Russia, Saudi Arabia, U.S: Who Is Going To Win In The Oil Price Stand-Off?
Among the largest producers, the Canada, Saudi Arabia, Iraq and U.S. were among the largest market share gainers in the past five years.
North American unconventionals have proven their top competitiveness against other supply sources.
While the market share trend is likely to continue, potential return of supply from Iran, Iraq and Libya may completely re-define oil market environment and depress oil prices.
Who Is Winning And Who Is Losing Market Share?Theories abound as to what categories of crude oil producers will sustain the greatest damage in the course of the current price correction and how the global market share distribution is going to change in its aftermath. An empirical review of the recent market share trends by producer can yield important insights in this regard.
The following graph provides a comparison of production growth rates among select countries and regions over a nearly five-year period from January 2010 through September 2014. The graph is based on U.S. Energy Information Administration data for monthly aggregate crude oil, field condensate and NGL production by country. To facilitate the analysis, production volumes are presented as percentage of base production, with January 2010 used as the base month.
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(Source: Zeits Energy Analytics, January 2015)
The graph captures very vividly several key themes that have dominated the global oil supply in the past several years. Of note, this was the period when West Texas Intermediate price averaged ~$100 per barrel (in today's dollars).
The graph highlights a steady worldwide production growth that averaged ~1.8% per annum on a compounded basis (please note that the data includes NGLs).
Among the world's largest producers, the U.S. and Canada stand out as major market share gainers, exceeding the world's overall production growth rate by a very wide margin. Of note, North American production grew despite major price realization discounts (as wide as $20-$25 per barrel at some points) relative to waterborne oil benchmarks due to infrastructure bottlenecks.
Middle East producers as a group produced essentially in lockstep with the worldwide production. A closer analysis of individual production volumes by country reveals a major market share loss by Iran that occurred beginning in 2011 (a consequence of the trade sanctions) and, most recently, Syria. Saudi Arabia and Iraq, on the other hand, picked up market share over the same period.
Russia and China barely managed to keep pace with the world's production growth.
Europe saw one of the largest production declines (-25%) which reflected mature asset base in the North Sea. Mexico also posted a significant decline (-8%) as the country's business environment remained difficult for foreign investment.
Africa's production decline was driven primarily by Libya (that lost more than half of its volumes from January 2010 to September 2014) and, to a lesser degree, Angola.
In summary, the very strong incremental volumes from the Canada and U.S., reversal of the earlier production cuts by Saudi Arabia, and Iraq's gradual rebuilding of its capacity were the primary drivers behind the recent global production growth. These factors kept the market adequately supplied in the past five years. The biggest market share losers were those countries that experienced major political turmoil or international sanctions (Libya, Syria, Iran). Countries and regions with mature asset bases (Europe, Mexico, Russia to some degree, and several others) struggled to keep up with the global demand growth, notwithstanding $100 per barrel oil.
What should one expect to happen in a low-price oil environment?
While the trends that became apparent in the past five years will likely continue in the future, some new factors are emerging that may play a major role in the oil market:
Iran, Iraq and Libya are a source of major uncertainty in the oil market. Combined, these three nations hold very large low-cost production capacity that is currently interrupted or requires investment and development. If brought online, this capacity has the magnitude to upset global supply/demand balance for a number of years and cause a prolonged depression in oil prices. Production increases from these three nations have already been a source of supply pressure on the market. During the first nine months of 2014, Iraq and Libya added ~1.1 million barrel per day of combined incremental production, according to EIA data. This factor without doubt contributed to the current oversupply situation and oil price collapse.
Producer nations with mature resource bases or unfriendly investment climates that were unable to grow production in a $100 per barrel environment are unlikely to gain market share in an environment where oil prices are much lower. Their production will likely continue to lag.
While the economic sanctions against Russia have been very mild so far, the deterioration of the overall investment and political climate in the country and continued flight of capital will likely render major new development projects non-viable (besides, even without sanctions, Russia has been a relatively high-cost, high-risk oil province for new projects). Given the continued maturation of the legacy West Siberia production base, natural declines may become increasingly difficult to offset. Given Russia's large share of the global supply, a relatively small decline in the country's production in percentage terms could make a noticeable difference for the world's overall supply/demand balance, particularly given the sustained nature of such decline.
North American unconventional resource plays are often portrayed as a marginal source of oil supply. At the end of the day, "the proof of the pudding is in the eating:" if a new supply source makes a dramatic market share gain in a short period of time whereas the majority of other suppliers are losing or struggling to maintain their market shares, maybe this new source of supply is not all that marginal after all. Having said that, North American unconventional plays may indeed be pushed to the margin, at least temporarily, should low-cost producers such as Iran, Iraq and Libya be able to bring significant volumes to the market.
In Conclusion…
Flexible, low-cost sources of supply that can benefit from existing infrastructure will likely come out as strategic winners in the current oil industry downturn. U.S. and Canada unconventionals are well positioned in this category. Mega-projects in technically challenging or politically unstable environments are not.
Potential return to the market of production capacity in Iran, Iraq and Libya creates an "all bets are off" scenario for the price of oil, potentially for a number of years. |
