Oil bulls are hoping every shale play in the US pulls–“An Eagle Ford”
But it hasn’t worked out that way–so far, the Eagle Ford is unique. What I mean by that is..it’s the only Big Shale Formation in the US where oil production really is collapsing like The Market expected.
By contrast, stats from the North Dakota Oil Commission shows Bakken production only showed its first Year-Over-Year decline in September–1.162 million b/d in Sept, which was down from 1.188 million b/d in Aug.
Permian oil production is actually still growing.
The Eagle Ford is very different.
Production in the Eagle Ford peaked in March and has been dropping ever since.
The rate of that production fall isn’t slowing…..it continues to accelerate.
The EIA data can be found in the Administration’s monthly Drilling Productivity Reports.
Here is the month on month production change that the DPR’s have shown for the Eagle Ford since the start of 2014:
For the month of December alone the EIA believes that Eagle Ford production will drop by 78,000 barrels per day.
On a projected December 1 beginning production base of 1.356 million barrels that is a pretty startling drop of 5.7% in just one month.
The DPR reports show that Eagle Ford production topped out at 1.726 million barrels per day in March and will exit December 448,000 barrels per day lower at 1.278 million.
If the EIA’s numbers are accurate this means that more than one quarter of the Eagle Ford’s production is gone in nine months!
Drilling Into The Decline Rates
Why is the Eagle Ford declining faster than the other plays? Is it the declining rig count?
But digging into the EIA data shows the rig count decrease across the three major shale plays is actually very similar.
The Permian rig count is down by 55% and the Bakken and Eagle Ford are both down by a little more than 60%.
So it isn’t the rig count. What is killing Eagle Ford production is its decline rate. Existing production in the Eagle Ford is falling at a much faster rate than the other plays according to the EIA.
No chart drives that point better than this one from the EIA’s December DPR…
The Permian’s 2 million barrels of production at December 1 are expected to decline by 75,000 barrels per day during the month.
Meanwhile the Eagle Ford’s smaller 1.35 million barrels per day of December 1 production will decline by an incredible 150,000 barrels per day…
Talk about needing to run fast just to stand still.
The decline rate of existing production in the Eagle Ford is 75% higher than the Bakken and almost triple the Permian.
Without a frantic rate of drilling new wells, it is no surprise that overall production in the Eagle Ford has to decline.
Earlier this month at the Baird 2015 Industrial Conference Pioneer Resources (NYSE:PXD) made the comment that they wouldn’t be surprised if they were completely out of the Eagle Ford within five years.
Instead Pioneer wants to focus on the Permian which according to the company “is the only American oil play that go grow over the longer term.”
You have to wonder how much the Eagle Ford’s decline rates play a part in this line of thinking.
I see a couple reasons why Eagle Ford production is decline faster than both the Bakken and the Permian.
First, the Permian is not a pure horizontal or shale play. Before horizontal drilling took off the region was already producing 900,000 barrels per day from conventional wells. That base of production is very mature and declining very slowly. That masks the true rate of decline of the Permian’s horizontal production.
Second, part of the reason that the Eagle Ford is declining faster than the Bakken is because it is a younger play. Bakken production started climbing several years before the Eagle Ford did. Younger production means higher declines and heading into this year the Eagle Ford had a huge surge of new production that is coming down very quickly.
Third, every play is different. In fact every well is different. With the high amount of condensate that the Eagle Ford throws off it is quite likely that a typical Eagle Ford horizontal well does decline faster than its Bakken and Permian counterparts.
How Much Is U.S. Production Declining Outside The Eagle Ford?
In their third quarter earnings release Core Labs (NYSE:CLB) gave an update on where they see U.S. production exiting 2015 at. Since Core Labs has access to better information than almost anyone, their view is at least worth a listen.
The Company continues to anticipate a “V-shaped” worldwide activity recovery in 2016 with activity upticks starting in the second quarter……U.S. production continues to fall from its peak in April 2015 and the Company now believes production could fall by over 700,000 barrels per day by year end 2015.
If that 700,000 barrel decline is accurate and the EIA is right about the Eagle Ford dropping 448,000 barrels it means that the Eagle Ford will be responsible for 65% of the total decline.
If these numbers are close to being accurate the next question to ponder is how long can this rate of decline continue? We know that over time the decline rates in horizontal wells lessen. But we also know that the rig count is still dropping.
As per usual, oil market data provides as many questions as answers.
One thing that seems clear from the EIA data is that the Eagle Ford is the least “sustainable” of the three major shale plays.
It may also be the key to an oil price recovery.
Keith Schaefer
Dubai started to interest me in 2012 when I was in Kurdistan, which is just off the top of the map below, above the word Baghdad. I was on a property visit—travelling half way around the world to see a pipe coming out of the ground—and all the brokers and investment bankers from London England on the trip were talking about Dubai. It was clearly the new hedonist haven for this financial group.
Other comments I heard over time was…that it was the Las Vegas of the Muslim world; that Muslim men and women came to Dubai to temporarily drop rigid social regimes and have fun. To this day I don’t know if that’s true but I got an idea of the Sin City metaphor in the first 15 minutes. After we checked into our budget hotel, we walked down the street to a small convenience store to get some bottled water.
Well, I was propositioned not once, but twice by two different groups of young ladies whose dress—or lack thereof—made their intentions very clear. And if we didn’t get that, then they just asked us straight up to our face. On another night in the Deira neighbourhood, right by Dubai Creek, we were also offered other “goodies” for about CAD$4. Shake your head, wrinkle your nose and keep walking.
That trip to Kurdistan was the background, but the trigger for the Dubai trip was… I woke up one day in the spring of 2015 and said to myself—I need more adventure in my life. The first email I see on my computer that day is a Groupon with a 7 day trip to Dubai. I convinced my friend Dave to join me on the four hour bus ride south to SeaTac airport and then a 13.5 hour direct flight out of Seattle to check out Dubai. You fly right over the pole, down thru Siberia, Kazakhstan, the middle of Iran and land in coastal Dubai on the eastern edge of the Arabian peninsula.
4 movies and 3 hours of sleep later, we arrived in Dubai, not quite 26 hours after we left (leaving 530 pm Wed arrive Dubai 730 pm Thursday). As you get off the plane, the 35 degree heat (95 F) swarms you. And that’s at 730 pm.
I already told you about my first experience at our hotel. Other than that, there is essentially NO crime in Dubai; it’s very safe. And it’s unbelievably clean. NO GARBAGE.
The adobe or stucco walls of all the apartments and homes in the gated communities are all immaculate; there is evidently Big Fines for dirty exterior walls.
Dave was in charge of the sleeping pills, and he delivered. That first night I took one of his little white pills and got a great 8 hours sleep—even on the very hard, cheap bed I was sleeping on. (That’s what you get for a Groupon).
The next morning—Friday morning—we were up for breakfast and discovered how cosmopolitan our budget hotel was—people from all over the world were there; Africa, southern Asia, Europe etc. We looked at our map and headed north to Dubai Creek, which is where the old Indian gold, silver and spice markets were—called Souks. We chose to walk, and the heat wears you down pretty fast.
When we got to the spice Souk, we found the area pretty deserted…because Friday is a holiday!
We obviously didn’t want to buy any spices, but I did buy a Tshirt for my son and a hat with DUBAI on it. I put that on, and started walking through the Souk. I saw a vendor selling fresh squeezed orange juice, and got one each for Dave and I. I asked how much and was told 15 dirhams each, or about $6. I gave him 30 dirhams and kept walking. I drank mine all really fast because it was so hot. In 2 minutes I came across another orange juice vendor, and asked him BEFORE I bought any, how much? 8 dirham he said.
Right. I put the Dubai hat back in my bag and put on my regular white hat. My white skin still screamed SUCKER COMING but I just couldn’t wear the hat anymore.
We took one of the several ferries across the creek. It’s an open boat, and only cost 1 dirham, or 40 cents. Different guys at the dock encourage you to go to their boat, and once it’s full you start the 5 minute journey. If you’re lucky, you picked a spot that’s shaded by the small central wooden canopy. The engine is open to the passengers and sends whiffs of diesel all around us as we leave the dock, turn around and move forward.
The gold and silver Souk across the Creek is another tourist trap; I want to sit there for an hour during prime time shopping and see just who goes in there and buys this stuff. It’s the same curiosity my wife would have wandering into a used sporting goods store in Vancouver.
It’s noon now and we have to be back at the hotel by 330 pm for our 4×4 desert tour. So we hop in a cab and head to the Dubai Mall—at 2.6 million square feet it’s the Largest Mall in the World.
Leaving the Souks and whizzing across a 6 lane bridge and down a 6 lane highway to midtown—the first thing that hits me is the futuristic architecture—I thought I was looking a CGI (computer generated) screen for a city on another planet, not a real city, right now.
In 12 minutes we drove out of the 19th century into the 22nd century. I can hardly verbalize how awestruck I felt looking up at the incredibly tall buildings all lined up as we drove by. And they weren’t just boxes with windows, they had designs on their cladding, or they twisted or they curved or they had real interesting peaks or tops to them. And they were all 50 stories or higher.
What a blessing to live in a city with such amazing architecture…it really does impact your psychology. I’ve been to Eastern European countries and walked among the never ending rectangular apartment blocks…even after they’ve been painted varying funky colours, they’re still a box…and you can feel the oppression that must have been there.
(photo taken on the elevated Metro coming from downtown to midtown; the working class neighbourhood to the business district)
But in Dubai, I felt freedom. It’s interesting that all the towers in Dubai are truly in the middle of nowhere (as Dubai is)…it’s a very flat, long linear beach with hardly a natural bend…it gave the city and the towers an…other-worldliness. It was like walking into a sci-fi book.
The other contributing factor to this was…there was nobody on the streets. From a pedestrian point of view, Dubai is deserted at this time of year. Despite having 2.5 million people in a 20×2 mile rectangle, it’s still too hot at 37 Celsius for people to be walking outside. It made for a bit of an eerie experience.
From November-March the cafes and streets are full, and it is the most cosmopolitan city I’ve ever been to. People from all over the world are here—beside the dominant Indian & Pakistanis, there were Africans, Europeans/North Americans, Indians, Chinese (though not as much as I would have thought), South-East Asians, and Hispanics. I saw them all…just in my own budget (CAD$50/night) hotel.
But from April to October, when the temperature rises from 30-45 degrees Celsius during the day, everyone takes the air-conditioned walkways from the towers to the Metro. So the streets are basically empty.
I thought of the movie Inception with Leonardo di Caprio. He and his wife go into a self induced dream and spend 50 years building cities, just the two of them. It’s a paradise. That’s what Dubai felt like to me.
The heat was certainly too much for me and travelling companion Dave…us 50 year old white guys don’t tan, we burn. (And frankly, at our age even at the best of times it’s not pretty on the beach). So there was no way we could go out and walk the beautiful beach .
So we spent some time at the Dubai Mall, where the big attraction—other than being BIG—is the ice skating rink with massive movie screen above it, and the two storey aquarium that is like two stacked Olympic sized swimming pools. There are all kinds of large fish and manta rays swimming there, and you can see divers in there feeding or cleaning I guess. You can pay to wear a head gear with an air hose and go in.
Then we headed back to our hotel to catch the desert tour. This was pretty cool—even though there are roughly 4000 4x4s out there each and every day. That’s what our guide said—four thousand trucks. And I believe him—we were careening up and down steep hills, taking corners and spinning wheels like mad– only 30 feet away from the truck in front of us. When you looked out across the dunes all the white trucks (they were almost all white) looked like ANTS going to and from the colony. Sadly the couple in the back of the van threw up about two-thirds the way through so we had to go pretty slow after that.
Our tour finished just before sundown, and we were then taken to another set of dunes where there was a big buffet dinner of Middle Eastern food (think Lebanese or Turkey), and we could buy a beer, which was nice.
The entertainment was a male dancer with a colourful sequined coat and skirt. He twirled to traditional music—and kept twirling. Then the sequins lit up and he twirled even faster. He finally stopped, and didn’t even fall down or waver as he left the stage. I’ve been less sure-footed after half a beer.
The next day, we got a 4 hour city tour as part of our Groupon. When our city tour drove us to see the beach—at 1 pm—it was almost deserted; again because of the heat. The beach spreads for miles, and there was probably only 30 people that we could see. We walked halfway to the water from the street across the sand, and turned around to get back in the air-conditioning.
The main midtown (business district) and uptown (Marina, Palm Jumeirah) streets are empty but the Metro is full—all day. (There’s a city map on page 8 below).
And an 8 car train comes by every 3 minutes. The big Metro, or subway system (it’s actually elevated throughout the city except for the part under the Dubai Creek) has huge, spacious terminals that are a great model for other cities. Now of course, they actually have the room to build it like that, being a new city. The main streets are very wide.
Each Metro train has 1 or 2 cars for women and children only, and one Gold Class cabin, which is twice the price of a normal fare. Our day pass on the Metro was CAD$8 to hang with the Mass of Great Unwashed, or $16 for the Gold, with cushy vinyl seats. No question for me what to buy on that one. Dave and I did most of our touring via the Metro, and walked around from one of the stations.
One of our activities was going up to Floor 125 of the Burj Khalifa, the tallest building in the world. We paid the $50 to go up the Burj. I wasn’t paying the extra $100 to go to the 148th—and that was the right choice as our day was so hazy you couldn’t even see the Palm Jumeirah 7 km away; we could barely see the Burj Al Ahrab hotel.
The one thing you could see—on a clear day—from the 148th floor I’m sure is The World—the 300 island development in the ocean off mid-town that is in the shape of the continents. The cheapest island was $15 million (I assume they come plumbed and wired…) and our tour guide said the most expensive was $40 or $50 million, I can’t remember which. I wasn’t going to even spend the $50 to go to Floor 125, but one of my expat contacts in Dubai said no, it was really worth it…and he was right.
The Metro and the Burj Khalifa—both started construction in 2005 and finished in 2010. I got a window into how it was built by my cab driver on the way back to the airport to return home.
He’s from Pakistan, and he got into Dubai via an “agent”. He arrived in 2002; 13 years ago. I’m sure there are hundreds if not thousands of agents who are charged with bringing in cheap foreign labour for the (tens of?) thousands of workers needed in Dubai—even today; mostly from India, Bangladesh, Pakistan and the Phillipines (in that order—that came from my half-day tour guide ). I would bet $100 there are 1000 active cranes in Greater Dubai right now (let’s say within a 10-15 mile radius) and I would bet $500 there are 500 cranes. So there is still LOTS of work.
My cabbie paid an agent to get him into Dubai (I didn’t ask how much). He says the agents make great promises of full employment and 3 meals a day and great clean city that’s safe. He says the city is clean and safe, but he didn’t get to live in the city at first. He lived in what was little more than a refugee camp on the outskirts of Dubai—with no air-conditioning.
He came from Pakistan because he says there is no money there. I asked him why that was—because the politicians catch it all, he said. Probably some truth there.
His initial work visa was for 3 years, and he was paid CAD$160/month or 400 dirhams. After those 3 years, he was able to get 2 year working visas. It sounds like you are tied to your sponsoring employer for those work visas. He has switched employers almost every time his work visa was renewed.
He earned 1000 dirhams a month with his second construction job. During this time he learned how to get his drivers certificate, so that when work visa #2 expired, he was able to get a drivers’ job. That paid 3000 dirhams a month, but because he had no experience the employer said he would only pay 2000. He took that, and after that next visa expired, he already had another drivers job lined up—the one he has now—that pays him 4000 dirham a month (CAD$1600)—or 10x his original wage 12 years ago.
He sends money home when needed. He calls his family back home once a week, which he says is very expensive. He usually communicates with them via What’s App, which is free. (I have heard of this app, but confess complete ignorance of how it works). I wish I had another half hour to talk to him. I had about 18 minutes.
Dubai is one of seven Emirates that make up the UAE—United Arab Emirates. Abu Dhabi, 150 km (100 miles) down the road is the main one. Abu Dhabi has the oil, and Dubai has the trade. Only 4% of Dubai’s GDP is oil, my tour guide said. It has always been a tax free zone, attracting capital and shaving a small piece off of an ever bigger pie, as opposed to carving big pieces out of a small pie (attention newly elected Prime Minister Trudeau!)
I’m not sure that just being a tax free zone would explain the incredible—truly epic—growth that Dubai has enjoyed for over a decade now. I think there has to be a lot of offshore (euphemism for ill-gotten) money here. But then part of me said…well, if all that money had been paid in taxes in the host countries, it would benefit the citizens of those countries…but now it allows people like this Pakistani cab driver to escape hopelessness and abject poverty. Sadly, it likely still contributes to a widening of the income gap globally, but the point is capital is still being spent. Not a justification; just an observation.
Business owners in Dubai—my tour guide said—are in almost the same order of nationalities as the workers—Indian, Pakistani, Bangladeshi. Iranians were down the list quite far, despite being right across the ocean. Of course, the Iranians are Shia Muslim compared to the Sunni Muslims on the Arabian peninsula, but my tour guide said in Dubai it’s all about trade and money and Iranians are more welcome in Dubai than any other place on the peninsula. Abu Dhabi, for example (he says)…do not have so much love for the Iranians. So the different Emirates (kingdoms) do have slightly different cultures.
The things to do in Dubai are:
1. Bur Dubai—the old downtown/Dubai Creek area with the gold and spice markets (Souk)
2. The Malls (midtown)—Dubai Mall with its skating rink and Biggest Mall in the World title and Emirates Mall with its Downhill Ski Slope. We did visit the ski-ing but it’s more like a toboggan hill. I didn’t ask how much it cost.
The Malls are actually quite entertaining due to the wide mix of people—traditional Arab dress for both men and women (burka/niqab) only account for 5% of the crowd, but because they are so different they stand out. The Dubai Mall is attached to the Burj Khalifa.
3. The Mid-town Towers (including Burj Khalifa; Burj means Tower).
4. Palm Jumeirah (uptown)—you know, the man made Palm tree out in the ocean—6 km up the middle and 11 km around each side, with each frond hosting about 100 homes by the looks of it. I have no idea what they cost. This was the last stop on our city tour, so Dave and I exited there and visited The Atlantis resort which is the Marquee attraction of the Palm, right at the end of the stem. The Atlantis has a huge 20 storey archway in the shape of an Arabian dome (think Ace of Spades).
It’s a long way off the metro line, and they charge you $15 (dollars, not dirham) to take their tram from the Atlantis to the metro line. Keeps the riff-raff out I guess. After a quick tour of the Atlantis—we couldn’t even get into the lobby without being a guest—we trammed down to the metro, and headed farther uptown to the Marina.
5. The Marina/Lagoon area—it’s just south of the Palm Jumeirah, and I couldn’t make it fit on the map below. It’s where most of the high-end, western hotels are located. The mall that’s at that end of town is all WASP-looking (White Anglo Saxon). Beers are CAD$20 and wine is CAD$30 a glass. If you come, enjoy. I’ll be in Bur Dubai where beer is $11.
Again, as we walked along the Marina, there were lots of open air, water side cafes…and the walkway was empty. And this was really eerie. This is clearly THE PLACE to be during tourist season; all the big name western hotels are here. But there was NOBODY on the boardwalk. And we were sweating like pigs when we finally got to whatever mall is attached to the Marina 30 minutes later.
Also uptown is the 7-Star hotel Burj Al Ahrab—with the iconic sailboat architecture—it’s not quite as far as The Palm. Plebes like me can’t actually go into the Al Ahrab, even to look. The cheapest thing you can do to get you in there is US$300 high tea. Dinner will be $500/person. The cheapest room is US$3,000. They used to allow you in to gawk at the lobby for $160 (400 dirham) but the guests complained about all the hayseeds with their big cameras. Now you can’t even do that. You get turned away at the guarded gate to get in.
I haven’t done much research into where all the fresh water comes from to feed Dubai, but our guide said half of it comes locally drilled artesian wells. I find that incredible, but there ya go.
I wrote earlier how cosmopolitan Dubai is…people from all over the world. You see every race and colour of people. Everybody dresses…western…except for the traditional dress you see, which truly was 5% or less of the people I saw.
And in one sense, that is what you would expect—because Dubai is the Vegas of the Muslim world. But is it really Sin City?
When I was in Istanbul in 2012, I toured The Big Three—a row of mosques and museums, and tourists—both male and female—were given proper clothes to put on, overtop of their own clothes, so as to be covered up in the shoulders and down the legs.
So when I’m doing some research on travel forums for what kind of clothes we should wear…I had no idea. Istanbul was the only thing I knew. And the forums said women had to cover up, and men should wear pants. Well, that clearly only applied to mosques, not the street. But I took too many pants and not enough shorts.
I got that I misjudged the clothing part first day.
I am so glad I did this trip (and that I did it with Dave, with whom I have great chats on religion, history and politics). Dubai is the most different city I have ever seen. It’s certainly the most cosmopolitan. It has just exploded onto the international scene in such a short time. New York did the same after the Erie Canal was completed. London was already there but the 50 years after The Great Fire made it.
Is This “Biggest Factor” Silently Charging Up The U.S. Natural Gas Market?
Mexican natural gas imports from the US will keep increasing through 2016 and 2017, to the point where Mexican demand could be 9% of US production with two years, up from the current 3.5%.
The chart below shows the trend clearly. Since November 2014, U.S. natgas exports to Mexico have jumped by over 67%. That’s 1.3 billion cubic feet per day more natural gas heading south of the border than we were seeing just a year ago.
As of August (the last month that the U.S. Energy Information Administration reported export data), pipeline exports to Mexico stood at a total of 3.26 billion cubic feet per day–equating to 3.5% of total U.S. production, which hit 94 Bcf/d in August.
At those levels, the numbers on Mexican exports are starting to look significant as a potential driver of prices (which, remember, are set on the margins of the overall market).
The thing is, imports could rise even further from here—and in a relatively short period of time. Just look at some of the new projects already underway to increase export capacity.
The biggest driver of rising natgas exports over the past year has been a mega-project called Los Ramones. It’s a pipeline running from south Texas into northern Mexico—the map below shows the route (labeled “5”), along with a number of other proposed Mexican pipelines.
Source: Oil and Gas Mexico
Los Ramones was connected to U.S. gas supplies via the NET Mexico pipeline on the American side in December 2014. With the total capacity of these lines being a very significant 2.1 Bcf/d.
That number is a little misleading, however. If you look closely at the graph above, you’ll notice that after the start-up of Los Ramones last December, exports have only increased by 1.3 Bcf/d.
That’s because even though the U.S. side is capable of delivering 2.1 Bcf/d, the Mexican section of the Los Ramones development is right now only able to take 0.7 Bcf/d—which in addition to a few smaller projects has added up to total export growth of about 1.3 Bcf/d.
The reason that Los Ramones isn’t running at full capacity is that pipelines activated last December were only Phase I of the mainline development. A second phase, Los Ramones 2, is currently under construction. This part of the pipeline network will deliver an additional 1.4 Bcf/d of natgas into central Mexico—and will allow U.S. exports along this line to finally reach full capacity of 2.1 Bcf/d.
Mexico’s national energy firm, Pemex, says Los Ramones 2 is on track to be completed in December 2015—meaning we should see it ramp up to fall capacity during Q1 2016.
That start-up alone would very quickly increase overall natgas exports to Mexico by over 40% from the 3.3 Bcf/d that’s currently being shipped. Bringing total exports to 4.7 Bcf/d – or 5% of current U.S. production (94 Bcf/d). That’s starting to get serious in terms of being a potential driver for prices.
But the line-up of new export projects doesn’t stop there. After the Q1 2016 commissioning of Los Ramones 2, the San Isidro-Samalayuca pipeline from New Mexico into Chihuahua state is expect to start up in July 2016—adding another 1.2 Bcf/d of capacity.
Then in 2017, more projects are on tap. Including the Ojinango-El Encino, Nueva Era, and CFE Tuxpan projects—which will add 2.6 Bcf/d of additional capacity. These are already tendered and expected to come online in the first half of 2017—meaning that within 18 months we could see total U.S. exports rise to 8.5 Bcf/d, or 9% of total U.S. production.
Another key event to watch here is another pipeline running from Brownsville, Texas underwater through the Gulf of Mexico, to Nueces, Mexico. Developers are submitting tenders for the project this month—and an award is expected in December.
This is a big one—with planned capacity of 2.6 Bcf/d. And it has a planned commissioning date of June 2018, which would bring U.S.-Mexico exports to over 11 Bcf/d in less than three years. That would make Mexico as big a user of American natgas as the states of California and Florida combined.
So what does this mean for U.S. natural gas producers?
Certainly the extra demand will be good for the overall supply-demand balance. But don’t expect exporters to Mexico to reap windfall profits right away.
As the chart below shows, prices paid for pipeline exports to Mexico have consistently been running about $1 per mcf below Henry Hub spot prices. Which makes sense, given that Mexican buyers are largely making purchases on long-term contracts—locking in attractive pricing in exchange for the offtake commitment.
Gas exporters therefore aren’t going to strike it rich simply by tapping into the Mexican market. It’s going to take time for exports here to add to overall demand, and thus put upward pressure on prices.
On that front, it’s interesting to note that prices have generally been much more stable (flat rather than falling) since the big Los Ramones pipeline came online in December 2014. We may thus already be seeing Mexican demand shoring up pricing (albeit at a relatively low level), which could be the first step in setting up this downtrodden commodity for a rally.
Keith Schaefer
EDITORS NOTE—Mexico needs more energy. That’s why it’s importing more US natgas, and opening up its oil industry to foreign companies. The best way to play this macro trend is THIS STOCK. Its next big catalyst is less than a month away.
OGIB INTERVIEW WITH ROBIN MILLS IN DUBAI
Robin Mills is author of “The Myth of the Oil Crisis” and is CEO of Qamar Energy, a consultancy that advises clients on strategic, commercial and business opportunities in Middle East oil and gas. I interviewed Mills–a Briton who has lived in Dubai for 12 years, while in Dubai in October.
I asked him
1) How fast will Iranian production come back online
2) How much spare capacity does Saudi Arabia really have?
3) How bad is the tension between Sunni’s and Shi’a in eastern Saudi Arabia?
3) What is the West’s misconceptions of the energy industry and life in the Middle East.
Keith: You say The Biggest Oil Story of 2016 will be Iran. Expand on that for me.
Robin: Sure. Iranian crude oil productions is down to about 2.8 million barrels a day and pre-sanctions it was at let’s say 3.6 million or so and so it’s lost about 800,000.
Iran has also been constrained on its ability to export condensate, so that’s probably another 400,000 barrels of condensate production which it has had difficulty selling and that is going to increase to 800,000 of production capacity or even a million barrels of condensate over the next few years.
Now with the end of sanctions on Iran—which is expected early next year—a lot of that oil is going to come back online. Now how quickly is still an open question but my own belief is it will be fairly quick.
So that means 800,000 barrels a day; perhaps a bit more, including the condensate on the market.
Now if you think of global demand growth in a typical year as being 1 to 1.2 million barrels per day—that means the return of Iranian Oil is enough to make up for all global demand growth or a very large part of global demand growth in 2016 and therefore to offset the declines in US shale production. At least in my view that keeps oil prices relatively depressed during 2016.
Keith: How quickly will they be able to restart their fields?
Robin: I think that in most cases relatively quick. The fields were shut down in an orderly way and it wasn’t like Libya where there was a sudden war and the fields were abandoned. The Iranians had a lot of warning this is going to happen. There’s been no physical damage to the fields so in most cases they shouldn’t have too much trouble restarting them at the original production levels or close to them.
Keith: They have quite an experienced and talented workforce.
Robin: Yeah they do. They have a lot of skilled people, a lot of experienced people. Now they may not be up with the latest technologies but at least in terms of doing the basics there, they’re pretty capable and well informed and they will, of course, be getting during the next year – if sanctions are lifted – they’ll have access to international service companies which will help them optimize production.
So they probably will have lost some production from where they were pre-sanctions because of under investment and lack of maintenance, etc. But I don’t expect a large amount and so they should be able to come online relatively quickly.
Now how quickly can they place all this oil on the world market, a rather oversupplied market? That’s a question and, of course, they can always place it if they’re willing to discount enough.
They also have a lot of stored oil; they have 40 or 45 million barrels of stored oil, which they will look to sell fairly quickly. Of course that’s just in storage tanks that can come back on the market immediately. It’s a marketing problem of how quickly can they sell it? So if you think of 40 or 45 million barrels, imagine they sell that over 3 months say 300,000 barrels a day compared to 3 months that’s a large extraction of supply even if for only a limited period.
Keith: Are they desperate for foreign capital? Would they be willing to really discount that or do you think they’d actually put a strategy in that would kind of keep the market the least impacted as possible?
Robin: Well I think there’s 2 separate questions there. One is what’s their marketing strategy for the short term in terms of getting rid of all this stored oil and getting back to their kind of whatever production level they achieve and managing to sell all of that? That probably will be a period of months, and okay I think they will discount but they probably won’t discount just to any level, they’ll have to feed this back in the market, they have to phase it in.
But in the longer term the Oil Minister is pretty clear—‘we’re going to get back to our pre-sanction level. Whatever OPEC says…we’re not going to talk about any production cuts until we are back at our original level because their viewpoint is in the last 3 or 4 years we’ve lost production, the other OPEC members have gained at our expense and so if anyone has to make production cuts to protect the price it’s not going to be us.’
Keith: So what’s Iran’s cost base compared to Saudi Arabia and Iraq–are they pretty much the same in that whole area or is one of those 3 drastically different in any way?
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Robin: I think they’re all very similar. The Iranian fields, in general, are a bit more mature and so somewhat higher costs but not dramatically higher and still far lower than the current oil price. So any extra oil they can sell is still attractive to them and they have some major new Greenfield developments which are very similar to those in Iraq and have the same kinds of costs.
Now okay there are some other issues in working there, some US sanctions will still remain in place and so there will be some caution about working there. But on the other hand, unlike Iraq there’s no problem with security and as you said, there are a lot of skills, experienced Iranians to work there and so in some ways you can expect those new fields to be cheaper than fields in Iraq.
Keith: How do you see western oil majors working in Iran, post-sanctions?
Robin: They’ve got 2 major Greenfields–Azadegan and Yadavaran–which are pretty much on the Iraqi border. In fact, they probably cross over into fields in Iraq. They were discovered a few years back and have only been partly developed. The Chinese companies are working on them but have not made much progress and, in fact, the Iranians kicked out the Chinese from one of those fields because of their lack of progress.
So these large fields will be up there for western majors to get involved in. Plus there’s a lot of medium sized fields and a lot of brown field redevelopments and various other opportunities.
Keith: So they’re ripe for the picking.
Robin: Yes very much so.
Keith: So just to give investors an idea here—because we’ve become so accustomed to press releases that talk about the size and production of a shale well–what kind of IP 30’s are we talking about for these new fields in Iran?
Robin: Well I mean it would be in the thousands of barrels a day even up to 10,000 barrels a day for the better fields. And, of course, unlike the shale wells these wells decline slowly and so they might have an annual decline rate of 5 or 10% max. So these wells will be major producers for 10 years or more.
Keith: Even in the first year they would only be that low?
Robin: Yeah, especially in the first year there might be very little or no decline cause it’s such a big field, a single well or a few wells doesn’t draw down the pressure very much. I mean unlike a shale well where you’re only accessing the part of the reservoir that you fracked. In a conventional field like this the well has ultimately seen the whole field which may be, in this case, maybe 50 kilometers long or more.
Keith: Got you. When you talk about condensate here, their condensate levels are around 400,000 barrels a day and it’s going to go up quite a bit. Does that have any impact on global oil pricing or is it completely separate?
Robin: I think that will have another major significant impact on global overall price because condensate is basically a light oil and competes pretty directly with a lot of the lighter US shale oil.
So it will have an impact; it will push down the overall level of oil price but particularly it will push down the level of light crudes and condensates but relatively make the kind of medium and heavy grades more attractive.
Keith: So the Nigerians and the Americans would be the most hit?
Robin: Yes it would affect the US, it would affect Nigeria, Libya, Algeria these kinds of African producers that have now been…because of the US these African producers have been forced to turn to Asia for sales and now they’ll find they’re competing with Iran in an already competitive market. But the producers of medium and heavy crude who are more diesel rich they will be better protected.
Keith: OK…I want to move over to Saudi Arabia for a moment. To me, The Big Question is—what is their true spare capacity right now? Because until the US started to cut back production in the last 6 months, Saudi Arabia was the only country with any significant spare capacity. I think Saudi spare capacity is a huge factor in the price of oil.
The Saudis have been producing 10 ½ million barrels a day for quite a while now…they say they can produce 12 million. What do you think? You’ve been over there for 10 years and you’re very close to Riyadh. What do you think their true spare capacity is?
Robin: Yeah this is a really tricky one to get…I mean the Saudis say 12.5 million sustainable capacity and they also say they have tested all the parts of that individually. So at different times they’ve produced all these fields at maximum rates so they know the whole thing works.
I think the message you get digging a bit deeper is yeah…maybe…but it would be a real stretch and it would be like not sustainable for very long and it would really become overproducing these fields. Maybe it’s like not 12 ½ but like 12 million.
But like sustainable?–something they could keep there for a long time? Perhaps more like 11 million. Now that would mean, of course, it’s only a half a million or something of spare capacity which is minimal in the global total.
So at the margin it’s quite a bit tighter than you might think.
And Saudi’s own domestic consumption is rising pretty fast. They add 150,000 barrels a day of domestic consumption every year. So if there’s no new field developments they will either have to cut exports or they’ll have to use up their spare capacity within the next 3 years or so and there are no real signs for major new oil developments.
I mean they have a whole list of things they could do but there’s nothing that’s been sanctioned, nothing seems close to being sanctioned either.
So again that’s a bit of a puzzle to me and at some point the Saudis are going to have to say ‘yes we’re going to go ahead with new field developments or redevelopments and then boost our overall capacity’. But they don’t seem in a hurry to do that.
Keith: I’m guessing that when they decide to do something they don’t need to wait a 1 ½ years for a permit like you do in the Western world?
Robin: No they can make a decision…these field development plans have been, it’s known and they’re on the shelf and they’ve been carefully studied and all ready to go if it’s something that was intended previously but not awarded.
So they can go ahead pretty quickly and most of their projects have been executed and the Khurais field which I think had 1.2 million barrels a day a few years back was executed very quickly, efficiently and smoothly when you think of such a giant project.
They’re not going to get held in politics like they would with Keystone or something like that in North America.
Keith: My other question is…how big a deal is the Shi’a-Sunni unrest in Saudi Arabia, particularly in the Eastern part where you’ve got the minorities being the largest there? In the oil fields area in the Eastern part of the country is tension higher there? Is terrorism potential a little more than what the market is getting credit for do you think? Or is that really just not an issue right now?
Robin: The tension is a real thing. The feeling by the Shi’a community that they’re marshalized and discriminated against is very real as well. It’s hard to say how much a threat it poses to the oil fields. Yes it’s in that area but the oil fields are very well defended of course.
Multiple layers of security, large security forces and the Shi’a population is only thought to be about 15% of the Saudi population as a whole. So it’s significant and they’re mostly concentrated in the East where the oil fields are, but it’s also still very much a minority.
I think the Saudi government has always been quite successful at keeping control internally. Now can they continue to do that in a period of low oil prices and financial problems and so on? I think down the road there will be questions of Saudi Arabia but at the moment, at least the short term security seems to be very effective.
Keith: Alright, we’ve talked Iran and Saudi Arabia so far…is there a part of the more broad, Middle Eastern situation either politically or geo-politically or on the logistics oil production side that you think is really misunderstood here in the West or is it all very straightforward?
Is there any kind of trend you see of people not appreciating one part of the Middle Eastern politics or oil logistics?
Robin: I see a lot of misconceptions but I’m trying to think of one of those that actually affect all markets significantly. Just one example if you talk about specific oil, like I can talk about Kurdistan. If you talk about Iraq then you get a lot of news coverage of Kurdish oil and the companies of Kurdistan, which is a very interesting story and quite a significant one.
But I think it gets overexposed vs. Southern Iraq. If you think of Southern Iraq is producing now over 4 million barrels a day and the Kurds producing the 500 or 600,000 barrels a day you can see they’re only a small part of the Iraqi oil story, but they get a lot of media exposure because it’s a safer place, it’s easier for journalists to get there. There are some smaller companies there that have to, of course, talk up their discoveries. It’s a bit more of a glamorous story than the south and the south is where the real oil action is. So I think that’s one example.
Another one is you mentioned the Shi’a-Sunni divide and that is a real issue and perhaps it’s become more real over the past few years. But I think it’s not a Cold War, like 2 kind of opposing ideological blocks facing each other off.
I mean there are many local conflicts and you’re find Sunnis against Sunnis and Shi’a against Shi’a, you’ll find Sunni’s cooperating with Shi’a, you’ll find splits within…like within the Shi’a in southern Iraq, for example, you have different factions.
You have, for example, Turkey which is largely a Sunni country but in some ways its policies are opposed to those of the Saudis and the UAE. So it’s actually much more complicated and you can’t see it as a kind of simple black and white division.
Keith: Robin, what great information. Thank you for sharing. We have to end here, but you helped me and my readers understand a bit more about oil in the Middle East. Thank you.
Robin: My pleasure. Thank you for having me and we’ll speak again.
AND I DO SPEAK WITH ROBIN AGAIN—on natural gas in the Middle East. Stay tuned for my second interview with Robin in the near future.
Keith Schaefer
