Petroleum producers shift attention from Middle East

Updated 15 August 2014
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Petroleum producers shift attention from Middle East

LONDON: Following four decades of war, sanctions, nationalization and unrest, oil and gas producers are gradually adjusting to rely less on the Middle East.
The countries around the Arabian Gulf and on the Arabian Peninsula still contain the greatest concentration of giant and super-giant fields anywhere in the world and have some of the most attractive oil and gas geology.
But the increasingly hostile political environment above ground has forced oil and gas companies to hunt for new reserves in other parts of the world where the geology is tougher but political conditions are much easier.
Diversification away from the Middle East is one of the main reasons why oil prices have remained virtually unchanged as unrest has spread across much of the region since 2011.

OUTPUT AND RESERVES
The region’s importance has been declining in terms of both production and share of proved reserves in recent years.
In 2013, the countries of the Gulf and the Arabian Peninsula, which the BP Statistical Review of World Energy terms “the Middle East,” accounted for almost 33 percent of global oil production and 17 percent of gas output.
But the share of both has flattened in the last three years after rising strongly since the mid-1980s.
The shift away from the Middle East is even more marked in terms of proved reserves, which represent future production.
Middle Eastern countries accounted for 48 percent of proven oil reserves worldwide in 2013, down from 56 percent in 2005 and 64 percent in 1993, according to BP.
The region contained 43 percent of proven gas reserves, down only marginally from 46 percent in 2005, but ending the steadily increasing share that had characterised the market since the 1980s.
For the last two decades, oil and gas producers have been adding reserves more rapidly outside the Middle East.
Between 1993 and 2013, oil producers added to proved reserves at an average annual rate of 4.2 percent in the rest of the world but just 1.0 percent in the Middle East.
Over the same period, gas producers added reserves in the rest of the world at an average rate of 1.8 percent per year compared with 3.0 percent in the Middle East.
But growth in the Middle East has slowed recently. In the second half of the period, reserve growth in the rest of the world accelerated to 2.3 percent a year, while reserve growth in the Middle East eased to just 1.1 percent.
The metaphorical center of gravity in the global oil and gas industries is gradually shifting from the Middle East toward North and South America, Africa and Asia.
And the trend seems set to continue over the next decade, given the shale boom in North America, and intensive exploration and production in other regions outside the Middle East.

RELATIVE LATECOMER
The Middle East was a comparative latecomer to the oil and gas industry and its dominance of global production is a relatively recent phenomenon.
During the first five decades of the 20th century, global oil production was dominated by the US, Mexico, Venezuela, Romania, Russia, Malaysia and Indonesia.
The first oil was found in Iraq in 1927, followed by Bahrain in 1932, Kuwait in 1937, Saudi Arabia in 1938, the UAE in 1954 and Oman in 1962.
As late as the 1940s, the Middle East was still a relatively small oil producer in global terms.
In 1950, the Arabian Gulf countries accounted for less than 17 percent of worldwide production.
Massive field discoveries between the 1940s and the 1960s, and extensive development work by the international oil companies, boosted the Gulf’s share of global output to 25 percent in 1960 and 31 percent in 1970.
But disputes escalated over pricing and government revenues.
Between 1970 and 1980, a wave of nationalizations saw all production in the region pass into government ownership, after which production growth all but ceased.
The Middle East’s share of global oil production peaked at 37 percent in 1975, a record that has never been seriously challenged since then.

REGIONAL STAGNATION
The Middle East region has become progressively more hostile for international oil and gas producers.
Nationalizations in the 1970s were followed by the Iranian revolution; the Iran-Iraq war; the first Gulf War between Iraq and the US; sanctions against Iraq; the second Gulf War; intensified sanctions on Iran; the eruption of a civil war in Syria; and now an insurgency in northern Iraq.
Only Saudi Arabia, Kuwait, Bahrain, Qatar and the UAE have retained a fragile sort of calm amid the violence and geopolitical instability.
With the exception of Saudi Arabia, the UAE and Qatar, the rest of the region has achieved no net growth in oil production since 1976.
Even in Saudi Arabia, production gains over the last 37 years (2.8 million barrels per day since 1976) pale in comparison with the increases achieved during the 1950s, 1960s and early 1970s.
Increasingly locked out of the best Middle Eastern oil and gas fields, international oil companies have been forced to shift their efforts to other, more readily accessible, sources of supply.
Huge new oil provinces were developed during the 1970s and 1980s in Alaska, the Gulf of Mexico, the North Sea and the Soviet Union in response to the oil shocks of 1973 and 1979.
Collapsing oil prices after 1985 led to a big reduction of exploration and production expenditure around the world and stemmed the shift away from the Middle East. But the renewed rise in oil prices in the 2000s has spurred a new exploration boom, and the shift away from the Middle East has resumed.

DECLINING FORTUNES
The shift will almost certainly continue over the next decade unless there is a radical improvement in the region’s political environment.
Saudi Arabia’s enormous oil and gas resources remain closed to outside companies. Sanctions have prevented any increase in oil or gas production from Iran. Syria and Iraq have become failed states where central authority has collapsed and both are convulsed by civil war.
By contrast, the shale revolution has added millions of barrels per day of extra production in the United States and Canada, and similar quantities of natural gas. Oil and gas companies are now exploring similar shale deposits around the world — including in Argentina, China and Russia.
Enormous conventional gas reserves have been developed in Australia and the industry is prospecting for more off the coast of Mozambique. Deepwater drilling is developing oil and gas off Latin America and West Africa. The industry is also prospecting in Thailand and elsewhere in Southeast Asia, as well as the South and East China Seas, East Africa and the Arctic.
With the possible exception of shale, none of these resources is as geologically attractive as the giant conventional oil and gas fields of the Middle East.
But the politics of the region have become too hard, so oil and gas companies are increasingly looking elsewhere.
Advances in horizontal drilling, hydraulic fracturing, seismic surveying and deepwater drilling have opened a much broader global oil and gas resource base, giving exploration and production companies many more options.
Middle East producers, especially Saudi Arabia, will remain hugely influential in the oil market for many more years.
Saudi Arabia, UAE and Kuwait are the only countries that routinely hold spare production capacity and therefore play a crucial role in helping to smooth out short-term fluctuations in supply and demand.
However, until the political and security situation improves, or oil prices fall, the Middle East’s relative importance as an oil and gas producer will continue its long, slow decline.

John Kemp is a Reuters market analyst. The views expressed are his own


Permian shale output closes gap with Saudi Arabia as rig count doubles, confirming US’ powerhouse status

Updated 21 March 2019
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Permian shale output closes gap with Saudi Arabia as rig count doubles, confirming US’ powerhouse status

  • Exxon’s 1.6 million acres in the Permian means it can approach the field as a “megaproject”
  • The majors’ Permian investments position the field to compete with Saudi Arabia as the world’s top oil-producing region

NEW MEXICO: In New Mexico’s Chihuahuan Desert, Exxon Mobil Corp. is building a massive shale oil project that its executives boast will allow it to ride out the industry’s notorious boom-and-bust cycles.
Workers at its Remuda lease near Carlsbad — part of a staff of 5,000 spread across New Mexico and Texas — are drilling wells, operating fleets of hydraulic pumps and digging trenches for pipelines.
The sprawling site reflects the massive commitment to the Permian Basin by oil majors, who have spent an estimated $10 billion buying acreage in the top US shale field since the beginning of 2017, according to research firm Drillinginfo Inc.
The rising investment also reflects a recognition that Exxon, Chevron, Royal Dutch Shell and BP Plc largely missed out on the first phase of the Permian shale bonanza, while more nimble independent producers, who pioneered shale drilling technology, leased Permian acreage on the cheap.
Now that the field has made the US the world’s top oil producer, Exxon and other majors are moving aggressively to dominate the Permian and use the oil to feed their sprawling pipeline, trading, logistics, refining and chemicals businesses. The majors have 75 drilling rigs here this month, up from 31 in 2017, according to Drillinginfo. Exxon operates 48 of those rigs and plans to add seven more this year.
The majors’ expansion comes as smaller independent producers, who profit only from selling the oil, are slowing exploration, and cutting staff and budgets amid investor pressure to control spending and boost returns.
Exxon CEO Darren Woods said on March 6 that Exxon would change “the way that game is played” in shale. Its size and businesses could allow Exxon to earn double-digit percentage returns in the Permian Basin even if oil prices — now above $58 per barrel — crashed to below $35, added Senior Vice President Neil Chapman.
Exxon’s 1.6 million acres in the Permian means it can approach the field as a “megaproject,” said Staale Gjervik, head of shale subsidiary XTO Resources, whose headquarters was recently relocated to share space with its logistics and refining businesses. The firm also recently outlined plans to nearly double the capacity of a Gulf Coast refinery to process shale oil.
“It sets us up to take a longer-term view,” Gjervik said.
The majors’ Permian investments position the field to compete with Saudi Arabia as the world’s top oil-producing region and solidifies the US as a powerhouse in global oil markets, said Daniel Yergin, an oil historian and vice chairman of consultancy IHS Markit.
“A decade ago, capital investment was leaving the US,” he said. “Now it’s coming home in a very big way.”
The Permian is expected to generate 5.4 million barrels per day (bpd) by 2023 — more than any single member of the Organization of the Petroleum Exporting Countries (OPEC) other than Saudi Arabia, according to IHS Markit. Production this month, at about 4 million bpd, will about double that of two years ago.
Exxon, Chevron, Shell and BP now hold about 4.5 million acres in the Permian Basin, according to Drillinginfo. Chevron and Exxon are poised to become the biggest producers in the field, leapfrogging independent producers such as Pioneer Natural Resources.
Pioneer recently dropped a pledge to hit 1 million bpd by 2026 amid pressure from investors to boost returns. It shifted its emphasis to generating cash flow and replaced its CEO after posting a fourth-quarter profit that missed Wall Street earnings targets by 36 cents a share.

 

Meanwhile, Shell is considering a multibillion-dollar deal to buy independent producer Endeavor Energy Resources, according to people familiar with the talks. Shell declined to comment and Endeavor did not respond to a request.
Chevron said it would produce 900,000 bpd by 2023, while Exxon forecast pumping 1 million barrels per day by about 2024. That would give the two companies one-third of Permian production within five years.
At first, the rise of the Permian was driven largely by nimble explorers that pioneered new technology for hydraulic fracturing, or fracking, and horizontal drilling to unlock oil from shale rock, slashing production costs. The advances by smaller companies initially left the majors behind. Now, those technologies are easily copied and widely available from service firms.
Surging Permian production has overwhelmed pipelines and forced producers to sell crude at a deep discount, sapping cash and profits of independents who, unlike the majors, don’t own their own pipeline networks.
Even as the majors have ramped up operations, the total number of drilling rigs at work in the Permian has dropped to 464, from 493 in November, as independent producers have slowed production, according to oilfield services provider Baker Hughes.
Shell, by contrast, plans to keep expanding even if prices fall further, said Amir Gerges, Shell’s Permian general manager.
“We have a bit more resilience” than the independents,” he said.
In west Texas, the firm drills four to six wells at a time next to one another, a process called cube development that targets multiple layers of shale as deep as 8,000 feet.
Cube development is expensive and can take months, making it an option only for the majors and the largest independent producers. Shell has used the tactic to double production in two years, to 145,000 bpd.
The largest oil firms can also take advantage of their volume-buying power even if service companies raise prices for supplies or drilling and fracking crews, said Andrew Dittmar, a Drillinginfo analyst.
“It’s like buying at Costco versus a neighborhood market,” he said.
The majors’ rush into the market means smaller companies are going to struggle to compete for service contracts and pay higher prices, said Roy Martin, analyst with energy consultancy Wood Mackenzie.
“When you’re sitting across the negotiating table from the majors, the chips are stacked on their side,” he said.
The revival of interest in the Permian marks a reversal from the late 1990s, when production had been falling for two decades.
“All the majors and all the companies with names you’ve heard left with their employees,” said Karr Ingham, an oil and gas economist. “Conventional wisdom was this place was going to dry up.”
Chevron was the only major that stayed in the Permian. It holds 2.3 million acres and owns most of its mineral rights, too, but until recently left drilling to others.
But this month, CEO Mike Wirth called the Permian its best bet for delivering profits “north of 30 percent at low oil prices.”
“There is nothing we can invest in that delivers higher rates of return,” Wirth said this month at its annual investor meeting in New York.
Matt Gallagher, CEO of Parsley Energy Inc, calls the majors’ investments “the best form of flattery” for independents operating here.
Parsley holds 192,000 Permian acres — most of which was snatched up on the cheap during oil busts — and sees its smaller size as an advantage in shale.
“We’re not finished yet,” Gallagher said. “We can move very quickly.”
The majors have greater infrastructure, but independents continue to innovate and design better wells, said Allen Gilmer, a co-founder of Drillinginfo.
“Nothing is a bigger motivator than, ‘Am I going to be alive tomorrow?’” Gilmer said.
“Hunger and fear is something that every independent oil-and-gas person knows — and that something no major oil-and-gas person has ever felt in their career.”

FACTOID

5.4 million

The Permian Basin is expected to generate 5.4 million barrels of oil per day by 2023, more than any single OPEC member other than Saudi Arabia.