OPEC Revenues At $1 Trillion in 2011

Jim Brown
 
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If crude prices remain over $100 for the majority of the year the OPEC exporting countries could reap over $1 trillion in revenue. This would be more than the $990 billion received in 2008. Unfortunately that revenue wealth is coming at a high price.

Quite a few of OPEC producers are using the increase in revenue to increase public spending and reduce the civil unrest and weekly demonstrations. Saudi Arabia has already announced $129 billion in new stimulus directly aimed at calming the protests.

Because of the added spending Saudi now needs $83 per barrel in order to balance the budget. The more they earn, the more they spend and the more consumers in import nations suffer. In reality the democracy movement in the Arab countries is costing Americans at the gas pump.

The IEA is worried that unrest is going to impact the new production scheduled to come online over the rest of the decade. The MENA countries were expected to contribute 90% of new production through 2020.

Russia will also benefit from the high prices. At $100 per barrel Russian revenues would rise about $100 billion to $350 billion according to Fatih Birol, chief economist at the IEA. That revenue is equal to about 21% of Russia's GDP.

The U.S. currently imports just over 9.0 mbpd and the president said in a speech on Wednesday he wants to cut that by a third before the decade is out. His methods included electric cars, biofuels, switching trucks to natural gas (Pickens Plan) and maybe some drilling. He did claim he would see about speeding up the permit approvals so the oil companies could get back to work. Of course he added a pointed jab claiming oil companies had existing leases containing billions of barrels of oil that were not being explored. He plans to enact a use it or lose it plan to force companies to drill and produce existing leases.

Oil companies claim this is not true. If the leases held "commercially" recoverable oil deposits they would be on it like stink on a skunk. Onshore leases in the U.S. have no geopolitical risk, are close to parts, infrastructure and experienced workforce. Companies claim the majority of leases not being worked have no value. They bid on the lease and then schedule seismic studies when the lease is awarded. When they don't find anything they abandon the lease and go work on something else. It is technically a valid lease in their name until the term expires.

Oil companies are "for profit" corporations. If they have 100 leases with proven reserves they will work the leases with the cheapest and easiest to recover reserves first. Just because a lease has 10 million barrels of oil does not mean an oil company will produce it if the "all in" costs are $85 a barrel. If they have a dozen other leases with $25 to $35 oil you know which ones they are going to produce.

Schlumberger claims the marginal all in cost of an average barrel of oil today is over $75. OPEC nations are cheaper because their deposits are conventional and close to the surface. In the U.S. most oil today requires expensive horizontal wells with multiple fracture zones and relatively slow production rates. Deepwater wells planned today could cost more than $125 per barrel before production begins 5-7 years from now. You can't drill cheaply in 7,500-10,000 feet or water 150 miles offshore for $25 a barrel. The government just added another layer of expensive regulation on deepwater drillers in calling for independent certifications by outside engineers of all equipment and processes as well as longer lead times for permits and more robust drilling equipment including costs for third party containment facilities.

The cheap oil is definitely gone and even if conditions in the Middle East went back to normal the price of oil is not going much lower. WTI may still suffer some volume pains as storage at Cushing continues to set records but Brent prices are probably going to remain over $110 for the foreseeable future. I started to say we may never see Brent under $100 again but you can never say never.

Jim Brown

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