OPEC’s record $1tn revenues keep internal troubles and the rise of unconventional oil at bay
“Stability, stability, stability.” That was the message from OPEC Secretary General Abdalla El Badri on the first day of the organization’s 5th International Seminar in Vienna. Despite this mantra, it’s clear that the ground is shifting beneath OPEC’s feet.
There are two versions of where OPEC now stands. The first – perhaps the most popular at the moment – is that it is a dysfunctional cartel already being marginalised.
Irrecoverably split between gulf ‘doves’ and fiscally-strained ‘hawks’, unable to stick to its own production targets, increasingly irrelevant as advanced countries pare back oil use and embrace revolutionary advances in unconventional oil and gas recovery, OPEC’s standing will diminish further as an abundance of abroad gas and crippling domestic energy and fiscal imbalances at home take their toll over the next decade. Or so it goes.
Shale oil
That’s certainly the version implied by ConocoPhillips’s CEO Ryan Lance as he addressed OPEC delegates.
“In 1990, North American reserves and production were falling, but thanks to unconventionals proved reserves have risen 68% since then,” Lance said. “North America could become self sufficient in oil as well (as gas) by 2025.”
Lance also predicted that North America “will become an exporter of [liquefied natural gas] in the near future.”
His address, heavily influenced by the latest US production figures and a bullish report by Citigroup’s Edward Morse titled “Energy 2020: North America, the New Middle East?” caused an audible stir in the seminar hall.
The comparison is overdone and inward-looking, but for a US oil company, not absurd: according to BP, US production rose by 600,000 bpd between 2009 and 2011, a rise greater than OPEC member Ecuador’s total production.
“As North America becomes the new Middle East, this poses a challenge to the future role of OPEC,” says Morse’s report. “After near-term supply tightness, the end of the decade sees investments coalescing in offshore output in the Gulf of Mexico, offshore West and East Africa, India, the Caspian and various places in Asia, turning markets looser – US energy independence is likely to come to fruition at a time of weakening prices.”
The rhetoric has obvious appeal to some sections of the oil industry, and OPEC will now be keeping tabs on North American production much more closely.
However, even if US supply growth expands at the rate forecast by Morse, the country’s energy prices will still be heavily influenced by global markets, and Lance’s prediction is at the far upper end of analysts’ estimates for what the US oil industry can achieve.
Different take
Time to examine the second view: recent oil price movements show that OPEC still stands tall, and is adapting to its position in a new energy market characterised by abundance, rather than lack, of supply. The hawks in OPEC – broadly speaking, the non-GCC producers – complain but are largely powerless to set policy.
Due to its internal divisions, OPEC has broken with the habit of a lifetime in June and failed to capitalise on an opportunity to bolster prices through a co-ordinated contraction in supply. Instead, the ceiling stays at 30 mbpd and El Badri has said that members will “respect” it by paring production by a few percent from now.
As well as an immediate fillip to ailing oil importing economies, Saudi-led OPEC policy has been a beneficial PR exercise for conventional producers in the cartel, and GCC members in particular. The opportunistic OPEC of the 1970s and 1980s may now be behind us.
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Shale takes time
OPEC Secretary-General Abdalla El Badri and Saudi Arabia’s Oil Minister Ali Naimi both shrugged off Lance’s view. Badri said that shale oil will “take its time before it can have a global impact,” while the latter only that he welcomes new sources of energy.
A quick look back at the last year serves as a reminder of why they can be a little dismissive. OPEC countries shared record revenues of $1.03 trillion in 2011, as oil prices topped $100 a day for the first time.
While oil markets panicked at the loss of Libyan crude (-1.2 million bpd) due to civil war, large increases from Saudi Arabia (+1.2 million bpd), the UAE, Kuwait and Iraq more than offset the loss, leading to virtually all of the net growth in oil production for the year, according to BP. In Qatar, record output levels were reached.
Then there are the longer-term fundamentals. OPEC’s share of worldwide production is 40%, and slated by the group’s researchers to fall by just 2% by 2035.
Member states hold 72% of the world’s oil reserves, with further discoveries in Iraq likely to hold this ration in the face of unconventional exploration. OPEC countries are drawing down on their reserves at around half the rate of Non-OPEC producers.
OPEC producers, and Iran and the Gulf States in particular, have been particularly adept at capturing market share in Asia, home to the most resilient import markets, particularly for the grades of crude that US domestic production is now replacing.
OPEC’s latest Oil Market Report states that which demand in advanced economies fell 1.12% in 2011 to 45.64 mbpd, while in the rest of the worlds it increased 3.23% to 42.15mbpd, powered by China.
The marginal cost of OPEC production – Venezuelan heavy oil excluded – is lower than unconventional sources, particularly Canadian oil sands.
If Paolo Scaroni is right (see page 6), and the abundance of gas from US shale, East Africa, and other sources causes oil prices to fall and stay lower, conventional oil producers with sound fiscal management are best placed to weather this ‘new normal’ oil price range.
Problems at home
More than non-OPEC supply, domestic issues of demand may be OPEC members’ biggest problem. The Gulf States consume more of their hydrocarbons each year, and inter-GCC tension over politics and prices prevents efficient trade in the region’s abundant and much-needed supplies of gas.
Domestic energy demand is rising by around 10% a year in Saudi Arabia, and the summer months see fumes from heavy crude belch from power generators in Kuwait, the UAE and the Kingdom, as the call on national grids from air conditioning rises.
Fiscal mismanagement in Venezuela and Iran has cornered current governments into hawkish price positions, though Iran is on the wane and the Chavez government may be ending. The positive view is that, whatever the domestic concerns of OPEC producers, they are at least within their own means to resolve.
The economic crisis in the Eurozone and worrying economic data out of China have also seen signs that OPEC is becoming a more nimble organisation. The address from India’s Oil Minister at the OPEC seminar (see page 7), is a symbol of the group’s increasing receptivity to hearing consumer’s concerns from new core markets.
Before 2008, it would have been inconceivable that elections in Greece would feature in a Gulf oil minister’s morning brief, but Jaipaul Reddy could bemoan the GDP cost of $10 on a barrel of oil at the OPEC seminar and receive warm applause.
“I believe demand in the future will peak before supply,” said Ali Naimi, citing uncertain demand and a changing energy supply mix as a reason to “question that Saudi Arabia will really need to think, at least for now, about additional future production capacity.”
In the face of turmoil elsewhere, the Gulf’s oil producers at least see little need for panic; they can always drill for more. OPEC’s role in energy markets is changing, but will continue for a long while yet.
