 Though OPEC’s dominant member, Saudi Arabia, denied it at the time, it’s
generally been accepted a primary reason behind the move to lower prices was to
hurt shale oil producers in the United States, who have higher production costs
than the Saudis and other oil-rich Persian Gulf nations.
On Friday, OPEC delegates will meet again in Vienna, and they’re expected to
maintain their “let it flow” stance.
But while there’s no denying North American shale producers have suffered a good
deal of economic pain in the past six months, it’s an open question whether the
OPEC strategy will succeed in the long run.
Why?
Because the low-cost environment spurred U.S. producers to get more
cost-efficient — and they’re seeing results.
Bernard “Bud” Weinstein put it bluntly in an interview with Watchdog.org: “At
$100 (a barrel) you can afford to be stupid. At $60 you can’t afford to be
stupid.”
North American producers have responded to the “adapt or die” mentality
essentially forced upon them.
“Production costs are falling,” said Weinstein, associate director of the
Maguire Energy Institute at Southern Methodist University.
A year ago the break-even price in about 75 percent of the shale oil fields in
the U.S. was estimated at $75 a barrel. Anything lower than that and drilling
became a losing proposition.
The Saudis reportedly thought the break-even price for U.S. shale across the
board was firm at about $80 a barrel.
But in the past six months companies have responded with a host of cost-saving
measures to more efficiently employ the hydraulic fracturing and horizontal
drilling techniques that challenged the OPEC countries for world supremacy in
the first place.
Producers in the Eagle Ford shale formation in South Texas — one of the biggest
shale areas in North America — report their break-even price is $56 a barrel.
They say the price could go as low as $41 by next year because of better and
more innovative production techniques.
“The death of the unconventional business has been greatly exaggerated,” Cody
Rice, senior analyst at the energy, metals and mining research group Wood
Mackenzie, told the San Antonio Express-News.
Some of the techniques range from putting rigs on tracks to using fiber optic
sensors deep underground to find the best way to tap oil and natural gas from
“tight shale formations.”
“The thing that’s really helped is drilling and completion costs have come
down,” Dan Steffens, energy analyst and president of the Houston-based Energy
Prospectus Group, said. “I honestly think the economic returns at $80-oil are
going to be better than the economic returns were at $100-oil, because these
drilling and completion costs have come down so much.”
“We’re doing a lot more with a lot less; we’re able to develop the assets at a
much cheaper cost now,” Chris Faulkner, the CEO of Breitling Energy, told
Watchdog.org. “So I think what (Saudi Arabia and OPEC have) done is, they’ve put
us through an exercise that has been very beneficial for us and that long-term
will hurt them.”
That helps explain why U.S. oil production is up even though prices are down.
Last week, the amount of U.S. crude hit 9.56 million barrels a day — its highest
level in 44 years.
Saudi Arabia has responded by producing record amounts of its own — 10.3 million
barrels a day in April.
Related: Don’t expect a big price drop at the pump after OPEC meeting
Yet even OPEC’s own analysts have conceded North American producers are
resilient competitors.
“Generally speaking, for non-OPEC fields already in production, even a severe
low-price environment will not result in production cuts, since high-cost
producers will always seek to cover a part of their operating costs,” said a
draft report of OPEC’s long-term strategy seen by Reuters last week ahead of the
Vienna meeting.
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 The price Brent crude — the generally accepted international
price — was as high as $114 a barrel at this time last year. With
the price already slipping, OPEC made its move in November, which
accelerated the decline. Brent crude went all the way down to $45 a
barrel in January.
Prices have rebounded somewhat, with Brent crude commodities
futures hovering between $62-$68 a barrel for the past month; West
Texas Intermediate — the price most U.S. producers trade in — was at
$60.20 a barrel at the close of trading Monday.
But the pain remains, and a number of energy analysts think OPEC’s
strategy is paying off.
U.S. producers have laid off thousands of employees, and the number
of active rigs has dropped 57 percent compared to last year.
There was talk the bottom was reached, but Friday the weekly rig
count compiled by the Houston-based energy company Baker Hughes
reported that 13 more U.S. crude oil rigs had been idled. That marks
the 25th week in a row of a decline in rig counts.
At least four shale oil companies have gone bankrupt, and those with
heavy debt burdens could follow unless prices go back up.
In addition, the U.S. still imports nearly 7.5 million barrels a
day, and a number of energy analysts predict slowing demand for oil
in the U.S., Europe and even China would further stress companies.
Before November’s OPEC meeting, the Saudis stored up $750 billion in
foreign currency assets — a big cushion to ride out a low-price
environment to starve out U.S. shale producers.
But a majority of OPEC members are feeling the hurt — even more than
their North American rivals.
When looking at U.S. producers “break-even costs are meaningless,”
Weinstein told Watchdog.org. “It varies from company to company.
It’s a different story for countries like Venezuela.”
A longtime OPEC member, Venezuela’s economy is almost completely
dependent on oil and needs the global price to be more than $100 a
barrel to pay for the government’s expensive social programs. With
an annual inflation rate now estimated at more than 500 percent, the
Venezuelan government of socialist President Nicolas Maduro is
practically in free-fall.
OPEC countries such as Nigeria, Algeria and war-torn Libya also need
oil prices in triple-digits to bail out their economies, and they
want OPEC ministers to reverse November’s decision and cut
production numbers, which would lead to higher oil prices:
fiscal break-even oil price
But all indications are, come Friday, OPEC and the Saudis will stay
the course.
“They’re probably under a lot of pressure to do something, but Saudi
does what’s in the best interests of Saudi oil and they don’t give a
(bleep) about these other guys,” Steffens told Watchdog.org. “It’s
not like it’s a band of brothers.”
Another wildcard is the unstable political situation in the Middle
East. Hot spots such as Iraq, Libya and Syria could explode, and
ISIS fighters have seized oil fields in the region, potentially
threatening supply routes, which can lead to a spike in the global
price.
So six months into this showdown, it seems too early to tell which
side will win — or whether we’re headed for a stalemate.
“It would thus be premature to suggest that OPEC has won the battle
for market share,” a May 13 report from the International Energy
Agency, based in Paris, said. “The battle, rather, has just
started.”
“It’s two freight trains running at each other,” said Faulkner.
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