OPEC appears to be stuck in a vicious cycle of cutting production only to see its share of the market filled by the United States and other, higher-cost producers that are not bound by the production restraints of the OPEC+ agreement.
The United States will account for the largest increase in oil supply in the next five years thanks to irrepressible growth in shale oil output, according to the International Energy Agency’s Oil 2019 medium-term outlook published on March 11. Among OPEC countries, Iraq and the United Arab Emirates are the only producers set to add significant new production capacity during the same period, though these gains will be offset by steep losses from Iran and Venezuela, due to sanctions and political and economic turmoil.
The United States will add 4 million barrels per day (mb/d) of oil to its already swelling production portfolio, accounting for 70 percent of the total increase in global oil supply to 2024. Total U.S. oil output will reach 19.6 mb/d by 2024 from 15.5 mb/d in 2018, according to the IEA.
“As a result of its strong production growth, the United States will become a net oil exporter in 2021, as its crude and products exports exceed its imports,” the IEA noted. Toward the end of the forecast period, U.S. gross exports will reach 9 mb/d, overtaking Russia, and will close in on Saudi Arabia, the world’s largest oil exporter. Saudi Arabia exported an average of nearly 7 mb/d to global markets in 2017, according to the Aramco Annual Review for the year.
Other non-OPEC countries, among them Brazil, Canada, a resurgent Norway, and newcomer Guyana, will add another 2.6 mb/d to global supply. Considering an anticipated decline in supply from some non-OPEC Asia Pacific countries, the IEA calculates the total non-OPEC increase over the next five years will reach 6.1 mb/d.
Greater U.S. exports to world markets will enhance oil security and provide buyers, particularly in Asia, with a wider choice of suppliers, the IEA noted. This makes for a sobering reality check for the Middle Eastern oil exporters for whom the Asian region is a key export market, as sales to OECD Europe and the United States have shrunk in recent years. For Saudi Arabia, exports to Asian customers accounted for around 70 percent of its total oil sales in 2018, when it exported an average 7.3 mb/d. Saudi Arabia, the UAE, and Kuwait have been investing heavily in crude oil storage and refining ventures in China, South Korea, Japan, and India as a hedge against this geographic shift in oil trade, which occurred even before the United States emerged as a rival oil exporter.
Saudi Arabia does not plan to add net new oil production capacity and the bulk of its upstream spending is dedicated to reservoir management to maintain its current capacity of 12.5 mb/d, a figure that includes production from the Neutral Zone shared with Kuwait where output is currently shut-in. “Among OPEC countries, only Iraq and the United Arab Emirates have significant plans to increase capacity,” according to the IEA. These gains, however, have to offset losses from Iran, where sanctions preceding the 2015 nuclear agreement resulted in capacity declines while fresh U.S. sanctions imposed after Washington pulled out of the accord in 2018 will delay any capacity increases due to the withdrawal of international oil and gas companies from Iran. Losses from Venezuela, holder of the world’s largest oil reserves, due to the current political crisis and U.S. sanctions, will also lead to an erosion of OPEC’s production capacity.
The result, according to the IEA, will be a 400,000 b/d fall in OPEC’s effective production capacity by 2024 on the assumption that U.S. sanctions against Iran will remain in place throughout the forecast period.
The IEA’s forecast for supply depends on investment trends in the industry, which saw two consecutive years of decline in 2015 and 2016 with only a marginal recovery in 2017. Investment picked up in 2018 as oil prices rose in response to a production cut agreement by OPEC and some key non-OPEC producers led by Russia.
The IEA, which was set up to defend the interests of OECD energy consumers in the aftermath of OPEC’s 1973 oil embargo, reiterated its call for continued investment if supply is to match demand growth, noting that its analysis of decline rates showed that in order to keep production steady, the industry needs to add the equivalent of output from the North Sea each year. Current North Sea production is estimated at just over 3 mb/d with Norway accounting for the bulk of total output and anticipated future growth.
It was therefore reassuring that 2019 upstream investment looked set to rise for the third straight year, according to what the IEA noted were preliminary plans announced by key oil and gas companies. Indeed, investment in new conventional oil and gas capacity may increase above levels going into shale oil and gas plays. “While US production growth has exceeded expectations, we cannot be complacent about investment levels towards the end of our forecast period and beyond,” it added. Based on preliminary company announcements, global upstream capital expenditure for oil and gas is expected to increase by 4 percent in 2019, with the Middle East leading the gains as the national oil companies such as Saudi Aramco, the Abu Dhabi National Oil Company, Qatar Petroleum, and Kuwait Petroleum Corporation spend more to address rising domestic gas needs.
According to the IEA’s calculations, global oil demand will ease as the Chinese economy matures and consumes less energy. Yet despite this expected slowdown, China and India will together account for 44 percent of the 7.1 mb/d growth in global demand expected to 2024. Energy demand in the Middle East will rise by 900,000 b/d, making it the second largest demand growth region. Overall, the IEA sees global demand rising by an average 1.2 mb/d per year between 2018 and 2024, to reach 106.4 mb/d. This forecast is unchanged from the 2018 IEA estimate for demand growth in its 2018-23 outlook. However, it did lower its estimate of demand for OPEC oil, which it said would decline in 2020 before rising again to an average 31.1 mb/d in 2023, up by just 600,000 b/d from 2019. This compares with a higher forecast for the call on OPEC oil in 2018, when the IEA saw demand for OPEC oil rising to 34.1 mb/d in 2023.
That said, the Paris-based agency does not see a peak in demand on the medium-term horizon; this is comforting for the Gulf Arab producers who are investing heavily in maintaining or expanding oil production and exports, which for most account for the majority of their external revenue earnings.
“The IEA continues to see no peak in oil demand, as petrochemicals and jet fuel remain the key drivers of growth, particularly in the United States and Asia, more than offsetting a slowdown in gasoline due to efficiency gains and electric cars,” the IEA noted, reiterating the same assumption reached in its World Energy Outlook to 2040 published late in 2018.
This is good news for producers of oil in Iraq and the UAE, among the few countries in the region with a host of international oil companies engaged in upstream developments. The two countries will lead supply demand growth with Iraq becoming the world’s third largest source of supply growth. The IEA sees Iraqi oil production capacity rising by an average annual rate of 150,000 b/d to reach 5.8 mb/d by 2024. The scenario for Iraq assumes most of the growth will come from the giant fields in the south with only modest growth in the north.
Iraq’s oil infrastructure in the north has been damaged by decades of insurgent attacks initially targeting its pipelines and later by deliberate acts of sabotage and looting by militants from the Islamic State in Iraq and the Levant against oil fields and refineries in northern Iraq. A lingering dispute between the federal government in Baghdad and the semiautonomous Kurdistan region has curbed output growth and exports from the northern Kirkuk province.
The UAE will also post solid growth, given its stable operating environment and low-cost reserves. The UAE, which has opened up its upstream and downstream sectors to a wide range of international investors and operators, is reaping the benefits of its investment-friendly policies. It is expected to see a 500,000 b/d rise in production capacity by 2024 as new projects come online. This will increase capacity to 3.85 mb/d, on par with Iran’s pre-sanctions capacity.
Saudi Arabia is not investing in net new capacity, a long-standing policy that aims to maintain oil production and capacity at current levels through reservoir management rather than the addition of greenfield projects. It remains the only oil producing country with significant spare production capacity, estimated at just over 2.5 mb/d at current production of around 9.8 mb/d.
“Its long-standing aim has been to stabilize, rather than add, capacity while developing natural gas,” the IEA noted, adding that this would require investment of $150 billion over the next decade. Aramco also plans to spend an additional $150 billion to develop its gas and petrochemical businesses to meet rising demand in Asia.
The UAE’s ADNOC has approved a $109 billion five-year investment plan of which 60 percent is allocated to the upstream.
These levels of investment need a stable oil price and a clear demand picture, neither of which is a constant in the energy world. Higher prices can slow energy demand growth and encourage the switch to alternatives while lower oil prices hurt the economies of the producing countries and make it harder to sustain the levels of investment needed to keep oil fields pumping.
The slump in oil prices at the end of 2014 and early 2015 prompted a move by Saudi Arabia to lead OPEC into joining hands with Russia and other non-OPEC producers to restore market balance to counter U.S. shale growth. The 24-member group, led by Saudi Arabia and Russia, accounts for 60 percent of global supply.
OPEC meets again on April 17 and 18 to determine whether there is a need to adjust output further. However, Saudi Arabian Minister of Energy, Industry, and Mineral Resources Khalid al-Falih said recently that he favors maintaining the output cuts until June, when the expanded OPEC alliance is due to meet again.
“Market management by producers is likely to remain necessary for some time given the outlook for the call on OPEC crude,” the IEA indicated in its outlook.
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