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November 2014

OPEC and the TMS

Posted by bernell on November 28, 2014

I hope everyone had a nice Thanksgiving.

I’m going to get out a Friday Report on the pre-production status of wells here in the TMS later today, but thought I would share a country boy’s perspective on what is happening in the world oil market and how it may relate presently and long term to the Tuscaloosa Marine Shale.

The current world oil market is simply an imbalance of production over usage of oil.  In other words, the principle of supply and demand has kicked in big time. 

OPEC Thursday voted not to manipulate supply by cutting back on production, but to rather let the market take its course.  That is, to let the less profitable supplies of oil take the hit.  

The oil market has reacted with a $7.70 drop in the price of oil to its lowest price since May of 2010.  Oil shale stocks have likewise taken a beating since the thought is that shale operating companies, particularly those focused on emerging plays such as the TMS, will be negatively affected by a low price of oil.

My observation on the cause of the recent rise in supply is that it can be traced back to two main sources of “new” supplies. 

First, oil shale plays in the United States have rapidly increased production over the last few years and it is reasonable to expect production will continue to grow from the proven plays at least into 2015 not only because of the fact that the cost of producing oil in these plays is reasonable, but because most of the operating companies in these plays are hedged with prices through the end of 2015.

To understand the impact of the oil shale plays here in the U. S., note that we have gone from importing 12 million barrels per day in 2007 to a projection of less than 5 million barrels per day in 2015.  It is anticipated that oil shale plays here could account for between 800,000 and 1 million barrels per day in production increases between now and the end of 2015.

A second factor affecting recent and forward looking oil supplies is Libyan oil production.  Political unrest in Libya has dramatically cut production there in recent years and, in fact, has allowed for the development of U. S. shale oil plays during this disruption.  Through early 2012, Libya was a steady supplier of 1.6 million barrels a day of oil.  However, for most of 2014 daily production in Libya has dropped down to around 250,000 barrels per day.  This began to change in the 3rd quarter and over 500,000 barrels per day was produced in September.  The expectation is for production there to reach over 1 million barrels per day by the end of 2015.

Meanwhile, demand for world oil is basically stagnant. The world uses a little over 90 million barrels of oil per day at present and little increase in usage is expected in 2015. 

World oil inventories rose this year during the 3rd quarter, a time of the year when oil inventories normally drop.  So, there is already an obvious imbalance between production and consumption.  Current projections for 2015 are for there to be roughly 400,000 barrels per day more oil produced than is being consumed. 

Without something changing, it will likely be more and it could be much more.

For those unaware, OPEC's decision yesterday to keep production levels the same means that OPEC will be actually increasing production levels over the next year since Libyan oil increases are exempt from the member requirements to maintain a steady production level.  OPEC has a history of propping up the price of oil by reducing supplies, but not this time.

Many assume that OPEC has decided the production from shale oil plays needs to be slowed.  I can see other less profitable oil production areas also affected, but no doubt U. S. shale production is a concern of OPEC.  But, I think the concern goes beyond the U. S. 

The technology being developed in the U. S. quite possibly can be used to produce oil from shale plays  all over the world.  An efficient shale production plan around the world would not be good for OPEC.

What does this mean to us here in the TMS? 

Well, the Tuscaloosa Marine Shale play is in peril, at least in the short term.

We need a higher price for oil than $66 (today's price) in order for most companies to stay here.

Moreover, we need most companies to stay here to continue to develop the infrastructure of suppliers to help bring down the costs so our oil can be produced at a lower price per barrel going forward.

Goodrich is hedged for 2015 and will likely continue drilling at least through the end of 2015, as a result.

Oil prices need to rebound by the end of 2015 or Goodrich will be pushed to stay.

The other companies here now? 

I’m betting these others aren’t sure right now just exactly what they will do here in the TMS.  And, uncertainty is not a good thing insofar as developing infrastructure.

I believe the TMS needs $80+ oil for us to continue to develop the play.…and $90 plus oil would be nicer.

So, when will we see the price of oil go back up? 

I don't know, but absent some sort of supply disruption (always possible in the fractious Middle East), I predict no earlier than 2016.

Thus, the TMS will likely limp along in 2015 on the back of Goodrich Petroleum and maybe a few others, but, will probably go into hibernation in 2016 unless the price of oil rebounds.

Long-term?  There is a lot of high quality oil in the Tuscaloosa Marine Shale and a lot of knowledge on how to get it has been gained over the past 3 years or so.

When the price of oil goes up, someone will come a drilling...I just wish we could get a little more infrastructure in place to be ready for a rebound in oil prices.

Stay tuned!

What do you think about it?