I was waiting for someone else to dip a toe in these waters, but since no one has, I will take the plunge myself concerning the next 12 months in the oil and gas world.
OPEC has announced a cut of about 5% starting this month, to last at least 6 months. Some think the big question is “Will they cheat?” Others think the big question is “Who will cheat,” with cheating as a given. I’ve voiced my opinion on this before, which is that they were already proclaiming a phantom increase in their production before the meeting, so a “cut” to their present true production has zero actual impact on their exports or revenue.
Due to my belief explained in the previous paragraph, I say, “They will hit their decreased production targets.” The thing to watch is not the announced figures, but the increase or decrease in storage. This is a hard thing to do, as only the US figures are somewhat believable, and they are about 3 months behind reality. Still IEA and EIA figures should be watched and see if there is a downward trend. That is not completely true… or should I say, “That is not truly complete?” In any case, the question is really “Will the downward trend of the production to consumption ratio continue or will it accelerate?”
If my belief is wrong, then consumption should almost immediately exceed production. If my belief is right, then the two figures will remain in near equilibrium with production changes and consumption changes being the factors that determine the future relationship between production and consumption balance.
I think that we’ll see the production-consumption ratio continue at its present pace, with consumption overtaking production this year, possibly this quarter.
The US Energy Outlook
The incoming president had campaigned on “energy independence” for the United States. As Harold Hamm, the CEO of Continental Resources, was an early and ardent backer of candidate Trump, many in the oil patch have interpreted this to mean that shale and light-tight oil drilling and hydraulic fracturing would increase its pace to make up the nearly 10 million barrels per day that the US imports
I think that as much as “The Donald” and Mr. Hamm might believe this to be the case (or not), it is just not feasible. Even if we ramp up the fracturing to inconceivable levels, we won’t hit the magic 10 million barrel level for longer than the next presidential term will endure
The above does not mean that energy independence itself is not feasible. It will take more drilling, more wind turbines, more solar panels (both industrial and on the personal/household level), more electric vehicles, more gas-fired and coal-fired power plants, and more nuclear power plants. That’s a lot of infrastructure, and whoever goes on the hook to build these will need to have some assurance that the next administration, whoever it is, cannot pull a “Dakota” on the owner/builder, and pull the rug out from under them after things have already been approved and have progressed to the final stage.
Another thing that can help with the above is to work with companies to synchronize traffic lights – let’s keep these off the internet to prevent mischief. The amount of gasoline lost in downtown areas due to out-of-sync lights has got to be significant. The method to do this is not hard, and most traffic lights already have the proper hardware. Even if they don’t, a small LOGO! type PLC is only a few hundred dollars, so this is not an expensive project over all.
To continue with energy-efficiency gains, we should have a moratorium on unnecessary flaring. I have always been amazed at the amount of gas we flare on some wells. The project should have a plan to use some type of on-site processing, storage, and transport of the gas to have it sold and used. I realize that some flaring (and flare capability) is necessary and unavoidable, but I’ve been on rigs where you have a hundred foot flare 24 hours per day. That waste of BTUs is dumb on all levels, except “ease of implementation.” Just because there are obstacles is no reason not to do the smart thing. You did similar with cuttings, so now you’ll have to do the same with natural gas.
We also need to continue to pursue new battery or fuel cell technology. The US used to be the technology leader. The government needs to get out of the way and let this happen again. Along this line (and previous points, too), the US government needs to stop picking the winners and losers. You cannot subsidize wind and penalize oil at the same time. Let them compete. Some tax break for new technology isn’t too much out of line, but outright subsidies for inferior technology have to be stopped or at least significantly curtailed.
Alternative sources for energy – biodiesel, algae-based, geothermal, tidal, or whatever – should be pursued, with grant money given to the development of the technology itself. Once it is ready for production, the grants should go away. If it cannot be made cost-effective, it isn’t really an alternative.
Energy independence, though, does not mean “more oil.” It means “self-sufficiency through production, innovation, and conservation.” Without all sides of that triangle, it is a pipe dream.
My prediction is the Trump and his camp recognize the above, and begin taking steps to allow more drilling on federal land, more coal use, and perhaps easier permitting for nuclear power. I don’t expect the government cheese factory to cut off “alternative” energy sources altogether, so wind and sun will still get their government cheese, too.
I hope that grants and subsidies for batteries go away. Tesla is making money. Let them pay their own way, or at least compete on a level playing field.
International Energy Outlook
• China and India are going to continue their growth.
• Indonesia is going to continue to consume more than it produces, and be kept out of OPEC.
• KSA is going to keep its production at the 9 to 10 MM BPD level as it has for the last decade or so.
• Iran is going to try to bring its production up to the 4 MM BPD level.
• Iraq is going to try to become the new KSA and increase its production to similar levels as quoted above.
• Venezuela will collapse altogether. The bankers (who have the spoils of the corrupt Venezuelan “leaders” in their coffers) are already calling to let the corrupt officials off the hook, conveniently keeping the ill-gotten gains in the banks’ control.
• Mexico will get its act together a bit more, but will still have corruption and drug cartels to keep its attention split between various objectives.
The above are what I consider “givens.” The “maybes” follow below.
Canada is either going to rebel and stop Trudeau and his green brigade from emasculating their economy in the name of unicorns and rainbows, or they are going to continue their counter-revolutionary bent and allow their economy to suffer horrendously due to the short-sighted plans Baby Trudeau has so far pronounced. My bet is on Trudeau getting his way, and Canada falling back even further, with its oil patch becoming a shell of its former self. Were I Canadian, I’d be looking at expatriate possibilities for the next few years.
Nigeria’s Buhari is not making much progress on the anti-corruption or anti-terror front. I think he is just being too nice. The velvet glove needs to come off, and some steel fist needs to be applied to shut down the miscreants. Boko Haram in particular has been exhibiting heinous conduct and needs to be crushed. The Niger Delta Avengers need to have their financial backers identified and cut off (as in the head of the snake). If Buhari can survive the assassination attempts that are sure to come with the above plan, it has a chance of succeeding. If not, then Nigeria will return to its corrupt ways. I pray that Buhari is able to complete his objectives. I think he’ll continue his velvet glove attempts through the coming year.
The North Sea is in decline. I foresee all North-Sea intensive operators trying to expand into different territories. Norway’s DNO is one example of this already happening. Statoil has been making international forays, as well. The UK needs to encourage BP and its other producers to step up their involvement in foreign projects. Will this happen and continue? I believe it will accelerate this year, continuing into the foreseeable future.
Offshore
Here’s the real casualty of the last two years. Anyone with a floater is hurting. Jackups are working at nearly break-even rates if they’re working at all. Long-term, sustainable oil and gas is going to come from these rigs.
If we go one more year with deep water nearly idle (or running at 40% utilization), then get ready for what the bulls have been calling for: skyrocketing oil prices. The fireworks won’t start this year, but if deep water drilling remains anemic through the next twelve to twenty-four months, get ready for oil prices like 2013. We’ll see at least $80 per barrel, and $100 per barrel is not outrageous.
My prediction is that there will be a pickup in deep water activity this year. There must be, or we’ll go back to the boom or bust, but in three year chunks instead of the historical 7 year chunks.
Oil Prices
Expect oil prices to average somewhere above $55 for the year. Unless some black swan or at least an event I don’t foresee occurs, then we’ll continue at present levels for this quarter, going up slightly through quarter 3 of this year. Quarter four is too far away to really predict, but I expect it to be in the upper $50s even without a continuation of OPEC’s current “cuts.”
There are a lot of things that can impact the above prediction. Fuel cell technology can increase to the point where gasoline as a passenger fuel becomes too costly. The beginning of the end of the internal combustion engine for passenger commutes will then be in the works, and with it, the end of the gravy train for oil production, especially condensates.
Another possible impact would be a break-through on some biologically-produced fuel source. Ethanol is not the answer for this one, but if someone can find a bacteria-algae-seawater combination that has some burnable fuel as a byproduct, then we’ll see more and more power sources switch to such a fuel. There is no doubt that many other ideas are being investigated on this front, so my three imaginary constituents may or may not be part of the “recipe” for this new fuel. In any case, any biological, reproducible, and economical source would put oil-as-a-fuel on the sidelines.
Another item that might drive prices down is the strength of the US Dollar. Typically, as it goes up, the price of oil goes down. This has not been the case for the last month, but don’t expect that to last.
Things that might increase the price include the typical wars that can always occur, a significant increase in world-wide economic activity and its inherent energy-use increase, or a significant decline in a major producer’s output. I see the last possibility as the most likely of the three I presented. I hope for the second. I dread the first.
Jobs
This one is going to be good news. I think by the end of the year, we’ll be hearing about “the great crew change” (GCC) again. Of course, they’ll have a new name for it, as they have proven that manpower is their most important asset, as long as they have money. When they have no jobs, then manpower is the most probable place for them to cut to get their bonuses. Perhaps I’m too jaded and pessimistic in this regard, but with layoffs counted in the hundreds of thousands world wide, I don’t see any reason for me to feel otherwise.
When this downturn first started, I published an article called “So Much for the Great Crew Change.” The final two paragraphs are worth repeating now:
No, the Great Crew Change is in dire peril of being nothing more than lip service. Platitudes are easy to voice when things are good. The companies who keep their young guns now are the ones putting their money where their mouths are. I would caution those who are not laid off to look at the history of any company that comes to me after this round of downturns subsides. You’ll be raided by someone offering a big paycheck, because they’ll need experienced people – because they laid off their slightly experienced people yet again.
But will you still have a job with that raider if and when things turn down again?
I think it was proven that the GCC was no more than lip service. I suggest you heed the advice above, and perhaps some advice I had in the comments, to wit: Save your money when you make the big bucks this time. Pay down your bills, including your mortgage. Put money in the bank and keep it there. That new truck won’t look so good as it is pulled away by the repo man during the next downturn.
And you can be assured there will be another downturn, even if the upcoming boom lasts for 20 years. I suggest that the current boom-bust cycle has been accelerated, and we’ll see no more than three years of boom before somebody does something stupid again to cause the next bust.
But, enough of the gloom and doom. We’re in for a good year, upcoming, so polish off the CV and get a haircut. Practice your interviewing skills, and start calling contacts again. The job market is picking up, and even the worst pessimist can’t think that is a bad thing, especially after the last two years.
石油圈
