OPEC Unsure How It Can ‘Live Together’ With Shale Oil

OPEC's Path to Output Cuts Unclear
  • Production freeze will be re-evaluated after 3-4 months
  • Spending cuts in oil planting seed for `a very high price'

OPEC and U.S. shale may need a relationship counselor.

After first ignoring it, later worrying about it and ultimately launching a price war against it, OPEC has now concluded it doesn’t know how to coexist with the U.S. shale oil industry.

"Shale oil in the United States, I don’t know how we are going to live together," Abdalla Salem El-Badri, OPEC secretary-general, told a packed room of industry executives from Texas and North Dakota at the annual IHS CERAWeek meeting in Houston.

The Organization of Petroleum Exporting Countries, which controls about 40 percent of global oil production, has never had to deal with an oil supply source that can respond as rapidly to price changes as U.S. shale, El-Badri said. That complicates the cartel’s ability to prop up prices by reducing output.

“Any increase in price, shale will come immediately and cover any reduction," he said.

Shale Output

The International Energy Agency earlier on Monday gave OPEC reason to worry about shale oil, saying that total U.S. crude output, most of it from shale basins, will increase by 1.3 million barrels a day from 2015 to 2021 despite low prices. While U.S. production from shale is projected to retreat by 600,000 barrels a day this year and a further 200,000 in 2017, it will grow again from 2018 onward, the IEA said. 

“Anybody who believes that we have seen the last of rising" U.S. shale oil production "should think again,” the IEA said in its medium-term report.

John Hess, chief executive officer of one of the largest lease-holders in North Dakota’s Bakken shale region, said shale might not respond as quickly as OPEC fears. There are logistical hurdles involved with returning enough rigs and workers back to the oil patch to start growing production again, in addition to financial hurdles.

“The balance sheets of shale producers are in disrepair,” said Hess, whose company recently reported its first annual loss in 13 years. “They’ve got to heal their balance sheets before they will start investing again.

OPEC launched a price war against U.S. shale and other high-cost producers, including Canadian oil sands and Brazilian deep-water oilfields, in November 2014 by not reducing output despite a global oversupply. Since then, oil prices have plunged by more than half, hitting a 12-year low of about $26 on Feb. 11.

In a rare admission that the policy hasn’t worked out as planned, El-Badri said that OPEC didn’t expect oil prices to drop this much when it decided to keep pumping near flat-out.

Strategy Shift

OPEC’s strategy began to shift last week, when the oil ministers of Saudi Arabia and Russia agreed to freeze their output at the January level, provided other oil-rich countries joined. El-Badri said the new policy will be evaluated in three to four months before deciding whether to take other steps.

“This is the first step to see what we can achieve,” he said. “If this is successful, we will take other steps in the future.” He refused to explain what steps OPEC could take.

El-Badri said low oil prices have caused companies to cut too much spending on developing new output, which could plant the seed for “a very high price” in the future.

“The concern is no investment now, no supply in the future. It’s as simple as that,” he said. “If there’s no supply coming to the market, prices will go up.”

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