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Demand growth low, price weak Marianne Kah, ConocoPhillips economist, says efficiency, innovation, cooperation needed; oversupply of sweet crude favors export By KRISTEN NELSON Petroleum News
Marianne Kah, ConocoPhillips’ chief economist, told the Alaska Support Industry Alliance’s Meet Alaska conference Jan. 9 that she’s been through four crude oil price fluctuations in her career, and said what will get us through the current challenging economy is “efficiency, innovation and having all parties work together,” including industry, service companies, contractors and state government.
Reviewing the causes of the current crude oil price drop, Kah noted that the Brent price had been stable for three years at between $100 and $120 a barrel. At the beginning of 2014 negative economic news about China started to come out. Libya came back into the market, adding production - although that is now coming off the market again, she said. The 2014 winter was warm, so there was less oil demand than normal. Coupled with those factors is the very rapid growth of U.S. shale production, adding up to “weak economic growth and too much supply.”
And the change in demand wasn’t forecast, she said, noting that in early 2014 the International Energy Agency predicted 1.4 million barrels per day of demand growth - at the end of the year the IEA was saying it would be half that.
Downward revisions have been common in recent global economic growth forecasts, Kah said, citing the International Monetary fund. In every forecast since 2012, the IMF forecast growth in the gross domestic product at the beginning of the forecast period, but by the end the forecast had dropped substantially. The same thing is happening with the IMF forecast for 2015, Kah said, first forecast at a growth rate of nearly 4 percent and already revised downward.
OPEC Worldwide production has been growing by some 2 million barrels per day, but with IEA now forecasting less than a million bpd of demand growth, “OPEC would have to decrease its production by over a million barrels a day or we’d have an oversupply.” The Organization of the Petroleum Exporting Countries said at its November meeting that it would not decrease production.
Saudi Arabia has been losing market share in Asia to Russia and other OPEC members, Kah said, and U.S. shale production is increasing.
With the surplus, inventory is growing at a rapid rate, she said, and “this imbalance is actually growing in 2015.” Kah said imbalance in supply and demand has gone away in the past because OPEC has cut production, but when OPEC doesn’t cut production the market needs to bring supply and demand back into balance and that, she said, will take longer.
Forecasts from consultants and investment firms show the price moving back up starting in 2015, but Kah said futures markets indicate that the move may be just back to $70 a barrel. Forecasts showing return to a higher price are based on companies having less cash, hence less cash to invest. With less investment prices rise in 2017-18 because of a drop in supply.
U.S. production Kah said a lot of U.S. production is from three big plays - the Eagle Ford, Permian and Bakken - and a lot of that has “fairly low breakeven prices so a lot of it is robust in a lower-price environment.”
There have been efficiency improvements in the Eagle Ford just since 2008, she said, with initial potential up 300 percent and drilling days down 50 percent. Since it’s early days in the shale plays, Kah said she believes industry still has a lot to learn, with more efficiency improvements resulting in “another whole round of cost reductions” coming from improvements such as better identification of sweet spots and better water reuse.
In the U.S., she said, light oil production will slow, but not until the second half of 2015, with the high grading of drilling prospects, low prices reducing costs and a backlog of wells drilled but not completed. It will take more than half of 2015 to see a downturn, she said, adding that the horizontal rig count has just started to turn down in the last couple of weeks.
Economic value Kah said one thing Alaskans know - but that the national government apparently hasn’t figured out - is how important the oil and gas industry is to the economy.
With U.S. job growth indexed to 2007, oil and gas sector jobs are up plus 67 percent over the last few years, compared to an increase for the economy as a whole of just plus 2 percent, she said, calling U.S. oil production a “really important driver of the U.S. economy.”
Kah also said there is an in-migration of manufacturing jobs to the United States, with manufacturing employment up since 2011, reversing a 12-year decline, so in manufacturing jobs the U.S. is “clawing our way back.” The export issue Kah said there is a change in the pattern of U.S. crude imports, with most light sweet crude imports backed out. The country, she said, has a surplus of light sweet crude, but continues to import heavy oil.
Light sweet crude, she said, doesn’t fit what most U.S. refineries were designed to do, which is process heavy oil.
The U.S. now has too much light sweet crude, also “super-light crude,” neither of which are a good match for U.S. refineries.
While crude oil exports are not legal from the Lower 48, they are legal from Alaska, she said, and with rail unloading capacity increasing on the West Coast, there is competition there for Alaska North Slope crude oil.
Exporting ANS to Asia from Alaska is a way to get a better value in Asia than ANS could get on the overburdened West Coast market, she said.
Kah also argued the case for lifting the ban on exporting Lower 48 crude oil, saying it would increase U.S. oil production and would also lower what U.S. consumers pay for gasoline because U.S. gasoline prices are set globally by international crude prices.
U.S. consumers haven’t benefitted from lower West Texas Intermediate prices, she said, because gasoline prices in the U.S. track Brent, not WTI.
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