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OPEC production cut and emerging realities!

By Kayode Adeoye
08 March 2017   |   4:19 am
In a report done for BloombergMarkets by BaileyLipschultz on the 17th of February, 2017 (last week), the online media submitted that Shale drilling is on a row as the Organization of Petroleum...


In a report done for BloombergMarkets by BaileyLipschultz on the 17th of February, 2017 (last week), the online media submitted that Shale drilling is on a row as the Organization of Petroleum Exporting Countries, OPEC cuts prices to keep crude oil above $50/barrel. In this week’s edition of Drillbytes, the details of the production cut and attendant stability hovering around $55/barrel is x-rayed with a note for Nigeria to use the emerging realities to buckle up in its quest to take advantage of the price relief even if marginal.

Shale wildcatters pushed ahead on the biggest surge in the United State’s oil drilling since 2012 as the explorers take advantage of prices above $50/barrel for more than two months. Rigs targeting crude oil production in the United States rose by six 6 to 597 last week, the highest total since October 2015, according to data released by Baker Hughes Incorporated. Drillers have added 72 rigs since the beginning of the year, the best start in five years. The expansion is spreading in Texas and Oklahoma with the Granite Wash play leading the increase this time around.

Producers are cashing in on a more stable oil market, with prices swinging between $50/barrel and $55/barrel as OPEC and 11 non-OPEC nations cut back production to help reduce global supplies. Saudi Arabia told OPEC it reduced its oil output by the most in eight years according to a report released by the kingdom last week. “We are seeing the rise that we anticipated to take place given the OPEC cuts”, Bloomberg intelligence analyst, Andrew Cosgrove said by phone. “These gains are spreading to other plays, and this is something we are expecting will continue through the first half given the stability in the price of crude oil in the international market.” Oil producers have brought 281 crude oil drilling rigs back to work since drilling bottomed out in May of 2016, the biggest gain since producers added 361 crude oil drilling rigs over the nine months through June of 2012. Meanwhile, the United States crude inventories rose to 518.1 million barrels two weeks ago, the highest in weekly data going back to 1982, according to the energy information Administration.

Drilling is booming in a few shale plays led by the Permian Basin in West Texas, New Mexico and the Scoop and Stack formations in Oklahoma as they offer good returns at a $50/barrel oil price. Producers including Diamondback Energy Incorporated and Occidental Petroleum Corporation remain focused on the Permean while Marathon Oil Corporation intends to double down on its assets in Oklahoma. Diamondback climbed to a record close last Wednesday after beating earnings estimates while Occidental looks to sell assets in South Texas so it can continue to expand in the Permian.

Marathon plans to double its number of crude oil drilling rigs in the Scoop and Stack to 10 this year. The Permian remains the most attractive play for investors this year, according to a Bloomberg intelligence survey. The Midland and Delaware basins within the Permian helped the oilfield reach a new high of $26 billion in mergers and acquisition activities last year. Last week, other parts of Texas and Oklahoma began to shine with Granite Wash Basin adding five crude oil drilling rigs and the Barnett Basin adding two. “The Granite Wash is located in the Mid-Continent region which is seeing a return of private operators,” said Cosgrove. “Given the rise in crude oil prices, this has become one of the basins we anticipate will grow,” Cosgrove concluded.

Back home in Nigeria, drilling is not booming for reasons bothering dwindled crude oil production due majorly to the activities of vandals but is gradually coming up. The oil majors in Nigeria namely; ExxonMobil, Total, Chevron and Shell Nigeria Exploration and Production Company, SNEPCO have not been encouraged to produce maximally due to the government’s cash call obligations to them hovering over $7B together with the activities of vandals! Therefore, the big players are playing small. The state owned Nigerian National Petroleum Corporation has been pushing for the development of frontier basins, starting with the Chad basin. However, other Basins should be explored. Basins like the Anambra, Dahomey (Tongeji Island) etc.

Nigeria should seize the opportunity presented by this slight hike resulting from OPEC and non OPEC member nations production cuts in freeing up cash calls to the oil majors, engaging the vandals damaging gas and crude oil facilities and creating a more robust and clement operating environment attractive enough for foreign direct investment in the sector. The marginal field operators, those still using crude oil drilling rigs and not those planning to conduct their operations riglessly, should come together and develop their oil blocks just so as to partake of the relief the current price regime offers almost two years hiatus. Afterall, the major contractors and third party contractors have reduced their rates to a level where they barely manage to break even.

The marginal field operators, if they agree, can seize this opportunity to play big within the $50/barrel window. It is the right way to go in a country increasingly becoming unattractive to the Dollar, the right thing to do to give relief to the Naira and most certainly, an economically sensible thing to do in an environment where Shale Oil drilling has contributed in no small measure to the crash in the international basket price of crude oil for over two years now.