Pump Oil Hard Now Or Live To Regret Production Cuts

Business, Company Strategy, Oil & Gas

opec_production_1

By John Richardson

OIL producers face a very straightforward choice: Pump crude as hard as possible right now or run the risk of your most important economic asset being left in the ground for good.

One of the reasons is that, regardless of what you might think about the science behind claims that burning fossil fuels has the potential to cause devastating climate change, both government and public opinion has decisively shifted.

For example, the leaders of the G7 group of nations recently made a commitment to cut greenhouse gases by 40-70% by 2050 from their 2010 levels, along with phasing-out all fossil fuel emissions by the end of the century. And remarkably, even a majority of Republican voters in the US are in favour of a carbon tax, provided the money raised is used to fund research into renewable energy.

The other reason for pumping oil as hard as possible over the next few years will be a growing realisation that a secular, long term decline in global economic growth makes very affordable energy absolutely essential. The cheaper that oil is over the next decade, the greater its consumption level at a time when it will face increasing pressure from the affordability issue, and from substitution by natural gas and renewables for environmental reasons.

Saudi Arabia appears to have already adopted the approach of maximising production before it is too late. It is already pumping 10.3 million barrels a day, a 30-year-high. This could be increased to as much as 12.3 million a barrel, according to the International Energy Agency.

The lower outlook for oil prices “turns oil in the ground in Saudi from an appreciating resource into a depreciating resource. If it’s depreciating, you produce it as fast as you can,” said Seth Kleinman, head of energy strategy at Citigroup.

What other choice does the Saudi government realistically have, seen as almost 50% of Saudi Arabia’s population in 2013 was under 25 years of age, with unemployment in that demographic at 12%?

It has to generate as much money as possible from oil sales to pay all the job-creation schemes essential for preventing major social unrest.  And here are some other statistics: energy products account for 90% of Saudi export exports, with the oil industry generating 45% of GDP. In other words, Saudi Arabia has no other way of footing the bill for creating all of this employment.

At the level of individual companies it also makes a lot  of economic sense to pump now rather than cut back and regret later.

In Canada, companies there plan to still increase output by 156,000 barrels a day each year until 2020, despite the fall in oil prices, said the Canadian Association of Petroleum Producers.

Just as is the case across the border with US shale oil, cutting back on production in Canada doesn’t add up as a few dollars of returns on a barrel of oil to pay-down debt are better than no dollars at all.

In another parallel with US shale oil, Canadian tar sands producers are ferociously cutting costs in order to keep production at as high a level as possible. Suncor Energy plans to, for instance, replace 800 dump truck drivers with automated trucks, which will save $200,000 per employee.

Here is the other thing about the tar sands industry: 85% of these Canadian reserves would have to be left in the ground if the world is to avoid the 2 centigrade average temperature rise seen as the tipping point towards dangerous levels of climate change, as the tar-sands process is very energy intensive, according to the University College of London.

So, just like Saudi Arabia, Canada’s tar sands producers need to fill as many barrels as possible with oil right now, before a global price on carbon price forces them to leave their No1 asset in the ground.

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