This article was published by The McAlvany Intelligence Advisor on Friday, October 27, 2017:
A Yiddish proverb holds that “a half-truth is a whole lie,” while Ann Landers said that “the naked truth is always better than the best-dressed lie.” Alfred Lord Tennyson said it best: “A lie which is half a truth is ever the blackest of lies.”
Whether Aramco’s CEO intended to tell a lie or just wasn’t completely forthright remains unknown. What Armin Nasser did tell CBNC’s “Squawk Box” on Sunday certainly wasn’t the whole picture. He blew off America’s energy frackers:
The concentration that we are seeing today [by American frackers] is on the sweet spot of shale, and this will not last forever.
You can concentrate for some time on the sweet spots and produce more oil. But ultimately you need to venture downward, and that’s where you have less quality and you require more cost to produce these barrels.
Shale oil will contribute additional barrels [to world crude oil supplies], but it will all depend on the price of crude.
Nasser no doubt was referring to data released last week that showed a decline in the number of oil rigs operating in the U.S. and another report that daily production of crude has dropped by more than a million barrels a day for the week that ended on October 13 – from 9.5 million barrels a day (mbd) to 8.4 mbd. The data thus confirmed his suspicions: that frackers are pulling their less-productive rigs down, and that the fields where rigs remain active are beginning to play out.
Nasser failed to mention several things: first, the oil rig count is down a total of 15 over the past several weeks, to just over 250, but up from 50 in place on January 6. Second, despite the decline in a single week in October, observers remain confident that American oil production will hit 10 million bpd by the middle of next year.
Nasser also failed to mention something else: Big Oil hasn’t been sleeping. It has been busy adopting and adapting, taking clues from the small independent frackers and reducing their costs tremendously. British Petroleum (BP) said in February that it needed oil at $60 a barrel – the same price that OPEC wants – in order to break even. Following the announcement, BP’s stock sold off 4%. In August, BP revised its projection, saying that thanks to spending cuts its new “breakeven” point is now $47 a barrel. BP stock rose 2% on the news. Said BP’s CEO Bob Dudley: “The break-even cost of oil and gas companies is going to the $40s and $30s today. It’s actually healthy. I think $100 a barrel was not healthy.”
BP isn’t alone. Chevron says it can break even – covering all of its costs and paying its dividends – at $50 a barrel, and by 2019 (that’s just 14 months from now) its breakeven point will be less than $30 a barrel. Total SA said essentially the same thing: at $50 a barrel it will be able to cover all of its costs and pay its full cash dividends to its stockholders. In an understatement, Total’s CEO Patrick Pouyanne told reporters earlier this month that “the world has completely changed.”
Finally, Nasser failed to mention that plans to sell part of his company have been put on hold, and that OPEC’s production cut agreement will likely have to be extended (it has already been extended once) from March 2018 to the end of the year. That’s because those cuts, even with surprisingly high compliance among the cartel’s members, have been offset by non-OPEC members, including America’s oil companies. So effective has America’s free market in oil been in replacing OPEC production cuts that earlier this month OPEC’s Secretary General Mohammed Barkindo offered an olive branch to the Americans: come join our cartel and we can work together in controlling the market.
All of which was strangely missing from Nasser’s conversation with CNBC.
The Wall Street Journal: Amid Low Prices, Oil Giants Gush About Breaking Even
OilPrice.com: Rig Count Plunge Set To Boost Oil & Gas Prices