No. of Recommendations: 12
Perhaps an even more important question, who are the low cost producers?
Jim,
That is, indeed, the more important question.
Non OPEC+ suppliers are not going to be the lowest cost producers. But they can be among the lowest cost non-OPEC producers of oil. And competitive on natural gas because of geography versus the markets.
The advantage that non-OPEC producers have is that OPEC+ suppliers are heavily dependent upon O&G revenues for their economies. And they generally also have extensive & expensive social programs that help keep their governments in power by pacifying their masses. So they need a certain level of oil prices. There is certainly some tradeoff between volume and oil prices since Price X Volume = Incoming Revenue. But there are lower limits on oil prices needed over any extended period. There can still be price wars (Saudi vs Russia) but they can't last for long. Financial reserves eventually run out. And Saudi, the most important, has further boxed themselves in by guaranteed dividends from Aramco plus linking oil prices to the US dollar.
So the name of the game is to be profitable at the minimum prices OPEC+ can withstand.
I'll use the company I best understand - XOM - as an example. They've stated that circa 90% of their upstream investments over the 2024-27 period can yield a 10% return at $35 Brent crude real prices. They are also selling off older, higher cost, conventional production while prices are good to further reduce their upstream production cost profile. They're not alone in doing so - especially with the technology developments in recovering shale oil, e.g. the Permian Basin.
Cost reductions are another key. XOM has now reduced op costs by over $11 billion annually in pursuit of their $15 billion goal by 2027. Scale is one important factor in company's ability to reduce costs. So consolidations are taking place across the US O&G industry. Companies are also focusing more on reducing geopolitical risks.
A third key is managing the balance sheet to be able to ride through the price cycles while maintaining investments in profitable projects. Oil is a depleting resource. You have to keep reloading the reserves.
As you say, you just have to be among the fastest runners among these guys.
