The statement made by Secretary of State regarding Trump’s administration intent to conduct “comprehensive review” on Iran, initially seemed to be surprising. I could not understand why would the U.S. government decided to do it when Trump’s administration has just confirmed that Iran is in full compliance with terms and conditions of the nuclear agreement.
It was especially strange considering that the confirmation and the announcement on the review occurred in a space of less than 24 hours.
However, if we look at the following statistics, it would suggest that even if the process of “comprehensive review” would start soon, it is going to be a display because chances are that decision has already been made by the Donald Trump’s government.
The published information points to a certain direction. I believe that we might be witnessing the beginning of the process aimed to suspend the access (partially or 100%) of Iran’s oil production to global markets.
Crude Oil Production in the United States is expected to be 8.9 million barrels per day the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate Crude Oil Production in the United States to stand at 8.83 million barrels per day in 12 months time. In the long-term, the United States Crude Oil Production is projected to trend around 9.1 million barrels per day in 2020.
$60/bbl would make many projects profitable again, but high-cost producers would still be out of the market. However, whether $60/bbl can be achieved in the near future is rather questionable.
The forecast suggests that crude oil prices might remain at the current level until 2020.
Improvements in lithiumion batteries could make electric vehicles cost competitive by 2020.
The rapid improvement of cost base for renewables could have negative impact on overall demand for liquid fuels.
We shall also keep in mind that the U.S shale producers have hundreds of drilled but uncompleted wells, called DUCs. Taking a DUC to completion took an average of 10 days during 2015, according to NavPort, which collates oil-well and rig data using regulatory reports.
“While each basin has a significant amount of DUCs, location is going to come into play when operators are deciding to frack the well — basins with the highest average initial BOE [barrel of oil equivalent] return should result in operators holding onto DUCs for longer periods of time, in hopes to get the biggest bang for their buck,” according to Amie Parenti, NavPort’s director of analysis services.
The number of DUCs in all basins held by reporting companies had grown by 34% during 2015. The top 10 reporting exploration and production companies among the four shale basins with the largest number of DUCs.
Here are the lists of the top 10 producers in the four basins with the largest number of DUCs. The list is sorted by average BOE during the first six months of production per proppant short ton used:
The value of Permian assets has been transformed by advances in production technology. Following the initial breakthroughs in hydraulic fracturing, horizontal drilling and seismic surveying that first made oil production from shale viable in 2009-10, companies have continued to innovate to boost output and cut costs. One of the motives for acquisitions has been for producers to secure larger patches of contiguous acreage, so they can drill more efficiently. From a single “pad”, horizontal wells can be drilled like the spokes of a wheel, cutting down the time spent moving rigs.
More intensive well completions such as these are more expensive, but they can also be much more productive. Peak production for wells in the Midland and Delaware basins was about 35 per cent higher in 2016, according to Drillinginfo, a data and analysis company.
At the end of 2011, the Permian was adding 101 barrels per day of new oil production per rig in the region, according to the EIA. Next month, it will be 660 barrels per day per rig: a sixfold increase in just five years. As a result, many companies find it commercially viable to bring Permian wells into production, even with US crude at today’s levels of about $52 per barrel. T
he number of rigs in the region drilling horizontal oil wells has nearly doubled from its low of 116 last May, reaching 221 last week, according to Baker Hughes, the oilfield services group. That increase is likely to continue.
The problem for the region is that as increased drilling also raises US crude production, it will put downward pressure on prices.
More than 20 energy companies had borrowed more than two-thirds of their limit on their credit lines, according to Spencer Cutter, a senior credit analyst with Bloomberg Intelligence. More than four of those have since filed for bankruptcy. The degree of distress last year wasn’t surprising given the sharp plunge in oil prices that started in 2014. A mounting number of energy companies were forced to sell assets, restructure or file for bankruptcy.
But now that oil prices have rebounded and borrowing costs for riskier junk-rated oil companies have dropped, it makes sense to think that the worst companies have largely been washed out.
This is not the case. For evidence, just look at the relatively high number of companies relying on revolving loans for their financing needs. At least 11 oil and gas producers are using 70 percent or more of their borrowing-base credit lines, according to Cutter. That includes smaller companies such as Trinity River Energy, Yuma Energy and Mid-Con Energy, and some larger ones such as Sanchez Production Partners and California Resources.
Banks could cut lines of energy companies for failing to have a more sustainable capital structure, forcing them to scramble for financing when investors are still somewhat sceptical about their future. About 24 percent of exploration and production companies will likely have the base size of their revolving credit lines cut in the upcoming round of redeterminations, according to a Haynes and Boone survey.
Since prices began to sink in 2014, the five “supermajors” more than doubled their combined net debt to $220 billion. That may be as bad as it gets. At $50 a barrel, they can balance their books and pay dividends without borrowing for the first time in five years, according to analysts at Jefferies International Ltd. All of the drillers will probably report profit growth in the next two weeks.
As the price of oil declined, producers saved billions of dollars by shedding jobs, renegotiating supplier contracts and canceling projects. BP Plc has said it plans to keep at least 75 percent of its cuts, and other companies have expressed similar sentiments. That strategy, combined with oil’s recovery, are allowing the majors to generate cash again, a key focus for investors heading into earnings season.
“As a group they are at peak debt levels now,” said Jason Gammel, a London-based analyst at Jefferies, citing operating and capital efficiency as well as rising oil prices. “Because quarterly earnings are backward-looking, the outlook is usually a bigger driver of the stock,” he said, with cash flow and dividends more important.
In 2014, when oil sold for $100 a barrel, the five supermajors generated a combined $180 billion in cash from operations. Last year, that figure fell to just $83 billion, Jefferies estimates. Cost cuts and higher oil prices will drive that up to $142 billion in 2017 and $176 billion the following year, according to the brokerage.
During the market rout, oil producers borrowed to maintain dividends they deemed sacrosanct. In the case of Shell, debt was also pushed higher by its $54 billion purchaseof BG Group Plc. The Anglo-Dutch company, as well as Exxon, BP and Total, suffered credit-rating downgrades as debts spiraled higher.
Fitch Ratings Ltd. estimates Total will have a $1 billion cash surplus after paying dividends if oil stays at $55 a barrel this year compared with a deficit of $3.6 billion at $45 barrel. Shell’s shortfall would be $823 million at $55, compared with $7.5 billion at $45.
“A lot of fat has been cut,” said Maxim Edelson, a Moscow-based senior director at Fitch. “The companies will have to think about if they want to keep cutting spending or start investing for growth again.”
Repairing and strengthening the balance sheet will remain the principal use of surplus cash, Jefferies’ Gammel said. Shell, the world’s most indebted oil producer after Brazil’s Petroleo Brasileiro SA, said last year that tackling that burden was its top financial priority. Shell and some of its peers remain on credit-rating watch for further downgrades.
Benchmark Brent crude is still trading at half its level of mid-2014 but is expected to average $56 a barrel this year, up from $45 in 2016, according to analyst forecasts compiled by Bloomberg. It rose 0.5 percent to $55.34 at 11:04 a.m. in London on Thursday.
“We’ve had 2 1/2 years of doom and gloom and we are on the cusp of the upstream oil and gas sector entering a new recovery,” said Tom Ellacott, a senior vice president at consultants Wood Mackenzie Ltd. “We expect the mood music to be a bit more upbeat.” I wish I could share optimism of Wood Mackenzie. Unfortunately, there are not much reasons for it.
The abnormal crude stock increase took inventories close to 80-year record levels at 508 million barrels, and is evidence that should worry oil bulls. However, the oil markets were not deterred. In fact, that has been a defining characteristic of the market in recent weeks – optimism even in the face of some pretty worrying signals about the trajectory of the market.
Moreover, we have witnessed many times how effective the ability of the U.S. shale producers to quickly offset efforts of OPEC to recover oil prices by its production cuts. The wide range of political and economic uncertainties as a result of the Trump’s administration policies, Brexit and other international events, do not provide any reason for such optimism. Therefore, whether we would enjoy the upbeat music mood remains to be seen.
The U.S oil and gas companies are in serious trouble. If they are not able to pay back their debt, it would not be limited only by mass bankruptcies and unemployment, but also could trigger the next banking crisis which would lead to a domino effect.
Since oil prices do not show any sign of recovery and demand does not indicate that consumption numbers will go up anytime soon, it seems that the collapse is inevitable. Therefore, I would assume, Iran would be used by Trump’s administration to solve problems which was created by the US shale producers.
By putting Iran out of global markets, it would reduce global output by more than 3 million barrels a day. The fact that about 70 million people in Iran will continue to suffer, is unlikely to bother the current administration.
Besides, time is right. Russian economy has sustained significant damage due to falling crude oil prices and imposed sanctions that followed annexation of Crimea.
Therefore, it is possible that Iran would not be backed by Russia this time. Exxon’s intention to resume its operations in Russia might be an indication that the agreement is reached and Iran’s, and possibly Ukraine’s, faith is sealed.