Opec battle with US shale nears day of reckoning
For oil cartel’s members, stakes could not be higher
LONDON: The clash between Opec and America’s oil industry is reaching a day of reckoning.
The US shale revolution is on course to be the greatest oil and gas boom in history, turning a nation once at the mercy of foreign imports into a global player.
That seismic shift shattered the dominance of Saudi Arabia and the Opec cartel, forcing them into an alliance with long-time rival Russia to keep a grip on world markets.
So far, it’s worked – global oil stockpiles are draining and prices are near two-year highs.
But as the Organisation of Petroleum Exporting Countries and Russia prepare to meet in Vienna this week to extend production cuts, ministers have little idea how US shale production will respond in 2018.
“The production cuts are effective – it was absolutely the right decision, and the fact of striking a deal with Russia was crucial,” said Paolo Scaroni, vice-chairman of NM Rothschild & Sons and former chief executive officer of Italian oil giant Eni SpA.
Nonetheless, “Opec has not the same power. The US becoming the biggest producer of oil in the world is a dramatic change.”
For Opec members, the stakes couldn’t be higher.
Saudi Arabia’s Crown Prince Mohammed Bin Salman is embarking on a radical economic transformation of the kingdom, including a partial sale of its state oil company that could be the largest public offering in history.
Venezuela, reeling from years of recession and a crushing debt burden, is on the brink of political implosion.
The producers’ efforts to clear the oil surplus are starting to pay off. They’ve drained excess inventories in developed nations this year by 183 million barrels, or more than half of the glut, which now stands at about 154 million barrels, according to Opec data.
That has revived London-traded crude futures, which sank below US$45 a barrel this summer, to a two-year high of US$64.65 on Nov 7.
That success goes some way to countering accusations that Opec had lapsed from the dominant market force
1980s into irrelevance.
Although its 14 members still pump 40% of the world’s oil, their share has dwindled from the days when Opec held the global economy in thrall.
“People may have thought that Opec was dead, but Saudi Minister Khalid Al-Falih has succeeded in building agreements and alliances within Opec and non-Opec, such as Russia, to restrain production,” said Luis Giusti, an adviser at the Center for Strategic and International Studies and former CEO of state-run Petroleos de Venezuela SA.
There are even signs that Opec’s opponents, the dozens of drillers tapping shale-oil deposits in Texas and North Dakota, are losing momentum. Companies may have already squeezed costs and maximised productivity of the 1970s and as much as possible, and their investors are finally insisting profits are returned to them rather than re-invested in more drilling.
Mark Papa, CEO of Centennial Resource Development Inc. and considered one of the industry’s founders, said in September that shale “is not nearly the Big Bad Wolf that everybody thinks.”
A year-long ramp-up in drilling by American operators appeared to hit a plateau in July, data from Baker Hughes Inc shows, and companies such as Pioneer Natural Resources Co have lowered their output targets.
The outlook for shale is so clouded that when Opec officials invited industry experts to brief them on the topic last week, they were disturbed by the diversity of opinions. — Bloomberg
Production cuts: A worker checks a valve of an oil pipe at Nasiriya oilfield in Nasiriya province, southeast of Baghdad, Iraq. Opec’s production cut has worked - global oil stockpiles are draining and prices are near two-year highs. — Reuters