2022 could be a great year for OPEC + producers
OPEC + has done surprising things over the past two years. First, he broke up at the start of the pandemic with his two leaders – Saudi Arabia and Russia – turning on each other over differences of opinion on how the crisis should be handled. . Then the two reconciled, and the group united around the largest production cuts in OPEC history in response to the destruction of demand caused by the equally unprecedented pandemic.
Overall, 2020 has been a year of unprecedented events.
But this year was not that different. This was a challenge for OPEC + as prices started to recover, presenting a temptation that has always been difficult to resist, especially for the most oil-dependent economies in the Gulf and Africa. And yet they resisted, sticking to a production boost plan that saw 400,000 bpd add to combined oil production each month.
That plan is still in action, at least until January, when OPEC + may reconsider its decision as some analysts warn of an impending oversupply of oil. OPEC analysts are not one of them – the cartel expects a slight, temporary effect on demand for the omicron variant of the coronavirus. But the cartel has proven over the past two years that it can be safe.
Bloomberg’s Julian Lee earlier this week reminded us that since its inception, the expanded OPEC + cartel has its work cut out for it. From the very beginning, when members decided to cut production in response to the U.S. shale boom, until this year, when they had to be flexible with production amid a wave of infections at Covid-19, the five years have been difficult for OPEC +.
The stimulating nature of the cooperation was to be expected given the often different priorities of the Member States. And yet it worked one way or another, even with obstacles such as Iraq’s inability to meet its production quotas, for which it had to be “punished” by getting additional quotas. . And that just might have made the group more resistant to any future shock.
The first challenge, analysts say, is oversupply. It wouldn’t be much of a challenge, however, as it’s considered temporary, only until the omicron wave passes, and assuming it would be as bad as previous waves, which is a bit unlikely for a very pragmatic reason: most governments cannot afford another long lockdown.
A much bigger challenge, as oil industry observers and OPEC members have noted, is shrinking the supply of alternative production. OPEC’s spare capacity could drop to 5.11 million bpd in the last quarter of next year, according to the US Energy Information Administration. This is down from 9 million bpd in the first quarter of 2021.
The Energy Information Administration defines reserve oil production capacity as oil production that can be started within 30 days and maintained for at least 90 days. The International Energy Agency defines reserve capacity as production that can be increased in 90 days.
Regardless of the definition, the world’s unused oil production capacity is shrinking because it is not a static oil reservoir. Oil reservoirs that go unused tend to deplete their resources, one of the main reasons so many oil producers were reluctant to start plugging wells when the pandemic killed demand. Once you plug a well, it may or may not revert to full production or to full production.
Speaking of well plugging, this may well explain part of why Russia is now close to its oil production capacity, and that is a much lower level than before the pandemic. Before, Russia pumped north of 11 million bpd.
Now, according to a Reuters report citing Russian oil companies, total production is approaching capacity at 10.9 million bpd, even though Deputy Prime Minister Alexander Novak has argued that Russia’s oil production will rebound to 11, 33 million bpd by May.
Most of the spare capacity will therefore be found in OPEC, and more specifically in the Middle East. But even that unused capacity requires maintenance, and maintenance equals investment. And investments in oil production are getting harder and harder to come by these days.
“We are heading into a phase which could be dangerous if energy expenditure is not sufficient,” Saudi Energy Minister Prince Abdulaziz bin Salman said earlier this month. This sentiment was echoed by Finance Minister Mohammed Al-Jadaan: “We are very concerned that the world may run out of energy if we are not careful to manage the transition.
It is not just the Saudis who are warning against underinvestment. Daniel Yergin of IHS Markit said the world was in a corner with a series of energy crises due to insufficient investment in oil and gas. And it’s common knowledge that U.S. oil companies are prioritizing returning money to investors over growing production while Big Oil is pouring billions in low-carbon energy to clean up its reputation.
What all this means is that the world could have a few more difficult years in terms of energy security, especially parts of it. OPEC +, on the other hand, could reap additional windfall profits as the oil supply remains limited for purely fundamental reasons. Of course, there is always the possibility of another demand destruction event in case the pandemic continues to surprise us, but OPEC + has already been there and has. He will survive and maybe even get stronger.
By Irina Slav for Oil Octobers