Dark days ahead for OPEC as oil forecast slips

15 May 2013
In a major move, the International Energy Agency (IEA) has slashed OPEC production growth forecast, citing a number of factors ranging from instability in the region and regulatory constraints.

In its stead, the IEA expects medium-term growth to emerge from North American shale oil and oil sands projects.

The IEA's landmark medium-term oil market reports (MTOMR) offer an insight into the thinking behind some of the world's leading energy-consuming countries, although China, India and Brazil are not members.

Still, the influential agency provides a counterbalance to OPEC and its pronouncements move markets.

And the agency's 2013 edition, published Tuesday, suggests darks days for OPEC.

"Escalating security risks, political instability and unattractive fiscal regimes in a number of OPEC member countries are expected to take a toll on OPEC production capacity growth and have led to a downward revision to our assessment for the 2013-18 forecast period," the IEA said.

"OPEC capacity is forecast to rise 1.75 mb/d by 2018, to 36.75 mb/d, about 750,000 bpd below our 2012 MTOMR estimate for the 2011-17 period."

While African OPEC countries will struggle with insecurity, the Middle East region will not be spared either.

The agency says the Syrian civil war spillover could yet have "far-reaching implications for OPEC's Middle East producers Iran, Iraq, Saudi Arabia, Qatar, Kuwait and the UAE," but admits that previous conflicts in the region have failed to deter the resolve of OPEC producers.

"In addition to above-ground political and security risks, OPEC is grappling with mature fields and accelerating decline rates," said the IEA. "Enhanced oil recovery projects and other advanced technology are needed to maximize recovery rates, but a number of countries lack the appropriate contract terms to attract foreign partners."

While Iraq, UAE, Saudi Arabia and Angola will lead OPEC production, Algeria, Ecuador, Iran, Kuwait and Libya will see a drop in output by 2018.

Iran, especially, could see its output contract by 30% by 2018 from 2012 levels, as western sanctions take their toll on the country's oil industry.

Shifting capex

But OPEC's biggest threat will be from North America, especially as there has been a massive shift in capital expenditures from OPEC to non-OPEC countries, especially to tight oil projects.

From 2006 to 2012, OPEC capital expenditure, or capex, grew 90% compared with 50% for non-OPEC producers. Going forward, OPEC capex is set to grow only 20% from 2012-18 while non-OPEC posts a stronger 30% growth, according to Rystad Energy.

The Middle East region's own oil consumption will also rise 1.6 million bpd over the next six years, which would have an impact on spare capacity.

As such, the IEA has also cut OPEC's spare capacity from a high of 7.18 million barrels per day by 2015 to 6.38 million bpd by 2018, in a further sign that the group is losing its influence over the global energy markets.


North Americal oil rush

The great shale development in North America means the United States - the world's largest consumer of oil -- will require less imports.

The IEA expects global trade in crude oil and petroleum products to fall by a nearly a million over the next six years as rising North American supply offsets the region's import requirement.

"North American net imports are forecast to contract by a significant 2.2 million bpd to 3.4 million bpd by 2018. Shipments to the region from the Middle East, Africa and Latin America are forecast to contract by 980,000 bpd, 840,000 bpd and 320,000 bpd, respectively."

This is a significant development as OPEC oil continues to feed US Gulf Coast refineries.

Saudi Arabia's oil exports to the United States rose 14% to almost 1.4 million bpd last year - its highest level since 2008. Venezuela, another OPEC player, sent 4% more oil to the US in 2012 than the previous year, with nearly 906,000 bpd.

Meanwhile, Iraq's crude oil imports of 474,000 bpd were up slightly more than 3% from 2011, moving the country ahead of Nigeria as the fifth-largest oil supplier to the United States for the first time since 1999, US Department of Energy data shows.

In all, Middle East oil accounted for 48% of North American imports last year with total volumes reach 2.7 million bpd, but that figure will fall dramatically by 1 million bpd by 2018.

In its stead North American production is set to rise by 3.9 million bpd in six short years, hurting OPEC's prospects.

"A distinctive trait of the North American supply boom is that it is taking place at the heart of one of the world's most highly industrialized, mature economies. The emergence of large-scale new supply in such a context will necessarily play out very differently from the way in which a comparable increase might affect the market if it came from a Middle East or sub-Saharan producer."

Looks like OPEC members will have much to talk about Vienna when they meet again as early as May 31.

© 2013


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