Wednesday, May 13, 2020
The three-month period of April through June 2020 will see the largest volume of liquids production cuts, including shut-in production, in the history of the oil industry, according to IHS Markit, a global information provider. It expects as much as 17 MMbbld total liquids output, which includes nearly 14 MMbbld of crude oil production, to be cut or shut-in during the quarter, and oil demand to be 22 MMbbld less than a year ago.
This slump in demand, combined with low oil prices, storage constraints, and government ordered cuts, are driving this extraordinary level of liquids production cuts and shut-ins worldwide.
“When it comes to the where, why, and how of production cuts, the wide range of technical, logistical, regulatory, contractual, and financial conditions means there is no single set of answers,” said Paul Markwell, vice president, global upstream oil and gas, IHS Markit. “But under these market conditions, it is pretty clear where production will be cut. Nearly everywhere.”
North America and OPEC members, as well as countries in the Commonwealth of Independent States, particularly Russia, are expected to experience most of the production cuts, although the exact where, why, and how is a complex matter. There is no fixed equation, because with a wide variety of environments, factors vary.
IHS Markit has identified three key factors that shape production cut decisions: Technical and logistical factors, including restart complexity: Technical factors relate to the degree of operational complexity such as terrain, field depletion, reservoir drive, production system configuration, and reservoir fluid composition. Complexity and field maturity influence how easy or difficult restarting production could be, including whether output could be forever lost or simply deferred. Other technical-related factors are health, safety, and worker availability. Logistical factors are offtake demand, transport options, and oil storage availability.
Financial considerations: These include operating margins, current oil price levels, future expectations of the oil price, financial health of the operator, capital availability and alternative spending options, such as other projects.
Regulatory and contractual conditions: These include ensuring compliance with government requirements for shutting-in wells, government orders to adjust production, and contractual obligations. Government orders to comply with the OPEC+ agreement to cut production fall into this category. Obligation to deliver associated gas (i.e., gas that is produced as by-product from a crude oil well) is an example of a contractual condition that could impact production decisions. For upstream operations that are integrated with downstream assets, such as refineries and petrochemical facilities, downstream market conditions and needs of downstream assets could impact decisions about upstream output, especially when the assets are under combined ownership.
As Jim Burkhard, vice president and head of oil markets, IHS Markit, commented, “All producing countries are subject to the same brutal market forces. Some will be impacted more than others. But there is nowhere to hide.”
SOURCE: The Weekly Propane Newsletter, May 14, 2020. Weekly Propane Newsletter subscribers receive all the latest posted and spot prices from major terminals and refineries around the U.S. delivered to inboxes every week. Receive a center spread of posted prices with hundreds of postings updated each week, along with market analysis, insightful commentary, and much more not found elsewhere.
This slump in demand, combined with low oil prices, storage constraints, and government ordered cuts, are driving this extraordinary level of liquids production cuts and shut-ins worldwide.
“When it comes to the where, why, and how of production cuts, the wide range of technical, logistical, regulatory, contractual, and financial conditions means there is no single set of answers,” said Paul Markwell, vice president, global upstream oil and gas, IHS Markit. “But under these market conditions, it is pretty clear where production will be cut. Nearly everywhere.”
North America and OPEC members, as well as countries in the Commonwealth of Independent States, particularly Russia, are expected to experience most of the production cuts, although the exact where, why, and how is a complex matter. There is no fixed equation, because with a wide variety of environments, factors vary.
IHS Markit has identified three key factors that shape production cut decisions: Technical and logistical factors, including restart complexity: Technical factors relate to the degree of operational complexity such as terrain, field depletion, reservoir drive, production system configuration, and reservoir fluid composition. Complexity and field maturity influence how easy or difficult restarting production could be, including whether output could be forever lost or simply deferred. Other technical-related factors are health, safety, and worker availability. Logistical factors are offtake demand, transport options, and oil storage availability.
Financial considerations: These include operating margins, current oil price levels, future expectations of the oil price, financial health of the operator, capital availability and alternative spending options, such as other projects.
Regulatory and contractual conditions: These include ensuring compliance with government requirements for shutting-in wells, government orders to adjust production, and contractual obligations. Government orders to comply with the OPEC+ agreement to cut production fall into this category. Obligation to deliver associated gas (i.e., gas that is produced as by-product from a crude oil well) is an example of a contractual condition that could impact production decisions. For upstream operations that are integrated with downstream assets, such as refineries and petrochemical facilities, downstream market conditions and needs of downstream assets could impact decisions about upstream output, especially when the assets are under combined ownership.
As Jim Burkhard, vice president and head of oil markets, IHS Markit, commented, “All producing countries are subject to the same brutal market forces. Some will be impacted more than others. But there is nowhere to hide.”
SOURCE: The Weekly Propane Newsletter, May 14, 2020. Weekly Propane Newsletter subscribers receive all the latest posted and spot prices from major terminals and refineries around the U.S. delivered to inboxes every week. Receive a center spread of posted prices with hundreds of postings updated each week, along with market analysis, insightful commentary, and much more not found elsewhere.
