The implications of under-investing in longer-cycle sources of crude oil don’t manifest themselves right away; projects approved during the last up-cycle require multiple years to come onstream, helping to moderate the global decline curve.
However, reduced investment in longer-cycle projects eventually will result in declining output from these areas.
Some of the examples cited by Schlumberger’s management team on the oil-field service company’s first-quarter earnings call and some data points that have appeared on our radar screens suggest that the leading edge of this supply air pocket may have arrived.
Consider the case of Angola. Once the largest oil producer in Africa, Angola’s output peaked at about 1.95 million barrels per day in early 2010.
Although Angola’s monthly oil output displays some seasonal variance because of scheduled maintenance, the pattern of lower highs and lows stands out. In March 2018, the country’s production hit a new low of 1.52 million barrels per day.
As an OPEC member, Angola agreed to limit its output as part of the production-management accord that the organization introduced in late 2016. The African nation had agreed to reduce its output by 80,000 barrels per day, to 1.67 million barrels per day. However, the International Energy Agency estimates that in March Angola’s oil output was 230,000 barrels per day lower than its September 2016 reference rate. This weakness appears to be a trend. Since January 2017, Angola’s compliance with OPEC’s supply cuts has averaged 162 percent.
Angola’s oil exports have also tumbled. These shipments hovered around 1.7 million to 1.8 million barrels per day as recently as 2014 and 2015 but have slumped below 1.5 million barrels per day over the past two months. The schedule of tanker loadings for June suggests that Angola’s oil exports may shrink to a 10-year low of less than 1.38 million barrels per day.
Most of Angola’s oil production comes from deepwater fields that require large, up-front capital expenditures and years of development before they produce their first barrel of crude oil—just the sort of long-cycle project that the integrated oil producers have shunned over the past three years.
Moreover, due to the geology of Angola’s offshore oil wealth, the country’s main fields exhibit an annual decline rate of 13 to 18 percent—significantly higher than the global average of 5 to 7 percent.
Against this backdrop, it’s no surprise that Angola is among the first oil-producing countries to suffer the adverse effects of the downturn in upstream capital spending. For the country to maintain production, operators will need offset the decline rate with new projects.
Angola’s output should receive a boost when Total’s Kaombo ultra-deepwater project comes onstream at the end of this year—assuming no further delays. The France-based integrated oil company expects output from this play to peak at about 230,000 barrels per day.
Kaombo is a massive project that has taken more than a decade to bring to fruition. The six main fields were discovered between 2005 and 2007, and Total made the final investment decision to develop the play in April 2014, a few months before oil prices began to weaken. The $16 billion project includes about 60 subsea wells, 300 kilometers (186 miles) of subsea pipelines, and 1.7 million barrels of oil storage capacity.
But the incremental volumes from Kaombo will offset the ongoing decline from Angola’s existing production base only temporarily. In fact, the International Energy Agency forecasts that Angolan oil output will decline once again and break below 1.3 million barrels per day in 2023—roughly one-third lower than its 2010 peak.
With the decline in final investment decisions on Kaombo-like projects since 2014, the number of large-scale projects scheduled to add to global supply over the next two to three years is thin. Many of the mega-projects that the major integrated oil companies sanctioned before oil prices collapsed have already come onstream or will enter production over the next few years.
Your complete guide to energy investing, from growth stocks to high-yielders.
In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Jan. 29, 2019
Balanced portfolios of energy stocks for aggressive and conservative investors.
Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.
Our assessment of every energy-related master limited partnership.
Roger Conrad’s coverage of more than 70 dividend-paying energy names.