Old Fields Die Hard

In an industry that is always full of contradictions, 2018 has been a particularly complicated and divisive year for the global oil markets--and it looks like it won't be letting up any time soon.

For months, the Organization of Petroleum Exporting Countries (OPEC) has been pushing for a dramatic decrease in production in the interest of bolstering prices at the pump. They've even managed to get major OPEC outsiders like Russia and the oil cartel to agree to production cuts. While the original deal is due to expire at the end of March, 2018, OPEC has just extended the production caps to the end of the year in an attempt to counterbalance the global glut of crude oil.

However, despite OPEC's best efforts, some countries are not stemming the flow of crude, and some are even ramping up production and even opening new major oil fields. Nigeria, for example, is talking out of both sides of its mouth, promising compliance with OPEC in the same year that it has pushed its output to the highest level in more than two years and is set to start up production in a new large-scale oil field by the end of the year, their first in half a decade.

Now, another major issue has arisen. British Petroleum (BP), which has long expected their mature oil fields to naturally plateau and then decrease in production, has now announced that their legacy fields are increasing output, to the great surprise of experts in the field and BP executives alike. An astonished Bob Dudley, BP's chief executive officer, told an interviewer at the CERAWeek by IHS Markit energy conference in Houston that he, "cannot remember ever in my career having seen a negative decline rate."

This unprecedented increase from mature fields adds another problem to OPEC's plan on top of the already major issue of the shale boom. And BP isn't the only supermajor contributing to the problem. Shockingly high results from legacy fields have also been observed by mega-producers including Shell Plc and in areas like Norway, the North Sea, and Russia (all regions highlighted by the International Energy Agency (IEA) for their remarkable recent output) creating a major headache for Saudi Arabia, who was shouldering the major brunt of OPEC cutbacks, cutting a jaw-dropping 1.8 million barrels per day in a desperate attempt to recalibrate the market price of oil.

While BP has had the most dramatic turnaround by a wide margin, other companies have still reported some pretty impressive findings, creating quite an upset for OPEC's master plan. While mature oil fields' production did drop last year, it was the smallest drop in a decade of collected data at just 5.7 percent, according to figures from the IEA.

The slowing decline in these fields is a huge surprise in any scenario, but it's made all the more confounding by the fact that the oil industry radically decreased spending during the pricing downturn of the last three years--a downturn that they were just finally coming out of. Since mature wells are usually a huge money pit in terms of maintenance, OPEC had been extremely hopeful and even dependent on the expectation that mature wells would decline significantly without major investment--especially since these legacy wells still account for more than half of the world's oil production.

According to some supermajors, however, the economic downturn had exactly the opposite effect. As explained by Wael Sawan, the executive vice-president focused on deep water at Shell, thriftier times have called for a re-strategizing and getting back to basics. This means focusing on existing wells and mature oil fields instead of drilling and prospecting in a short-term effort to get more oil more cheaply and efficiently.

It's all a response to the same issue--low oil prices--but with exactly the opposite approach from OPEC, setting oil up for a turbulent year as income-boosting strategies clash. OPEC is trying to keep its eye on the horizon, with long-term goals to increase global oil prices not just for this year, but going forward, but all of the production cuts are for naught if private companies continue to act in their own short-term best interest, increasing their income by putting more and more oil into an already saturated market.