooc Ltd., China’s third-largest oil producer–which produces most of its oil from offshore fields–also said last month it expected output to decline by 5% this year, after years of rapid growth.

As China’s production starts to decline, demand for oil from overseas should remain firm, which would be good news for prices, which have been languishing near multi-year lows amid a global supply glut and weak demand in the rest of the world.

ALERT: Oil Prices Set to Rise Sharply

Oil Production Going to Drop; Oil Prices Likely To Increase

Rystad Energy, an independent oil and gas consulting services and business intelligence data firm in Oslo, Norway, has online, a wealth of information concerning upstream oil production projects and costs. Some of it is a bit dated but some of their charts date from late 2015.

http://www.rystadenergy.com/

The two below Rystad charts were published by CNN Money on November 23, 2015.

This is overall or average cost, not marginal cost. It cost Canada $41 to produce a barrel of oil but only cost Russia $17.20. I guess that is why Canada is cutting back but Russia is not.

 Here is the breakdown between capital expenditures and operational expenditures. Why would the United Kingdom’s operational expenditures be two and one half times those of Norway? After all, they are both drilling basically the same oil field.

So why is not the price of oil having a more dramatic effect on production? Well it is, it just takes a while. Here are some plans from about a year and a half ago, when the price of oil was much higher.

Rystad published the two below charts in their US Shale Newsletter in January 2015 but the data dates from the 4th quarter of 2014, just as the price of oil had started to drop.

At that time Bakken (ND) had a break even price of $53 while Eagle Ford oil had a break even price of $42 and Eagle ford condensate a break even price of $50.

The below chart, from the same newsletter, assumes $90 a barrel oil.

Shale oil, at the time, had an average break even price of $65 a barrel, which would have given them a 45% internal rate of return and a payback time of only 2 years. It is amazing how much things have changed in just a little over a year.

But by October 2015 things had changed dramatically.

Exclusive: Offshore oil output to plunge as producers scrap field upgrades

Global offshore oil production in aging fields will fall by 10 percent next year as producers abandon field upgrades at the fastest rate in 30 years, in the first clear sign of output cuts outside the U.S. shale industry, exclusive data shows.

A drop in oil prices to half the level of a year ago has forced producers to slash spending and scrap mega projects that can take up to a decade to develop, but they are also taking less visible steps to cut investment in existing fields that will have an immediate impact on global supplies.

There have been few signs of how cost cuts of around $180 billion will impact near-term production until now. They could erode the glut that has forced down prices, and help balance global production and demand by the middle of next year or earlier, Oslo-based oil consultancy Rystad Energy said.

Data provided exclusively to Reuters by Rystad show a sharp decline in investment to upgrade mature offshore oil fields in order to arrest their natural decline, in what is known as infill drilling.(Graphic: link.reuters.com/xaz75w)

The above chart shows the decline in infill drilling due to previous drops in the price of oil. The data is from the Gulf of Mexico, Southeast Asia and Brazil. The decline in infill drilling in 2009 was the largest… until now. The first half of 2015 saw the largest decline in offshore infill drilling in history.

In three major offshore basins — the Gulf of Mexico, Southeast Asia and Brazil — infill drilling dropped by 60 percent between January and July this year compared with the same period last year, according to the Rystad Oil Market Trend Report, whose data is based on company data and regulatory filings.

For example, according to the data, in the Gulf of Mexico, infill drilling on mature wells dropped from 149 wells between January and July 2014 to a total of 61 wells during the same period this year.

Based on this trend, Rystad Energy estimates that global offshore oil production in mature field will decline next year by 1.5 million barrels per day (bpd), or 10 percent, to 13.5 million bpd from 15 million bpd in 2015.

The above chart is change per operator, just in the GOM. And this was just in the first half of 2015 when the price of oil averaged about $56 a barrel. What is it now when the price of oil is over $20 a barrel lower?

Well, just since June Wood Mackenzie says the latest figures show that the amount of deferred capital spending on projects awaiting approval has almost doubled from $200bn to $380bn, with 2.9m barrels a day of liquids production now not due to come on stream until early in the next decade.

Global liquids cost curve (October 2015)

*The break-even price is the Brent oil price at which NPV equals zero using a real discount rate of 7.5%. Resources are split into two life cycle categories: producing and non-producing (under development and discoveries). the latter is further split into several supply segment groups. The curve is made up of more than 20,000 unique assets based on each asset’s break-even price and remaining liquids resources in 2015.

Source: Rystad Energy UCube September 2015

What the above chart tells me is that it now costs a lot more to produce a barrel than it once did. And… unless crude oil hits at least $60 a barrel soon a lot more projects will have to be cancelled. But… all that being said, I think it is now obvious that oil production will drop, rather dramatically, beginning sometime in 2016. And that drop will lead to a rise in the price of oil, at least to $60 a barrel and likely higher.

That is unless some black swan event happens. That could be a collapse in several economies of the world… or a collapse of the economy in one country, China. In other words, it is a given that production is going to decline. So if demand stays constant, or rises, then the price of oil will definitely rise. We know what is going to happen to supply. We have no idea what is going to happen to demand.

 But if BAU continues as normal, the price of oil is going up.

"Now is there anything else that we should worry about?" 

Jack Feanhald, WWN News

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