Despite not wanting, Saudi Arabia is back in its traditional role of the global swing producer.
While the Organisation of Petroleum Exporting Countries (Opec) and its non-Opec allies are endeavouring to balance the global energy equation by cutting output, major challenges continue to derail their efforts. The growing US output is one of them.
The US Energy Information Administration is projecting the United States to pump 12.4 million barrels of crude a day in 2019 and 13.2mbpd in 2020. The January average was 12mbpd, already up 90,000mbpd from December 2018.
Most of the increase in the US output is expected from Texas and New Mexico. The Permian basin spanning West Texas and the southeastern New Mexico has been the real engine of Texas oil output, emerging as one of the most prolific oil and gas producing regions in the US.
The Permian Basin is approximately 250 miles wide and 300 miles long, across West Texas and southeastern New Mexico. It encompasses several sub-basins, including the Delaware Basin and the Midland Basin.
According to the Texas Independent Producers Royalty Owners Association (TIPRO), in 2018, the Lone Star State’s oil production hit a record level not seen since 1973.
It produced more than 1.54 billion barrels of crude in 2018, topping the previous record of 1.28bn barrels set in 1973, TIPRO reported in its annual “State of Energy Report.”
In 2017, Texas also came close to beating the 1973 oil output record, pumping 1.26bn barrels of oil.
To put Texas oil production in perspective, if it was a country, it would be the world’s third oil producer sometime this year, behind only Russia and Saudi Arabia, HSBC underlined in a report.
In view of the growth prospects in the area, US oil major, Chevron has plans in place to double its production in the Permian by 2022 and is investing in growing production at high-return, short-cycle projects.
While major global oil producers are taking steps to align output with demand by cutting production, the US continues to be on an output expansion spree. On Feb 8, Baker Hughes reported an increase in the number of active oil and gas rigs in the United States during the week.
The total number of active oil and gas drilling rigs rose by 4 rigs, said the report, with the number of active oil rigs increasing by 7 to reach 854, and the number of gas rigs decreasing by 3 to reach 195.
The total oil and gas rig count is now 74, up from this time last year. Of these, 63 are oil rigs.
In sharp contrast, Opec’s January output fell nearly 0.8mbpd compared with December to 30.8mbpd.
Nearly half the cuts were borne by Saudi Arabia, followed by the United Arab Emirates and Kuwait.
Interestingly, the Iranian output, which has been targeted by the Trump administration with sanctions, was little changed from December.
In order to ensure crude market balance, Saudi Arabia has plans to reduce oil exports to 6.9mbpd in March, down from 8.2mbpd last year, energy minister Khalid Al-Falih told The Financial Times.
Al-Falih also added that the Kingdom planned to reduce its oil production to 9.8mbpd next month, over 0.5mbpd below its pledged production level under the output cut deal.
Under the deal, which came into effect at the start of 2019, Saudi Arabia was to produce 10.311mbpd.
With oil glut in sight, under Naimi’s stewardship, instead of cutting back production to support prices, Saudi Arabia opted to ramp up production so as to drive the US shale producers out of business and to preserve its market share.
However, the plan backfired. Oil prices plunged from around $100 per barrel in mid-2014 to just under $30 per barrel in January 2016.
Analysts are now of the view that in essence, it was the growing US oil output that forced Saudi Arabia to reach out to Russia and other non-Opec stakeholders and form the so-called Opec+ group of producers, in a bid to regain the control of global oil markets.
But Riyadh had to pay a price.
Despite its unwillingness, Riyadh is back, wearing the mantle of the global swing producer.
Published in Dawn, February 17th, 2019