Resilience of Shale & Disappointment of OPEC (Arab Times)
http://www.arabtimesonline.com/resilience-of-shale-and-disappointme...
Almost nine months have passed since the historic OPEC meeting when its swing producer role was abolished and its members were allowed to produce as much oil as they can in order to cause the oil prices to reduce so that US shale oil producers would be forced out of business. However, the opposite happened. Shale oil producers are still in business even though oil prices have dropped below $50 per barrel. In fact, USA oil production is at its peak with production of more than 9.5 million barrels a day, and is bound to increase further.
So where did OPEC go wrong? Despite having all kinds of information regarding energy and being in daily contact with both sides of the market – consumers and producers, it still failed to estimate the power of the shale oil producers. In fact, it even failed to know the actual cost for producing one barrel of shale oil.
How na’ve was OPEC to think that reducing the oil prices to below $100 per barrel will cause shale oil producers to become bankrupt and close down their operations!
Oil prices are currently below $45 per barrel and the oil market is awash with oil but there is not a single sign of any reduction in shale oil production.
Why didn’t OPEC do its homework properly? Why did it listen to commentators who said shale oil will cause earthquakes and harm the environment, and that most local and state governments will not allow any shale oil developments on their lands? Until now, OPEC has not been able to pinpoint the breakeven cost of shale oil production.Oil producers are losing more than 50 percent of their daily income due to miscalculation and misjudgment. There are no signs indicating that oil price will stop declining further or oil production will reduce.
If the oil producing countries knew the simple economics of shale oil and its resilience to low oil prices, OPEC would not have taken the decision to allow the oil production to go out of hand. It would have instead taken other routes to bring better discipline in the oil market.What OPEC needs is a price level that non-OPEC members cannot compete below its economical breakeven price. However, this question should have been answered during the meeting in November last year. OPEC failed to specify the number at that time due to which its members have since been suffering from loss of revenues.
It is certain that the oil prices will not stabilize in the coming months especially when Iraq and Iran are pushing more barrels of oil into the market and are striving to gain market shares by providing discounted prices.
Therefore, the struggle among the OPEC members is likely to intensify until a political or commercial compromise is reached. These days, the challenge is not about how high oil price will reach but how soon a compromise can be reached.
Meanwhile, OPEC has to continue looking for the shale oil cost price.
Source: Arab Times
Views: 1056
Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on -
The Arab Times doesn't appear to have much background in energy reporting. It does claim to be "The largest Arab-American On-Line e- newspaper in the United States". Not as one might surmise a media outlet actually connected to pan-Arab energy markets and decision makers.
IMO there was nothing naive about OPEC strategy and it wasn't aimed specifically at US shale producers. OPEC made a logical business decision in a market with a substantial and growing supply glut exacerbated by slowing demand. If they miscalculated anything I suspect that it is the same dynamic that everyone else missed. Not that the US shale operators couldn't squeeze efficiencies out of their best reserves but that investors and private equity would be so willing to continue financing the deficit operations of over leveraged companies that didn't have access to the best reserves. There should have been a much greater number of bankruptcies and mergers and acquisitions before now with an accompanying decrease in production. Instead the ability of marginal producers to re-negotiate debt and raise additional capital through inventive and risky means has allowed them to continue operating at a loss for far too long. And, in the process, prolonging the supply glut that must abate in order to re-balance with demand and support increased prices.
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Permalink Reply by Joe Aldridge on
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Skip.
This what I've said from the beginning. The Saudi's were concerned that the US was going to allow exporting of oil because of the shale production. They wanted to maintain market share at any cost. Its a true production war. "We can produce more and we can produce you into the cellar".
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Permalink Reply by Skip Peel - Mineral Consultant on
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Joe, you have consistently criticized the concept of defending market share and now you want to claim that you have been saying that all along? Sorry, I'm not buying it. The Saudis didn't care which producers cut back - only that someone other than themselves took the role of swing producer and they maintained their market share. The Saudis aren't dumb. I suspect they thought through the strategy and assessed all the possibilities. I think they missed the only one that was impossible to see because it was so unlikely and had never occurred before as far as I am aware. Distressed E&P companies that should have been allowed to go bankrupt or be acquired with an associated curtailment of production have found means of raising capital that has allowed most to continue to produce at a high level and prolong the supply glut. We have discussed this previously particularly in the below linked article. Private equity firms that have been poised to scoop up reserves at bargain basement prices have found little to buy because it has taken so long for companies to reach the end of their ability to raise money. When banks re-calculate reserves and adjust lines of credit in October we may see the wave of bankruptcies and acquisitions/mergers that are required to bring supply into balance with demand.
http://www.gohaynesvilleshale.com/forum/topics/future-of-shale-revo....
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Permalink Reply by RGV AG on
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I truly am a neophyte compared to Skip and folks like Joe and others on these type of things and I don't know the O&G business well at all, I want to get that out there.
But I do have a some experience and knowledge of how lenders will look at "distressing" situations. I firmly agree with what Skip is saying above, but I think there is a component of the lenders looking at all they can do to kick the can down the road some too keep either bad debt or the write downs off their books as long as they can.
I have a suspicion that if and when oil and gas prices go up some is when we will see an increase of bankruptcies and aquisitions, as as that time assets and value will be increased some. The lackluster financial positions will have changed for some of these companies but I do not believe the debt loads that have been extended out will be surmountable. Basically the lenders will want to repo something as valuable as they can, that is when these folks will be cut off from cash and support in my opinion.
Basically I think there will be some continued extension of lifelines as long as there is a possible improvement to consider. In a sense many of these companies have become "too big to fail" to varied and sundry lenders. No matter what it is going to be real interesting and I do think there is going to be a slew of bankruptcies and mergers at some point.
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Permalink Reply by Skip Peel - Mineral Consultant on
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RGV, I think the realization by lenders that there are no prospects of significantly improved crude prices in the short term has set in. I think they've kicked the can as far down the road as they care to go. The next sixty days will reveal whether that is the case.
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Permalink Reply by RGV AG on
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Skip, I think you may be right. But just like the S&L crisis and other "bubbles" the realization usually takes a little time to get to "actualization", I am just interested to see when the dominoes start to fall. Really kind of a sad thing, given all the optimism of the past several years.
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Permalink Reply by Skip Peel - Mineral Consultant on
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From what I have read October has been the most often predicted date that the can gets kicked down a pot hole and is gone for good. Those companies without sufficient liquidity will have reached the end of their ability to support field operations and thus cash flow through borrowing. Those that have assets seen as valuable by equity and industry firms with capital waiting to be deployed will be acquired. Those that do not will go bankrupt.
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Permalink Reply by William C. Morrison on
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There are other international issues (pressues) and other OPEC members in trouble due to the depressed oil prices. Among them are Venezuela, Nigeria and of course Russia. The price drop put a real hurt on those folks and Venezuela is near bankruptcy. I would opine that the Saudi's have taken a lot of heat from those people. And with Iran coming back on line things could get worse. ISIS has also had an impact on oil supply, and that will not change much for a while. Basically, I say much of Iraq oil is in turmoil. Kuwait has said nothing but I am sure they are hurting cash wise too. I do not think Saudi relaxation is all about US Shale oil. The Shale oil certainly has had an impact on them. My understanding is that Saudi Arabia is selling bonds for the first time. That too may have some political impact. I think there is a lot more to the problem than we think.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Unfortunately the reaction to depressed prices by most OPEC members has been to increase production in an effort to make up for the drop in revenue. It's hard for the members to act in concert because some don't like each other. And some are sworn enemies.
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Permalink Reply by Doug Boone on
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I don't think it has been about market share at all. The Saudis have been trying to squeeze the Iranians and Russians. They are scared to death about the Iranians obtaining nukes and don't like the Russians meddling. If the Saudis are satisfied with the nuclear deal, oil will be back at a $100 within months.
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Permalink Reply by Skip Peel - Mineral Consultant on
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The Saudis have been quite transparent on their reasoning for maintaining production levels. All the producing nations negatively impacted think the Saudis are targeting them specifically. The Saudis don't care who cuts production first as long as it's not them. The other OPEC members might have a chance to convince the Saudis to cut back if they were willing to do the same. They are not. Even a half million barrel a day cut now, by whomever, couldn't raise the price above $70 IMO. It would take a cut in production and a significant increase in demand. And that looks unlikely for some time to come.
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