First oil

To many analysts’ surprise, key elements of OPEC have reached an output deal, just when it looked like the global oil production chaos would continue. And it’s not just a freeze, but a reduction.

Indeed, Saudi Arabia and Iran announced on Sept. 28 that they had reached a deal, whereby OPEC will trim its output to 32.5 MMbopd from the recent level of 33.24 MMbopd. This is a cut of about 740,000 bopd, and it is the first OPEC reduction since 2008. As part of the deal, Saudi supposedly will reduce its output 400,000 bopd, so that fellow OPEC members Iran, Libya and Nigeria can continue increasing production from depressed levels, caused by sanctions and/or civil unrest.

There was an immediate reaction on global commodity markets, as crude oil futures for WTI and Brent rose about 6% in one day, from their Sept. 27 levels of $44.67 and $45.97/bbl, respectively. By week’s end, WTI had climbed another 2%, to finish at $48.03/bbl. Needless to say, there were shouts of joy in Houston, and instant predictions of better times ahead.

But these celebrations are premature. We have seen other OPEC deals announced in the past, only to watch them collapse—the devil remains in the details. Between now and its official meeting next month, OPEC must re-establish some form of individual member quotas, determine the exact output figure that Iran can live with, and make sure that Iraq does not go off the reservation at the last minute.

Iraq nearly scuttled the deal, with Minister of Oil Jabar Ali al-Luaibi complaining that the output figures cited by OPEC do not represent Iraq’s actual production. He told the media in Vienna, that if by November, estimates of Iraqi output had not changed, then his country could not accept the deal and would ask for alternatives.

The Permian continues to excel. The Permian basin of West Texas remains the largest concentration of E&P work in the U.S., and for good reason. As detailed at a recent association meeting in Houston, IHS Markit’s director of Commercial Plays and Basins, Reed Olmstead, said that break-even prices for oil production in the major U.S. shale plays have fallen, on average, at least $30/bbl for WTI. And while there has been progress in the Eagle Ford, Bakken and Niobrara shales, nothing exceeds the Permian’s performance. In that province, the break-even figure has fallen to at least $37/bbl, and a couple of operators may have gone lower.

So far, the Bone Spring play in the Permian’s Delaware formation has shown the highest average productivity of any set of North American unconventional reservoirs, noted Olmstead. And in the Wolfcamp Midland formation, perhaps the greatest improvement in overall play productivity has occurred, driven primarily by operator migration. “As the play has been successfully delineated, operators have curtailed activity in the Southern Midland, while operators in the northwest have increased rigs and drilling activity,” explained Olmstead. “The Northern Midland sub-play also has shown a productivity increase.”

Some quick thoughts before Election Day. When this issue hits our U.S. readers, about three weeks will be left before the Nov. 8 presidential election, and the stakes for the upstream industry couldn’t be higher. As Contributing Editor Roger Bezdek has outlined so well in his special election article on page 57, the contrasts/differences between the two major party nominees couldn’t be more clear, as to how their policy stands would affect U.S. E&P. So clear, in fact, that we don’t need to prod you on who to vote for—the choice is obvious. But we do urge our U.S. readers to go out and vote your pocketbook, and do what’s right for the future of this great industry.

And be sure to also read Roger’s column, Oil and Gas in the Capitals. In that column, he details the many “parting gifts” that Mr. Obama and his administration, in their waning days of power, are giving the U.S. industry, in the form of punitive regulations and ignorant prohibitions, just to make life difficult for upstream operators. 

About the Authors

Kurt Abraham

World Oil

Kurt Abraham kurt.abraham@worldoil.com