OPEC+ production cuts extension – a trillion dollar at stake.

[Petroleum economist]

Summary
If OPEC in late 2024 would not extend its productions cuts, then its members over the next three years can lose more than a trillion dollars in revenues. OPEC+ has entered a world where the question is not how much you can produce, but how much you can sell at a reasonable price.
With a trillion dollars at stake, I expect that agreement will be reached and that the production cuts will be extended.

Introduction
OPEC+ produces roughly 45 mln bbl/day. Officially OPEC+ has been implementing production cuts at the tune of 5.4 mln bbl/d. The 5.4 mln bbl/d is a high number, as members like to exaggerate their production capacity to get a higher allocation within OPEC+. Actual cuts of 3-4 mln bbl/d are most likely a more realistic number.

Not extending production cuts
OPEC+ may not extend its production cuts. Saudi is quoted as the source which wants to lift cut the backs unless other members provide more help in sustaining them. If the cut backs would be lifted, then additional low-cost OPEC+ production will push other high-cost oil out of the market. A race to the bottom will start where parties will try to underbid each other to obtain/retain market share. Prices of $ 40-50/bbl or less are possible. The bottom price will be the time that parties will shut in production to wait for better times.

New oil production and low oil prices
Oil from existing wells and facilities worldwide have decline rates of 10%/year. The decline rate is highest in oil shales (30%) and lowest in oil sands (2-5%). Each year 10 mln bbl/d of “new oil” needs to be added to keep the 100 mln bbl/d world oil production flat. Low prices will cause fewer projects to take the Final investment Decision (FID). The effect of FID delays on oil production will become visible only after some time.

Impact on production other than shale oil
Most types of oil production (oil sands, heavy oil, conventional onshore, offshore shallow water/deep water /ultradeep water) have long lead times (2.0-3.5 years). The effect of the delayed FID’s on oil production will not be visible until 2.0-3.5 years after the start of drop in oil prices- Already sanctioned projects will continue to be developed. Production will remain flat.

Impact on shale oil
Shale oil, with its short lead times (3-6 months), can stop its FID’s almost immediately. Production can start reducing shortly after low oil prices become apparent.
The US produces approx. 9 mln bbl/d of shale oil and needs 30% (=decline rate) * 9.0 =2.7 mln bbl/d per year of “new oil“ to keep its production flat. If 40% of the new oil is delayed, then shale production will drop with 40% * 2.7 mln bbl/d = -1.0 mln bbl/d per year.

Time required for oil market to rebalance
With an OPEC surplus of 3-4 mln bbl/day and an initial reduction of 1 mln bbl/d per year, it will take 3-4 years for oil demand and demand to rebalance. During this period oil prices will remain low.

Impact on OPEC+ revenues
With an initial production of 45 mln bbl/d and $ 70/bbl, OPEC+ daily revenues are 45 * 70 = $ 3.2 B/day. With production increased with 3-4 mln bbl/d to 48-49 mln bbl/d and $ 45/bbl, OPEC+ revenues reduce to 48.5 * 45 = $ 2.2 B/day, a 30% reduction of $ 1.0 B/day. The OPEC+ income reduction of $ 1.0 B/day over the next three years adds up to a revenue loss >$ 1,100 B.

Negotiation position of Saudi
Saudi sits in a special position in the OPEC+ extension negotiations. Saudi has implemented most of the cuts and can increase its oil export from 5 mln bbl/day to 7 mln bbl/day.
If the oil price collapses to $ 45/bbl, then the negative impact on Saudi net revenues is limited to 5.0*70 = $ 350 M/day (before) minus 7.0*45= $ 315 M/day (after) is a loss of 10% or -$ 35 M/day. This is well below the 30% for the rest of OPEC+.
Saudi thus can afford to do some arm twisting at the negotiation table to get the rest of OPEC+ in line as it will not hurt in the same way as the others.

Conclusion
OPEC+ can lose > $ 1 trillion dollars over the next three years if they do not reach an agreement on the extension of the production cuts. Saudi is less sensitive to losses than other OPEC+ members and has the upper hand in the negotiations. With a trillion dollars at stake, I expect that agreement will be reached and that the production cuts will be extended.

Note that if the production cuts are not extended then the US shale oil production can drop with 3 mln bbl/d and the US will become a net oil importer.

[Petroleum economist]

As illustration of above in today's announcement from Obsidian Energy:

“Considering the recent softness in commodity prices and market uncertainty due to global factors, Obsidian Energy has also revised our 2024 capital expenditures downwards by approximately $15 million, reallocating a portion of light oil spending towards incremental share buybacks through our normal course issuer bid (“NCIB“) and further debt reduction. In total, the reallocation of capital is only expected to impact average 2024 production by approximately 40 boe/d.“'

The above illustrates the delay effect: The C$ 15 M reduction in capex is 5% of the C$ 335-345 M budget. The 40 BoE/d oil reduction is 0.1% of the 30-37.4 K BoE/d production.