The crude oil producer-group, Organization of the Petroleum Exporting Countries, OPEC, in November 2014, adopted a laissez faire output policy which essentially removed caps on members’ supply quotas. Driven in the main by Saudi Arabia and some Gulf producers, the policy was a thinly-veiled attempt to drive the higher-cost (mostly North American tight oil) producers offline and ensure a good share of the global oil market. On a year-on-year basis, petroleum liquids additions by North American tight oil producers rose from 44,000 barrels per day (bpd) in 2006 to a staggering 1.7 million bpd in 2014, according to a report by Rystad Energy. Though this was largely responsible for the massive global supply overhang ─ which exceeded 2.5 million bpd in 2015 ─ the response by top producers, Saudi Arabia and Russia as well as Iran and Iraq among others, unleashing their massive supply capacities, only served to exacerbate the condition. Global crude oil prices plummeted to multi–year lows. In what was loosely termed a ‘‘sheikh-versus-shale’’ duel, this bid for better market share exacted a devastating toll on the duelling spigots.
North American Tight Oil Producers
When global crude oil prices were well-above US$100 per barrel, tight oil producers in North America, which in the main, had breakeven oil prices in the US$65 – US$90 per barrel range, stayed profitable. However, when falling prices tested US$26 per barrel and even stayed low for months on end, many of these producers were forced offline, and quite a few, permanently. Data from the law firm, Haynes and Boone LLP, show that in the period from January 2015 to 14 December 2016, there were 114 bankruptcy filings in the North American upstream sector and with a total debt of more than US$74 billion. For many of the ‘‘oil-rigged’’ states and provinces, taxes on proceeds from oil and oil-related businesses formed a major proportion of revenue; for some, tax proceeds from such businesses exceeded US$5 billion in 2014.
With the bust however, came sharp revenue decline and personnel lay-offs in both core oil and gas as well as associated companies. In Texas for example, a report shows that with the downturn in an oil industry which accounted for 13.5 per cent of the state’s output in 2014, more than US$40 billion was cut from investments in the year to May 2016; for core industry payrolls, the cut was about 65,000 while those in associated industries stood at about 250,000.
The downturn also saw a spike in personal and business insolvencies in Canada’s oil patch. According to the Office of the Superintendent of Bankruptcy Canada, Alberta (43.5%), Manitoba (22.9%), Newfoundland and Labrador (37.7%) as well as Saskatchewan (30.2%) all saw significant increases in insolvency for the year ended 31 March 2016. Job losses in the province of Alberta were more than 40,000 even as office space vacancy rate for Calgary ─ the province’s principal city ─ stood at 20.2% in March last year, per CBRE.
Companies operating in Canada’s oil-sands plays also took hits from the oil price rout. Recently, ExxonMobil and ConocoPhillips, perhaps in fulfilment of U.S. regulatory requirements, both reduced their reserves valuations, as low oil prices rendered significant portions of their oil-sands holdings mathematically unrecoverable within five years. ExxonMobil removed a historic 3.3 billion barrels ─ most of that from the Kearl oil-sands fields ─ from its books, while ConocoPhillips de-booked 1.15 billion barrels from its joint venture operations at Foster Creek, Surmont, Christina Lake and Narrow Lakes developments.
Petroleum proceeds form a significant proportion of national revenue for many members of OPEC; and so, the protracted low price regime wreaked havoc on their ledgers. In 2016, net export revenues slumped 64% from 2012 values; and for 2015, the value was 57%.
Venezuela is perhaps the most crisis-ridden of the OPEC members. Crude oil accounts for almost all the country’s revenues. With about US$10.5 left in reserves and debt for this year at about US$7 billion, the country risks default. Food shortages have become so severe and riots intense. Estimates of inflation for 2017 exceed 1,500%.
Libya’s economy is also almost completely dependent on oil and gas resources. Rival armies have been vying for control of the country’s resources since the ouster of the dictator, Muammar Quadhafi and output has only last January, recovered to just above 40% of its pre-crisis level.
Petroleum resources account for more than 80% of Nigeria’s foreign exchange earnings. In addition to the impact of low oil prices, production ─ which comes mostly from the Niger Delta ─ was almost halved by unrest in that region. The country’s substantial dependence on imported goods put the prices of such goods beyond the reach of many of the citizens; and since most of the states depend on federal government allocation of petroleum proceeds to meet budgetary provisions, salaries of many civil servants are still months in arrears.
At the onset of the oil price slump, Saudi Arabia, Qatar, Kuwait and the United Arab Emirates together had about US$2.5 trillion in savings, a sturdy hedge against economic storms. However, with their high expenditure profiles ─ a lot of which were in subsidies ─ and the protracted price slump, this was deeply eroded. The credit rating agency, Moody’s, has projected further fiscal deficits in 2017 for the six-nation Gulf Cooperation Council, GCC ─ comprising Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates. Saudi Arabia’s deficit is expected to be 11.7%, though outlook for the country as well as that of Oman was considered stable. Bahrain, Kuwait, Qatar and the United Arab Emirates were given negative outlooks.
Petroleum resources also account for a significant proportion of Russia’s earnings. Buffeted by both Western sanctions and a low oil price regime, the country witnessed an economic slump. However, following the enactment of a fiscal consolidation strategy to reduce the country’s dependence on petroleum resources, Moody’s recently upgraded the outlook on her sovereign credit rating to stable, from negative.
Driven obviously, by economic exigencies, OPEC and non-OPEC members reached an accord on 30 November 2016, to reduce oil production by about 1.8 bpd in a bid to rein-in the supply overhang and bolster prices. Tight oil producers in North America however, were not party to that accord and some, particularly, in the U.S. shale plays have promptly dusted-off and re-deployed their hitherto sequestered facilities. That, just may be the setting for another oil price slump.