Non-US investment cuts may affect global outlook, EIA official says

Overseas investment decisions could have a bigger impact on global petroleum markets in 2016 than exporting countries’ volume reductions or geopolitics amid continuing depressed crude oil prices, US Energy Information Administration Deputy Administrator Howard Gruenspecht suggested to a Washington audience.

“Unlike geopolitical events and exporting countries’ actions, investment decisions are easier to track,” he said during the Center for Strategic and International Studies’ annual State of the Oil Market event on Feb. 17.

“Investment has dropped off, but hasn’t stopped completions,” Gruenspecht said. “Cuts have already shown up domestically and eventually will start to appear elsewhere in the world. Oil market analysts are watching this very carefully.”

It’s uncertain whether major crude producing countries outside the US and Canada would agree to reduce export volumes enough to start reversing the price slump, he said.

“[The Organization of Petroleum Exporting Countries] is quite different now from how it looked in the 1980s,” Gruenspecht said. “Regimes in Iraq and Iran are trying to get back into the game. If they want to significantly increase their production, the implications for their fitting into OPEC could be quite challenging. Worldwide, more countries also want to produce now than in the 1980s.”

Another speaker agreed. “There’s a dance now, with Saudi Arabia in the role of prima ballerina after decades of staying in the shadows,” said David Knapp, a senior editor at Energy Intelligence Group. “At the end of each of its visits with other big producers, there’s a round of applause from the bears and a minor jump in oil prices. But Saudi Arabia also doesn’t want to end up as the world’s biggest holder of stranded crude assets in another 25 years.”

What led to lower prices

Producers’ decisions since 2008 to simply shift their development outlays to another commodity eventually led to the current across-the-board price slump, a third speaker observed. “Every time one commodity’s price crashed, they moved onto the next one,” said Rusty Braziel, president and principal energy markets consultant at RBN Energy. “Guess what? Producers are out of commodities. They have to start cutting costs instead.”

There’s still a close correlation between oil prices and rig counts, Braziel said. “But unconventional production has increased, showing that productivity has grown,” he said. “Most of the major US basins are seeing about a 2-3 times improvement in volume over 5 years ago. Costs are way down.”

New US unconventional oil and gas wells may not be drilled with prices so low, but producers still will know that the resource is there and go after it once prices improve, he said. “They’ll have to deal with lower prices,” Braziel said. “But many will be able to keep drilling because operations are much more efficient. Still, I wonder if, when we look back on what’s happened years from now, we’ll see this as a bubble where inventories had to be worked off.”

Refining is another part of the petroleum business where the US is in significantly better shape than the rest of the world, a fourth speaker said. When US President Ronald Reagan deregulated crude oil prices in early 1981, US refiners went through “a Darwinian process” in which 180 plants eventually were closed, according to Tuner Mason & Co. Executive Vice-Pres. John Auers.

“In the end, the US was left with the most evolved, complex set of refineries in the world that cut run heavier crudes into higher value products,” he said. “We also have the deepest and most talented labor pool, allowing US refineries to run more reliably at lower costs. You can add improvements at a Gulf Coast refinery now more cheaply than the rest of the world. Lower crude oil and natural gas prices haven’t hurt either.”

Contact Nick Snow at

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