Conventional non-OPEC Oil: Declines are Set to Rapidly Accelerate

Energy
  • Since 2010, US shale oil production has grown by over five million bpd – by far the largest single source of growth in the world
  • While the world has been focused entirely on shale oil production, something very important has taken place in the rest of the non-OPEC world
  • Since 2010, conventional non-OPEC crude oil production has declined substantially. This is important because even after the meteoric rise of shale production over the last eight years, 2 out of every 3 non-OPEC barrels still come from conventional sources. 65% of non-OPEC production has been quietly developing a severe depletion problem that we anticipate will only get worse
  • According to Rystad Energy, global oil and gas industry will spend only $440bn in the 2015-2020 period, nearly 50% below the $875bn the industry spent between 2010 and 2015
  • After peaking at 44.9mmb/d in 2010, conventional non-OPEC oil production will fall to 43.5mmb/d this year – a decline of 1.4 mm barrels or 160,000 b/d per year since 2010
    • Investors consider the drop in conventional non-OPEC production to be immaterial given the surge in US shale oil production
    • We believe the surge in US shale liquids production will be nearly impossible to repeat in the next 5 years
    • Slowing US shale growth, combined with demand that continues to surprise to the upside, means that the world will increase its reliance on a segment of the global oil market that has been neglected and capital starved and is already in decline: conventional non-OPEC oil
  • According to the IEA, major new non-OPEC projects will only add 1.0 mmb/d per year between now and 2022 – a 40% slowdown compared with the last two years and 30% below the last 10 year’s average. Assuming major projects account for 80% of all new field development, we expect total new conventional non-OPEC production to add 1.2 mmb/d per year. Assuming a 4% decline rate implies that conventional non-OPEC crude production will decline by nearly 500,000 b/d each year between now and 2022
  • Once you add back OPEC NGLs, biofuels, refining gains and oil sands production growth, we believe that total non-OPEC production outside the US will decline by 100,000 to 200,000 b/d per year between now and 2022
  • US shales simply cannot meet the combination of anticipated global demand growth and a decline in non-OPEC production outside the US
  • Making matters worse, several years of reduced maintenance capital spending is taking a toll on existing conventional non-OPEC fields. North Sea production has been down 150,000 b/d on average y-o-y for the last three quarters. We expect these problems will persist and the IEA has now revised North Sea production lower for the remainder of 2018
  • Similarly, IEA has revised Mexican oil production lower by a very large 200,000b/d for all of 2018 after third quarter 2017 production declined over 300,000b/d y-o-y
  • IEA originally called for non-OPEC production outside the US to grow by 600,000 b/din 2018. We have long disagreed with this projection and the IEA has already walked back their estimate to 200,000 b/d (which we believe will still be revised further)
  • Despite this year’s disappointment, IEA is once again hoping that 2019 will see robust conventional non-OPEC crude growth outside the US in excess of 500,000b/d – something our models suggest will again be impossible to achieve

Goehring & Rozencwajg Commentary Q2 2018

Image Source: Goehring & Rozencwajg Natural Resource Market Commentary 2Q18

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