'Selfish' oil firms relish new production despite glut

[LONDON] As oil firms scrap dozens of billions worth of mega projects essential for supplies in decades ahead, fresh output from huge fields already being developed is set to weigh for many more months on an oil market struggling to shake off a glut.

A collapse in oil prices over the past 20 months to below US$30 a barrel has taken a heavy toll on production around the world, reversing spectacular growth in US shale oil and halting plans to develop costly and complex fields deep in oceans or treacherous seas such as the Alaska Arctic.

But companies that have been investing often more than US$10 billion in projects that were approved in the first half of the decade, when oil fetched in excess of US$100 a barrel, are pushing ahead with many of their developments.

These include the TEN field off the coast of Ghana, operated by British company Tullow Oil, which is set to start production in the middle of this year, expansions at Chevron's Jack/St Malo field in the Gulf of Mexico and at Cenovus' Foster Creek oil-sands field in Canada.

Around 3 million barrels per day (bpd) of oil production is set to come on stream in 2016 from projects whose development started as early as 2013, according to Oslo-based consultancy Rystad Energy.

These projects will add a further 1.5 million bpd in 2017, with around two-thirds of the production coming from offshore developments.

Patrick Pouyanne, chief executive of French oil major Total , was unapologetic about boosting his production by more than 9 per cent this year even as the world faces a huge production overhang. "We are all still investing in projects we decided in 2012-2013 and 2014. These projects will be put in production in 2016, 2017 and still 2018," Pouyanne said last week at the International Petroleum Week conference in London.

"I am not sure we participated in the stabilisation of the market, but you know, there is only one good reaction when you face a crisis, that is to be selfish and produce as much cash as you can." Total in recent years began production from the CLOV field off Angola's coast, in which BP, Statoil and Exxon Mobil are partners. It is on track to launch the ultra-deepwater Kaombo project, also in Angola, in 2017.

In January, Anadarko started production from its Heidelberg project in the Gulf of Mexico which was discovered in 2009 and started development three years later.

The U.S. Energy Information Administration expects production in the Gulf of Mexico to rise from 1.5 million bpd in 2015 to 1.8 million bpd in 2017, offsetting some of the declines in shale oil production.

The ramp-up of production from projects is equally vital for the host nations, particularly economies that depend heavily on oil revenue such as Angola, Nigeria or Mexico, where national oil companies are partners in the developments.

The vast majority of the world's projects of over US$1 billion are formed by joint ventures between international and national oil companies, according to data from consultancy EY.

With more than US$220 billion of oil and gas projects cancelled or put on hold since the start of oil's price decline and companies slashing spending plans, a correction in global supplies is under way, Rystad Energy head of analysis Per Magnus Nysveen told Reuters.

Production from mature fields is nevertheless set to decline by around 3 million bpd this year due to natural field decline and lower investment. "Behind the scenes there is a lot of correction going on because old producing fields are declining faster than they used to because there is less drilling," Nysveen said.

Global oil production is expected to align with demand towards the year-end as US shale output declines, even though the world will continue to store unwanted barrels for the rest of 2016, the International Energy Agency says.

That means the rebalancing is taking far longer than most Opec members had anticipated when the exporter group's leader pushed through a strategy in late 2014 to maximize output and drive higher-cost producers out of the market.

New production is likely to delay the rebalancing further, analysts at US-based investment bank Evercore said. "While ultimately lower upstream (oil production) capital will drive lower aggregate supply, evidence suggests the balancing point is shifting to the right," Evercore said.

This sets "a challenging environment for the market to question the sustainability of demand trends, and (is) likely a reflection of today's market reality, in our view".

REUTERS