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Thread: OPEC ponders how to co-exist with U.S. shale oil

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    Senior Contributor Toby's Avatar
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    OPEC ponders how to co-exist with U.S. shale oil

    First, they ignored each other. Then, they went into a bruising fight. Finally, they are talking, albeit with opposing agendas.
    The history of the relationship between OPEC and the U.S. shale oil industry has evolved a great deal since the cartel discovered it had a surprise rival emerging in a core market for its oil around five years ago.
    U.S. shale bankers came to Vienna this week and OPEC is readying a trip for its top officials to Texas in a bid to understand whether the two industries can co-exist or are poised to embark on another major fight in the near future.
    "We have to coexist," said Khalid al-Falih, Saudi Arabia's energy minister, who pushed through OPEC production cuts in December, reversing Riyadh's previous strategy to pump as much as possible and try to kill off U.S. shale with low oil prices.
    OPEC and non-OPEC countries led by Russia agreed on Thursday to extend oil output curbs by nine months to March 2018, keeping roughly 2 percent of global production off the market in an attempt to boost prices.
    But OPEC now realises supply cuts and higher prices only make it easier for the shale industry to deliver higher profit after it found ways of slashing costs when Saudi Arabia turned up the taps three years ago.
    In the Permian Basin - the largest U.S. oilfield - Parsley Energy Inc (PE.N), Diamondback Energy Inc (FANG.O) and others are pumping at the fastest rate in years, taking advantage of new technology, low costs and steady oil prices CLc1LCOc1 to reap profits at OPEC's expense.
    OPEC's latest calculus acknowledges the global clout of shale but seeks to hinder its growth by keeping just enough supply on the market to hold prices below $60 per barrel.
    "All shale companies in the U.S. are small companies," said Noureddine Boutarfa, who represented Algeria at the meeting. "The reality is that at $50 to $60 a barrel, (the U.S. oil industry) can't break beyond 10 million barrels per day."
    That is the level many analysts estimate U.S. oil production will reach next year, in what would be a 1 million bpd rise, a staggering jump for an industry marked during 2015 and 2016 by scores of bankruptcies and thousands of layoffs after a two-year price war with OPEC.
    Still, that extra volume may not be enough to meet rising global demand or offset natural declines in traditional oilfields, which OPEC is banking on.
    "For all OPEC members, $55 (per barrel) and a maximum of $60 is the goal at this stage," said Bijan Zanganeh, Iran's oil minister. "So is that price level not high enough to encourage too much shale? It seems it is good for both."
    Some OPEC members seem keen to show they have shed any prior naivete about shale, making it a key topic during Thursday's meeting after barely mentioning it before. Shale's limitations, including rising service costs, also were discussed.
    "We had a discussion on (shale) and how much that has an impact," said Ecuador Oil Minister Carlos Pérez. "But we have no control over what the U.S. does and it's up to them to decide to continue or not."
    Mark Papa, chief executive of Permian oil producer Centennial Resource Development Inc (CDEV.O), was asked by OPEC delegates to give a presentation on shale's potential last week. He appeared to have played his cards close to his chest.
    "In terms of the threat, we still don't know how much (U.S. shale) will be producing in the near future," Nelson Martinez, Venezuela's oil minister said after the talk.

    WARNING FOR SHALE

    By the same token, some U.S. shale leaders may also want a better insight into OPEC thinking and help OPEC understand that shale is not a flash in the pan.
    "OPEC looks at shale and it scoffs," said Dave Purcell of Tudor, Pickering, Holt & Co, a U.S. shale investment bank that attended the OPEC meeting for the first time. "There's a rational scepticism globally, but it misses the mark."
    For example, the UAE Energy Minister Suhail bin Mohammed al-Mazroui said he did not believe U.S. oil production would rise by 1 million bpd next year.
    Some of OPEC's customers are happy to see an alternative. India, the world's third-largest oil consumer, said this week it is looking to the United States for greater supply.
    "The new normal has to be accepted," Dharmendra Pradhan, India's energy minister said this week ahead of the OPEC meeting.
    OPEC meets again in November to reconsider output policy. While most in the group now appear to believe that shale has to be accommodated, there are still those in OPEC who think another fight is around the corner.
    "If we get to a point where we feel frustrated by a deliberate action of shale producers to just sabotage the market, OPEC will sit down again and look at what process it is we need to do," said Nigerian Oil Minister Emmanuel Kachikwu.

    (Additional reporting by Rania El Gamal, Ahmad Ghaddar, Dmitry Zhannikov, Alex Lawler, Shadia Nasralla; editing by Dale Hudson and Philippa Fletcher)
    Last edited by Toby; 27 May 17, at 11:21.

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    Former Staff Senior Contributor Ironduke's Avatar
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    In other words, they are exploring how they can collude/engage in cartel action on a mutual basis.

    I'm looking forward to the coming obsolescence of oil, when it is finally relegated to only being a chemical feedstock for manufacturing and to fuel only ships/airplanes.

    The geopolitical costs and national security risks that oil dependence engenders are simply too high to bear for decades and decades more.

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    Senior Contributor Toby's Avatar
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    Quote Originally Posted by Ironduke View Post
    In other words, they are exploring how they can collude/engage in cartel action on a mutual basis.

    I'm looking forward to the coming obsolescence of oil, when it is finally relegated to only being a chemical feedstock for manufacturing and to fuel only ships/airplanes.

    The geopolitical costs and national security risks that oil dependence engenders are simply too high to bear for decades and decades more.
    Now that they know US shale isn't going away after the drop in oil price. Which has helped restrict shale oil rigs from popping up elsewhere. Maybe now is the time to reach an agreement. I wouldn't get into bed with them. I'd continue to improve the technology and increase efficiency. Keeping the Arabs on the back foot

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    Senior Contributor chakos's Avatar
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    Quote Originally Posted by Toby View Post
    I'd continue to improve the technology and increase efficiency. Keeping the Arabs on the back foot
    Exactly right. If the US can pull this off it will also break the back of resurgent Islam. With the Arabs not holding the US to ransom with the 'Do as we say or we start trading oil in Yuan/Rubles/Imperial Credits' the West can turn their backs on the now useless Arab world and watch it turn into Sub Saharan Africa economically. Let them fight over sand.
    The best part of repentance is the sin

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    Former Staff Senior Contributor Ironduke's Avatar
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    Quote Originally Posted by chakos View Post
    Exactly right. If the US can pull this off it will also break the back of resurgent Islam. With the Arabs not holding the US to ransom with the 'Do as we say or we start trading oil in Yuan/Rubles/Imperial Credits' the West can turn their backs on the now useless Arab world and watch it turn into Sub Saharan Africa economically. Let them fight over sand.
    It is not enough to simply produce shale oil at home - even if it is competitive with sweet Arabian oil on the global market, oil is a commodity. Even if we were to consume no Arabian oil, the fact that it is a commodity makes it just as relevant from a geopolitical/geostrategic standpoint, and still shapes our foreign policy decisions.

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    Senior Contributor Toby's Avatar
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    Quote Originally Posted by Ironduke View Post
    It is not enough to simply produce shale oil at home - even if it is competitive with sweet Arabian oil on the global market, oil is a commodity. Even if we were to consume no Arabian oil, the fact that it is a commodity makes it just as relevant from a geopolitical/geostrategic standpoint, and still shapes our foreign policy decisions.
    It also shapes theirs. The Saudi's have just tried to f--k US shale oil. Now they realise they missed the boat they suddenly want to make a deal.....screw em....US arms sales will suffer though long term.

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    Former Staff Senior Contributor Ironduke's Avatar
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    Quote Originally Posted by Toby View Post
    It also shapes theirs. The Saudi's have just tried to f--k US shale oil. Now they realise they missed the boat they suddenly want to make a deal.....screw em....US arms sales will suffer though long term.
    Goes without saying. Without oil Saudi Arabia would be Yemen, with the addition of Mecca and Medina (which until the 1920s were ruled by the family that got Jordan and Iraq [later overthrown] from the British as a consolation prize).

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    Turbanator Senior Contributor Double Edge's Avatar
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    Quote Originally Posted by chakos View Post
    Exactly right. If the US can pull this off it will also break the back of resurgent Islam.
    Given how Trump wants to create a gulf bloc against Iran which had nothing to do with ISIS.. . I think resurgent Islam is going to continue for a while. Just got a shot in the arm


    With the Arabs not holding the US to ransom with the 'Do as we say or we start trading oil in Yuan/Rubles/Imperial Credits' the West can turn their backs on the now useless Arab world and watch it turn into Sub Saharan Africa economically. Let them fight over sand.
    The problem with trading in those currencies is you can only spend it in countries where they are accepted. There is no ransom

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    Senior Contributor Toby's Avatar
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    Quote Originally Posted by Ironduke View Post
    Goes without saying. Without oil Saudi Arabia would be Yemen, .
    and the world would be a better place .....less terrorism for starters

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    Senior Contributor Toby's Avatar
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    This is how Arabs from Saudi football team pay respect in Australia to the London dead......they don't line up for a minutes silence and carry on oblivious...sound familiar?

    Name:  6b392255e32e35347a3f3416883e.jpeg
Views: 175
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    http://www.telegraph.co.uk/football/...ilence-honour/
    Last edited by Toby; 08 Jun 17, at 23:39.

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    What the article misses is while OPEC nation's can produce oil for profit at 10-20, OPEC needs oil at or above 60 to fund their government and government programs. U.S. shale is profitable enough at 40-50. Not enough to go crazy and fast, but profitable enough for slow and steady (relatively) development. That is for the Powder River basin here in Wyoming that I do work in. PRB is not as profitable as Permian in Texas/New Mexico or Niobrara in Colorado.

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    Senior Contributor Toby's Avatar
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    Quote Originally Posted by Jimbo View Post
    What the article misses is while OPEC nation's can produce oil for profit at 10-20, OPEC needs oil at or above 60 to fund their government and government programs.
    Because they have no other revenue streams to speak of Where as clearly the US does.

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    Padishah Shahanshah Senior Contributor xerxes's Avatar
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    Not related to anyone response in this thread, thinking about shales, i think there are two amazing facts that people typically miss:

    The shale revolution came purely out of American entrepreneurship and its consequence was never envisioned or planned for until felt in 2014. Think about, the shale wildcatters did what everybody else failed to do: to bend OPEC and non-OPEC as well. People often talk about Saudis, but the bigger consequence is for Russia. What are they doing to prepare for the day after. Selling more Migs and Sukhois ? i think not. Saudis are late, despite their best effort to IPO the beast and re-invest it into PIF, that remains just a transaction. It will take decades to develop those non fossil oriented industries.


    Often, people talk about as US vs Saudi or US vs Russia. The amazing fact is that the shale production is privately owned. Nothing to do with the US Government, whereas Aramco and Rosneft and other semi or fully state-owned oil companies are an arm of the state. where production rates are linked with geopolitical ambitions.
    If we contrast the rapid progress of this mischievous discovery of gunpowder with the slow and laborious advances of reason, science, and the arts of peace, a philosopher, according to his temper, will laugh or weep at the folly of mankind. - Edward Gibbon

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    Senior Contributor Toby's Avatar
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    Quote Originally Posted by xerxes View Post
    Nothing to do with the US Government,
    Oh right so the US government didn't give permission for the 'Wild catters' to drill?..that's interesting, I guess anybody can do anything now then!

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    Padishah Shahanshah Senior Contributor xerxes's Avatar
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    Quote Originally Posted by Toby View Post
    Oh right so the US government didn't give permission for the 'Wild catters' to drill?..that's interesting, I guess anybody can do anything now then!

    Perhaps, i shouldn't have talked in absolutes => "nothing to do with US Gov.".
    For sure the government does have a sway with permits, tax and subsidies, but nothing like a Rosneft or Gasprom that reports to the Kremlin or an Aramco to reports to Riyadh.


    Market forces and the CEO's fiduciary responsibility to maximize shareholder value drives shale producers (and Big Oil)'s decision when it comes to investment, IRR, production rate etc etc.
    Cannot say the something for the state-own players.

    Would have Sechin sold a portion of the crown jewel Rosneft to Qatar IA and Glencore without the blessing of the Kremlin ? no.
    If we contrast the rapid progress of this mischievous discovery of gunpowder with the slow and laborious advances of reason, science, and the arts of peace, a philosopher, according to his temper, will laugh or weep at the folly of mankind. - Edward Gibbon

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