Can OPEC CUT PRODUCTION FOREVER?

(edited)

It seems every week now OPEC announces another cut in production or decrease in exports .  It seems to me they are just delaying  the inevitable. With (1) four new or upgraded oil export terminals on Gulf of Mexico being constructed (2) three million bbls/day new Permian to Gulf pipeline capacity coming online (3) and over 9000+ Drilled but Uncompleted, DUCs, wells drilled (80 % in Permian)  . . . . .  

Edited by JJCar
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(edited)

It seems every week now OPEC announces another cut in production or exports .  It seems to me they are just denying the inevitable with (1) four new or upgraded oil export terminals on Gulf of Mexico (2) three million bbls/day Permian to Gulf pipeline capacity coming online (3) and over 9000+ Drilled but Uncompleted wells drilled (80 % in Permian. . . . . .  .  ? ? ? ?  

Also can Saudi's keep other members in line ?

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It's beyond me why the Saudis haven't just said" Look....we're pumping x amount per day and if the US doesn't like it, let them cut back" 

 

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(edited)

Some Shale operators can now make good money with oil in the $30's.  As US Shale consolidation takes place and all embrace new technology and drilling methods Shale will be very profitable at $45 to $55 oil (or lower). 

Saudi Arabia has a unique problem  . . . . . .  While their B/E is $4.00 barrel the Royal govt needs $80 - $85 oil to balance their budget and quell their serious dissident population.  Over 60% of their population is under 30 years old and many are unemployed.  If oil settles under $50 the government's existence is in jeopardy in my opinion. 

With non-OPEC supply increasing (while US Shale leading we are not the only ones)  they are in a precarious position.

Edited by JJCar
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4 hours ago, JJCar said:

A few Shale operators can now make money with oil on the $30's.  As US Shale consolidation takes place and all embrace new technology and drilling methods all Shale will be very profitable at $45 to $55 oil (or lower). 

Would be wonderful if true, but I remain sceptical.  The sweetest patches have already been drilled, and their production is already in decline due to the crazy decline rates of Shale Oil.

Overall production is increasing in Shale oil by more and more wells being added.

But the wells being added are now the Second Stringers, the JV group.  The best wells, the Varsity team, are already retiring.

Expecting the JV second stringers to out-perform the best Varsity team sweet spots in both production and breakeven costs seems pretty darn unlikely to me.

Obviously, I have a minority opinion on this, and my view on this wrankles some people, especially over on LinkedIn.

I may be wrong.  But maybe not. 

 

4 hours ago, JJCar said:

Saudi Arabia has a unique problem  . . . . . .  While their B/E is $4.00 barrel the Royal govt needs $80 - $85 oil to balance their budget and quell their serious dissident population.  Over 60% of their population is under 30 years old and many are unemployed.  If oil settles under $50 the government's existence is in jeopardy in my opinion. 

With non-OPEC supply increasing (while US Shale leading we are not the only ones)  they are in a precarious position.

Yep.  A few years ago on the old Oilpro forum, I made quite a few comments and rough calculations about the true breakeven costs of Saudi oil production.  Attempting to factor in the money skimmed right off the top to the huge extended Royal family, plus social welfare costs to keep the non-royal 'lesser' Saudi rank and file in line and to prevent a bloody decapitation revolt against the royals, my estimate a few years ago was around $88 / bbl breakeven cost.  I doubt that breakeven cost much has changed since then.

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(edited)

Good answer.  If you are correct on shale one still has to take into consideration that according to Shell "breakeven for off-shore going forward is sub $30.".   

Do you expect any big news out of Ceraweek in Houston ?

Edited by JJCar
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3 hours ago, JJCar said:

It seems every week now OPEC announces another cut in production or decrease in exports .  It seems to me they are just delaying  the inevitable. With (1) four new or upgraded oil export terminals on Gulf of Mexico being constructed (2) three million bbls/day new Permian to Gulf pipeline capacity coming online (3) and over 9000+ Drilled but Uncompleted, DUCs, wells drilled (80 % in Permian)  . . . . .  are all of naught. ? ? ? ?

It is hard to predict the future with OPEC+ but I would assume some cheating as in the past will happen. Remember Venezuela is a member and today power outages killed the refineries. That at the moment is still a small amount as the world mostly has banned their oil. I doubt much more cuts if they see a draw down here in US capacity. If Canada and US keep up at the rate they are drilling I see OPEC trying to ramp up production and win market share back. It's a wait and see game now I believe till the quarter is over. I really don't see any reason for more cuts but Saudi is really the only one able to slow more production out of the whole group as they are biggest producer. Russia I believe is done cutting.

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(edited)

6 hours ago, JJCar said:

It seems every week now OPEC announces another cut in production or decrease in exports .  It seems to me they are just delaying  the inevitable. With (1) four new or upgraded oil export terminals on Gulf of Mexico being constructed (2) three million bbls/day new Permian to Gulf pipeline capacity coming online (3) and over 9000+ Drilled but Uncompleted, DUCs, wells drilled (80 % in Permian)  . . . . .  are all of naught. ? ? ? ?

Your question was about OPEC.......

But my answer will be only about Saudi Arabia as they essentially ARE OPEC.....

My beliefs may be contrary to those of other people on the board,  and may even be contradicted by "official statistics" published by the Saudi's........

But here goes:

 

I DO NOT BELIEVE A THING THE SAUDI'S SAY AS FAR AS THEIR "PRODUCTION" PLANS ARE CONCERNED.....

The SAUDI's may have waited too late to actually perform  ANY PRODUCTION CUTS..........

THE SAUDI'S CANNOT CUT THEIR PRODUCTION IN ANY MEANINGFUL WAY WITHOUT "CHANGING THE ECONOMIC CULTURE" OF THEIR NATION.......

 

I do not see Saudi Arabia doing the CULTURAL changes that will be needed to support cuts.....

 

They cannot afford to cut production.............   THEY OWE TOO MUCH..............  AND HAVE COMMITTED THEMSELVES TO TOO MUCH.........

 

Saudi Arabia is a one-industry-country....   OPEC HAS EXISTED FOR OVER 40 YEARS,  BRINGING IN TRILLIONS OF DOLLARS TO THE SAUDI GOVERNMENT........

And the Saudi's WASTED ALL OF IT.........

THEY NEVER DIVERSIFIED THEIR ECONOMY.....

 

-  They have a huge percentage of their population that DOESN'T WORK AT ALL AND IS DEPENDENT ON GOVERNMENT CASH HANDOUTS............

-  They also VASTLY OVER-PAY FOR ALL OF THE JOBS THAT THEY DO HAVE............

THE PERCENTAGE OF GOVERNMENT JOBS IS EXTREMELY HIGH.......

 

MBS,  their new leader,   is the FIRST of their leaders who has actually tried to resolve these problems........

 

BUT WITHOUT MAJOR STRUCTURAL CHANGES IN THE WAY THE SAUDI GOVERNMENT OPERATES,   IT IS TOO LATE TO DO ANYTHING......

 

To survive the new OIL WORLD ORDER,    Saudi Arabia needs to make some drastic changes:

 

(1)  they need to eliminate the majority of their programs that PAY PEOPLE THAT DO NOT WORK.........  WELFARE BENEFIT CUTS...

(2)  the Government needs to INSTITUTE INCOME CONTROLS,  AND DRASTICALLY REDUCE THE AMOUNT THE GOVERNMENT PAYS TO GOVERNMENT EMPLOYEES......   PAY CUTS......

(3)  the Government needs to do what MBS already did a few months ago,   CONFISCATE AND TAKE BACK THE MANY BILLIONS OF DOLLARS THAT HAVE BEEN GIVEN TO ALL OF THE 20,000 ROYAL COUSINS............

(4)  THE GOVERNMENT NEEDS TO INSTITUTE EXTREME COST CONTROLS ON ALL FUTURE GOVERNMENT PROJECTS.......  AND STOP JUST THROWING MONEY AT EVERY PROBLEM.......

(5)  The Government needs to renegotiate the cost involved with existing projects............

(6)  The Government needs to do everything possible to research,  and bring into the KIngdom every kind of "INDUSTRY" THAT THEY CAN IN ORDER TO DIVERSIFY THEIR ECONOMY.........

 

As has been discussed before,  the Saudi's need about $80 per barrel to survive,  even though their ACTUAL PRODUCTION BREAK-EVEN IS ONLY AROUND $5 TO $6 PER BARREL.........

 

That approximate $75 dollar per barrel "SPREAD" is what the Saudi government wastes on all of it's various projects discussed above......

 

UNLESS THE SAUDI'S CAN REDUCE THAT $75 SPREAD BY HALF,   THE COUNTRY WILL NOT SURVIVE IN IT'S CURRENT CULTURAL MATRIX....

 

Global Oil will not be going back to $80 per barrel or more as far as i can see.........

 

The Saudi's need to adapt..........

Edited by Illurion
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(edited)

On 3/11/2019 at 9:36 PM, Illurion said:

................ 

As has been discussed before,  the Saudi's need about $80 per barrel to survive,  even though their ACTUAL PRODUCTION BREAK-EVEN IS ONLY AROUND $5 TO $6 PER BARREL.........

 

That approximate $75 dollar per barrel "SPREAD" is what the Saudi government wastes on all of it's various projects discussed above......

 

UNLESS THE SAUDI'S CAN REDUCE THAT $75 SPREAD BY HALF,   THE COUNTRY WILL NOT SURVIVE IN IT'S CURRENT CULTURAL MATRIX....

 

Global Oil will not be going back to $80 per barrel or more as far as i can see.........

 

The Saudi's need to adapt..........

Well that says it all. . . . . and then some.  I agree 100%.   I would add (1) their $900 million cash reserves have been cut in half . (2) their "Invest Saudi Arabia" project where the are looking for $474 Billion from outside investment is now a joke.(3) their Aramco IPO will never come to be due to unrealistic valuation, no transparency and new risk to their very existence.  

My money says $45 -$55 bbl oil by Q4 of 2020 as the new normal.  The only thing that will avert those prices is major conflict outbreak in Middle East.  

Edited by JJCar
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(edited)

TALKING ABOUT SAUDI WASTE. ....... I SAW THE FUNNIST VIDEO OF SAUDI KING SALMAN. 

The king planned a trip to 4 Asian nations  last year.  He brought with him a "small" group of family and friends, as in 1500 !  I think he has 40 wives and who knows how many children.  

He also brought along two of his own private escalators to descend and ascend from and to his private 727.  

BUT the kicker is the escalators were made of solid gold.  Real solid gold , not gold plated.  

When he arrived for his royal visit to Indonesia the video showed the King coming down the escalator with what looked like a military attaché and some type of gov official. When half-way down the esculator it stopped.  It broke.  The king turned to the military attache'  with a bilwildered look.  They just stood there their on the multi million dollar gold toy. The escalator broke down and they just froze. They didn't know what to do. LOL

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47 minutes ago, JJCar said:

TALKING ABOUT SAUDI WASTE. ....... I SAW THE FUNNIST VIDEO OF SAUDI KING SALMAN. 

The king planned a trip to 4 Asian nations  last year.  He brought with him a "small" group of family and friends, as in 1500 !  I think he has 40 wives and who knows how many children.  

He also brought along two of his own private escalators to descend and ascend from and to his private 727.  

BUT the kicker is the escalators were made of solid gold.  Real solid gold , not gold plated.  

When he arrived for his royal visit to Indonesia the video showed the King coming down the escalator with what looked like a military attaché and some type of gov official. When half-way down the esculator it stopped.  It broke.  The king turned to the military attache'  with a bilwildered look.  They just stood there their on the multi million dollar . The escalator broke down and they just froze. They didn't know what to do. LOL

I would LOVE to see that video.......

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1 hour ago, JJCar said:

The only thing that will avert those prices is major conflict outbreak in Middle East.  

agreed

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10 minutes ago, Illurion said:
1 hour ago, JJCar said:

The only thing that will avert those prices is major conflict outbreak in Middle East.  

agreed

There are other factors to consider. OPEC+ slowly drop the outputs will eventually cause shortages. But if that were to happen now, tap the spr and add 1.5mbd. That would slow a an extreme spike. See who blinks first...….....

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1 minute ago, Old-Ruffneck said:

See who blinks first...….....

i hope it is not us.......

or....

hope it is not the "finance people" behind us..........  since everything runs on money..........  

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Something I’ve been wondering for quite some time, too.  How they can ever emerge from the cuts and keep oil prices from sliding back down again is beyond me.

On a different note, I’m about to begin my MBA with a dual concentration in a combo of Finance, business analytics, and healthcare.  I have a strong interest in the industry post MBA, and currently follow it daily-any tips for a young interested professional like myself are greatly appreciated!

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2 hours ago, JJCar said:

TALKING ABOUT SAUDI WASTE. ....... I SAW THE FUNNIST VIDEO OF SAUDI KING SALMAN. 

The king planned a trip to 4 Asian nations  last year.  He brought with him a "small" group of family and friends, as in 1500 !  I think he has 40 wives and who knows how many children.  

He also brought along two of his own private escalators to descend and ascend from and to his private 727.  

BUT the kicker is the escalators were made of solid gold.  Real solid gold , not gold plated.  

When he arrived for his royal visit to Indonesia the video showed the King coming down the escalator with what looked like a military attaché and some type of gov official. When half-way down the esculator it stopped.  It broke.  The king turned to the military attache'  with a bilwildered look.  They just stood there their on the multi million dollar gold toy. The escalator broke down and they just froze. They didn't know what to do. LOL

His escalator, I would argue, is not solid gold.  Think of the weight and, if the moving steps/gears/motors/tracks/wheels/bearings/etc. were made of solid gold, then they would (again, in my opinion) be prone to malfunction at a rate so high they wouldn't even use them at home let alone transport 1 or 2 of them around the world to be embarrassed on a regular basis.  Heads would roll!  Literally.

Anyway, here is a Business Insider article that covered the event and has the video embedded for your viewing pleasure.

Watch the Saudi king get stuck in midair when his golden escalator breaks down in Russia

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The Saudis are likely playing the long game. The US shale play is a house of cards built on debt and will eventually crash. The decline rates of these shale wells are so drastic that the idea of a 'drilling campaign' is a pipe dream and to keep a reasonable production plateau ( which is required to keep the myth alive and to get more financing to SERVICE their existing debt) these companies must drill CONTINUOUSLY.

As Tom has pointed out, the 'sweet spots' were drilled first. This is common sense. Therefore each additional well is not expected to perform as well while still experiencing the drastic decline curves.

Technology will only get you so far, which is now being exposed by the 'sibling vs parent' well issue.

Furthermore, remember the service companies (required to drill or complete any well) which these shale players forced to cut their rates so that the shale play looked profitable a few years ago? Guess who is now raising their prices to reasonable rates again.

I believe the Saudis are simply playing the long game and waiting for the inevitable, drastic implosion of the US shale fiasco.

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The consolidation of the Shale industry is just starting.  US shale operators will go from 500+ operators to under 100.  This is a natural culling of the industry as it goes through the maturation process.  

PLUS, look at the auto industry panic investments in electric vehicles.  The inflection point probably 4 or 5 years out.  

OIL SUPPLY UP + OIL DEMAND (EVs) = PRICE DOWN

Oil can be propped up short term  . . .  BUT those that are long betting on oil going and staying up are just "Fiddling while Rome Burns"

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20 hours ago, JJCar said:

A few Shale operators can now make money with oil on the $30's.  As US Shale consolidation takes place and all embrace new technology and drilling methods all Shale will be very profitable at $45 to $55 oil (or lower). 

Saudi Arabia has a unique problem  . . . . . .  While their B/E is $4.00 barrel the Royal govt needs $80 - $85 oil to balance their budget and quell their serious dissident population.  Over 60% of their population is under 30 years old and many are unemployed.  If oil settles under $50 the government's existence is in jeopardy in my opinion. 

With non-OPEC supply increasing (while US Shale leading we are not the only ones)  they are in a precarious position.

That is the whole point to their Vision 2030 plan, to change the economic model of their business and society to make it more sustainable and self-sufficient.  They know the easy money in the energy industry is gone, and we are all going to have to adapt to a new normal going forward.

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3 hours ago, Oil_Engineer said:

That is the whole point to their Vision 2030 plan, to change the economic model of their business and society to make it more sustainable and self-sufficient.  They know the easy money in the energy industry is gone, and we are all going to have to adapt to a new normal going forward. 

YES ! ! !  This is the reason for vision 2030 .  HOWEVER, they are a day late and a dollar short(actually $450 Billion short which is the drop in their cash reserves since the price crash).  

The ARAMCO IPO will never happen.  Worldwide Non-OPEC supply is growing and will finally put to rest OPEC's price fixing Anti-Free Trade practices.  

But be aware.  Trump wants to set-up MESA (Middle East Strategic Alliance), kind of an Arab Nato,  with the Suni States to pressure Iran and get an Israeli / Pakistan peace. Hope he doesn't sell out and agree to control oil prices.

Also OPEC secretary had dinner last night in Houston with major Oil Companies, Shale Companies, US Investment banks, etc.  The reason is to (1) stop the "NOPEC" bill in congress to stop price fixing and (2) to get them to lobby congress for some type of oil price control all in the name of maintaining investment in energy..  US oil Co's want high prices as much as OPEC (Saudi Arabia) and already voiced there stand against NOPEC bill.  

If Hess energy is making 55% return on new 2018 wells in the Bakken isn't that enough to re-invest.  Saudi B/E is $4.00 bbl  . . . .   they need more to re-invest ?  

 

Edited by JJCar
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OPEC Sec General just said they are doing US Shale a service.  OPEC/ Saudi's are not our friends.  

He stated 100 shale operators filed for bankruptcy . . . .   he's right and more small operators will follow.  Their whole business model was based on $100 bbl oil.  Things change.

As Chevron CEO said over a month ago, " cut costs or die".  So true

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(edited)

On 3/12/2019 at 12:36 AM, MSOIL said:

Something I’ve been wondering for quite some time, too.  How they can ever emerge from the cuts and keep oil prices from sliding back down again is beyond me.

On a different note, I’m about to begin my MBA with a dual concentration in a combo of Finance, business analytics, and healthcare.  I have a strong interest in the industry post MBA, and currently follow it daily-any tips for a young interested professional like myself are greatly appreciated!

Sounds like you could make good money as a Hospital CFO...

Good luck......

As for your question,  others might disagree with me,  but my answer is that they just lied,  and never made the cuts in the first place.........  So their lie caused short-term price per barrel increases , and brought in a lot of money for them  for a short time,  before the price went back to normal.......   and after a couple of months,  they will lie again,  and do the same thing all over again.....  to them,  oil price raises are all about "perception."

Edited by Illurion
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Appreciate the kind words 😊

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Someone go looking for the drilling plans at Aramco. If you can find some version of them, you'll notice the drilling activity is way up, with forecasted increases each year. Yet output isn't up much. 

The notion that Aramco could just increase 2 million on a sustained basis might be a myth from another era. I doubt lift costs are still lowest in the world, though still a lot better than you'll get out of anything in North America. The cost per well there, it's kind of hard to produce because of their deliberate opaque ERP, but it is safe to say their land wells are among the most expensive in the world. The days of them capping a well because it only puts out 1,500 barrels a day are long over. The time to well completion is pretty abysmal too. It's tough to get decisions made in a timely fashion. I never could see how unconventional will do anything but hemorrhage cash at Aramco unless they decouple it from their normal practices. Which they attempted to do, but the internal politics ended that. 

Make no mistake, as a production machine it does make a lot of money. But it has to sponsor a government and the House of Saud. And that has to be factored in for BE costs.

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