Is OPEC prepared for the upcoming oil crunch?


The oil market is “tightening up,” the US International Energy Agency (IEA) said in its monthly report last week.
The report had many warnings about the tightness of the oil market as world demand for the black liquid is expected to top 100 million barrels a day in the next three months, while the supply picture isn’t rosy due to a fall in production in Latin America; a ban on Iranian shipments by the US; a fragile situation in countries like Libya; and finally, an infrastructure bottleneck in the Permian, America’s largest basin for shale oil.
The upcoming crunch in the oil market won’t be limited to next year. Many, like the heads of the Organization of the Petroleum Exporting Countries (OPEC) and the IEA, are warning that the current, timid investments in oil and gas projects will start to have an impact in the near future.
In the midst of all of this, it is legitimate to ask if OPEC, the central bank for global oil, is ready for the tightness in the market.
Many efforts have been undertaken by OPEC to meet consumer demand over the coming few years, but that is still not enough unless others outside the producer group can step up to the challenge. So far, things seem disappointing in the near term.
Brazil has fallen short in increasing its oil production this year: It only added 30,000 barrels per day (bpd) of supply, while the IEA was expecting to see at least 260,000 bpd. American shale oil producers won’t increase supply by more than what they have achieved until more pipelines are built or expanded — and that will take at least 10 to 15 months from now.
Therefore, we are back to square one and the pressure will be on OPEC and its new allies, led by Russia, to do something.
OPEC producers are already doing a lot at a very high capital cost. Saudi Arabia alone is planning to invest $300 billion on oil and gas projects over the next 10 years.
The national oil company, Saudi Aramco, is racing to bring a new huge boost to the market from the Khurais field. A new gas and oil separation plant should be commissioned sometime in the coming three months to add another 300,000 bpd of Arab Light oil stream to the market, raising the entire production capacity of the field to 1.5 million bpd. That is one and a half times of Oman’s daily production and 500,000 less than what entire Mexico can produce at a single day.
That, however, isn’t going to be as easy. It is true that Saudi oil fields (both onshore and offshore) have the lowest operational cost in the industry, but that doesn’t mean the cost and the complexity of operations are not increasing.
For example, the water cut in Saudi fields (the percentage of water produced with each barrel of oil) is one area where the cost is rising. That extra amount of water needs extra facilities to process and dispose of it, since it is highly saline.
Saudi Aramco is also hiring more rigs and drilling more wells and is now tapping offshore deposits to keep its maximum production capacity at 12 million bpd. The cost of leasing an offshore rig can be as twice as much of that onshore.
Over the past few weeks, the company awarded two offshore drilling contracts. The first contract went to an American company, GE’s Baker Hughes, to drill in Marjan field; the other was awarded to China Harbor Engineering Arabia for the construction of two drilling islands to boost production at Berri offshore.
The company is also planning to increase the capacity of Zuluf, another mega offshore field, by 600,000 bpd; however there are so far no details on when or how that will happen.
Onshore, the company is also expected to complete the de-mothballing of its famous Dammam field, where Aramco first struck oil in 1938, to produce 25,000 barrels a day in 2021, raising it later to 75,000 barrels a day in 2026.
These are the major increments that are expected to come from Saudi Arabia in the coming few years to ensure the 12 million bpd of capacity will be there.
Other OPEC members are also doing something about the upcoming oil crunch. Iraq, the second largest producer of the group, plans to boost output to more than 7.5 million bpd by 2023-2024, including 6 million bpd to be allocated for export and the rest for local refineries.
Kuwait is also ramping up production and will pump a significant amount of crude this year and next from its fields in the northern part of the country. The UAE is also adding more capacity year-on-year to reach a target of 3.5 million bpd by 2020.
Libya, Nigeria, Iran and Venezuela may not be able to raise production capacity due to geopolitical or security risks. So the whole burden of the market in the coming few years will rest on just a few countries.
OPEC still has its limits — yet as oil prices edge higher this winter, the group can still act and respond to short-term spikes in demand. Over the medium and long term, OPEC needs higher prices, political stability and stable demand to invest further.