Pretend it’s voluntary

News from S&P Global Platts on the upcoming OPEC+ meeting (online):

Saudi Arabia and Russia… have insisted that they will only participate [in an agreement to reduce oil output] if the US also agrees to production cuts.

A condition unlikely to be met for more reasons than one. To begin with, there’s no “US” to “agree” to the cuts: the US government only has jurisdiction over wells on federal land and offshore. To throttle shale production, it’s Texas that would have to act, plus North Dakota, New Mexico, Oklahoma, and a few other states. The same applies to Canada, although I’m not 100% certain – anyway, Alberta is taking part in this conference call.

US President Donald Trump, however, is hostile to the idea, and US officials instead have offered up as their contribution to a deal projections from the Energy Information Administration showing that American oil output will fall on its own by 1.81 million b/d in a year due to market forces.

The latest report, known as STEO, includes reduced estimates for past production as well, suggesting that the US has never hit the 13 mmbpd mark and produced around 12.7 mmbpd in 1q2020. It projects US oil output to decline to less than 11 mmbpd in November, implying that the total output decline over the seven months from April to November would be close to 1.8 mmbpd. Moreover, one million barrels per day would disappear in just three months, April through June. That’s quite a fast decline compared with the previous low-price spell in 2015-16.

Russia, however, has rejected that line of reasoning, with Kremlin spokesman Dmitry Peskov telling reporters in Moscow that conflating involuntary declines with actual production cuts “is like comparing length and width.”

Both are measurements; length can easily become width and the other way round. Russia can do nothing and watch its producers shut down high-cost wells or it can try a preemptive cut. It doesn’t have that much to lose, it seems. Russia’s energy minister has said on national TV that it costs $3 to $7 to produce a barrel from older, mature fields and some $15-$20 from recently developed fields. If this is correct and these are the current lifting costs, it follows that the new fields are losing money as we speak. To check, add transportation costs and deduct the total cash expenses from the current Urals price. It’s some $4-5/bbl below dated Brent so it’s got to be less than $20/bbl.

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