Page 6 - FSUOGM Week 15

FSUOGM COMMENTARY FSUOGM
state’s energy regulator. The Republican politi- cian urged the US on April 8 to cut at least 4mn bpd of supply within the next three months to avoid storage running out.
Texas accounts for more than 40% of US national oil production. While antitrust laws prevent US producers from co-ordinating sup- ply, the state could in theory legislate to cap out- put. Even so, this would leave authorities at risk of being sued by operators claiming losses as a result of the restrictions.
The US would also have to impose a cut unilaterally rather than through an explicit agreement with other producers, to ward off accusations of collusion. Such anti-competi- tive activity is banned by the Organisation for Economic Co-operation and Development (OECD), of which the US is a member.
Norway, another OECD member, has in a similar vein said it would consider a unilateral cut to production if OPEC+’s deal comes into force. The country, which lifted 1.75mn bpd of crude in February, was among seven to attend
the group’s talks last week as an observer. The others were Argentina, Colombia, Ecuador, Egypt, Indonesia and Trinidad & Tobago.
What next?
Unilateral cuts would, of course, help tighten the market. But as non-OPEC+ countries will not be party to a formal agreement committing them to quotas, they will be able to ramp production back up when it suits them. This is likely to sow distrust among OPEC+ members, especially those pledging the biggest reductions: Saudi Arabia and Russia.
A chief cause behind the collapse of OPEC+’s previous production pact in early March was growing frustration among the group that other producers were profiting from their actions by raising their own supply. Those same anxieties could re-emerge and derail the pact, plunging the industry once more into chaos. Either the deal could fall through, or OPEC+ members could simply flout their commitments. ™
Kazakhstan commits to major
cut in oil production
Kazakhstan is likely to target cuts at its older fields already in decline
KAZAKHSTAN
WHAT:
Kazakhstan has pledged to lower output to under 1.32mn bpd.
WHY:
The country is taking part in a global pact on supply cuts.
WHAT NEXT:
Kazakhstan’s ability to restrict production at its large international projects is limited. It is likely to target cuts at smaller, mature fields instead.
KAZAKHSTAN has joined OPEC allies in com- mitting to a 23% cut in its oil production, with its output in October 2018 serving as a baseline for the reduction.
This means that during May and June, the second-biggest oil producer in the former Soviet Union will maintain its rate of extraction at just under 1.32mn barrels per day (bpd). In reality, Kazakhstan will have to make a deeper cut than 23%, as it has been flowing oil at a rate signifi- cantly higher than its baseline in recent months. As of mid-March, its daily output was around 1.89mn bpd.
Implementation
Kazakhstan will have to implement the cut with one hand tied behind its back. The country relies on three internationally led projects – Tengiz, Kashagan and Karachaganak – for more than 60% of its oil production. It cannot easily reg- ulate these fields’ output without violating con- tractual terms.
Rising production at Kashagan was the chief reason for the country’s difficulty in complying with previously agreed OPEC+ cuts over the past
three years. The field was brought on stream in October 2016, less than a month before Kazakh- stan agreed to start co-ordinating supply with the producers’ alliance. Kashagan’s investors were eager to ramp up production as quickly as possible to recoup the project’s capital costs, esti- mated conservatively to have exceeded $55bn, with little consideration for OPEC+ quotas.
This time around, Kashagan’s unstable output is likely to make compliance difficult. The field’s complex reservoir characteristics have resulted in huge swings in well production rates. This uncertainty will make it difficult for Kazakh authorities to calculate the cuts needed to meet the nation’s quota.
Thanks to sheer economies of scale, Kazakh- stan’s three main projects provide the country’s cheapest oil. It is therefore not in the govern- ment’s interest to cap their output, even if it was able to agree such a move with their operators. Authorities are likely instead to target cuts at mature oilfields already in decline, operated by national oil company (NOC) KazMunayGas (KMG) either solely or through joint ventures with Chinese partners.
P6
w w w . N E W S B A S E . c o m Week 15 15•April•2020