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Mike Priaro

Mike Priaro

"Mike Priaro, B.Eng.Sc.  (Chem. Eng.), U.W.O. '76, P.Eng., Lifetime Member Association of Professional Engineers and Geoscientists of Alberta (APEGA), worked in facilities, production, operations and…

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The Hidden Danger Of OPEC’s Market Share Strategy

The Saudis' crude oil market gambit to increase market share by refusing to reduce production in order drive out higher-cost producers has not yet killed off competition from North America.

In fact, U.S. shale oil production has not declined in several key shale regions, and output has actually increased a little from year-ago levels.

Oil production from the Texas Eagle Ford shale in Oct. 2015 was 1.5 million barrels per day (mb/d), about 5 percent higher than Oct. 2014, according to Sami Yahya, energy analyst with Bentek Energy, while average crude oil production from the Bakken in North Dakota in Oct. 2015 was 1.2 mb/d, or about 1 percent higher, than one year ago. Oil production from the multi-horizon West Texas Permian basin recently exceeded two mb/d, up about 5 percent over year- ago levels.

Permian Basin oil production. Source; U.S. EIA, Dec. 2015. Related: This Joint Venture Could Stir Up The Lithium Market

Americans are drilling to hold acreage, drilling sweet spots where some wells can produce light oil and condensate as well as natural gas and natural gas liquids, improving performance of completions and stimulations and increasing production rates per well. All of these little innovations are achieving cost reductions. With less than half the drilling rigs still operating, Americans are still drilling and completing enough wells to keep overall production only slightly down from a peak earlier this year.

Meanwhile, oil sands production is set to increase significantly this year and next as a result of projects under construction coming on stream.

(Click to enlarge)

Oil sands production forecast. Source; National Energy Board, 2015-03-26. Related: Strippers Suffering From Low Oil Prices

At its 168th meeting in Vienna on Dec. 4, 2015, OPEC stated that "As far as supply is concerned, non-OPEC countries would continue to see significant reduced production growth as compared to past years".

OPEC recognizes that, so far, it has only achieved a slowing in non-OPEC production growth but it believes "...that non-OPEC supply is expected to contract in 2016." However, OPEC supply will surely increase as members Iraq and Iran both want to increase oil production - Iraq when insurgent hostilities cease and Iran as sanctions are lifted.

The OPEC conference observed "since its last meeting in June...OECD and non-OECD inventories standing well above the five-year average." Rising inventory levels of oil and products act as a dampener on prices, and if storage runs out before increased demand offsets production growth, oil prices could dive even lower than they already have.

Recently, other OPEC members have talked about re-visiting production levels to provide greater support for oil prices as the Saudis' gambit to increase market share has failed thus far to force a dramatic reduction in U.S. shale.

However, any attempts by Saudi Arabia and OPEC to cut back production in order to boost prices will result in increases in North American production. It only takes nine days to drill a Texas horizontal shale oil well!

But it is not as if the Saudi strategy has failed to achieve any results at all. It is important to remember that prior to the oil price decline, U.S. shale oil production was forecasted to keep increasing for at least five-to-ten years before peaking in the mid-2020s, while in Canada the overall production from oil sands would eventually have resulted in production of ten mb/d, putting Alberta on a level with Saudi Arabia, Russia and the U.S. Related: This Could Become The Most Promising Arctic Oil Basin

The Saudi strategy has forced all that potential to go dormant, but any price increase will start to bring some of it back. Hence, oil prices will stay low for at least two-to-five years until demand catches up with supply – barring any geopolitical upheavals.

Furthermore, on Oct. 9, 2015 the U.S. House of Representatives voted 261-159 to lift the ban on exports of U.S. domestic crude oil. The provision has become a bargaining chip in a last minute budget deal – Democrats could agree to lifting the export ban in exchange for clean energy tax credits. Passage is far from clear, but the U.S. is now one step closer to competing internationally against OPEC.

Americans would be happy to see no more imports of Canadian oil sands crude, not just because of its higher than average GHG emissions and the ecological risks of transporting dilbit, but because more cheap Canadian oil sands crude drives down the domestic, mid-continent price of crude.

With U.S. refinery utilizations currently running around 95 percent, there is little room for more heavy, sour Canadian oil sands crude particularly because of the need for re-vamps to increase refining capacity of U.S. domestic sweet, light shale oil, or without new pipelines and expensive re-vamps to handle high-sulphur, heavy bitumen from the oil sands.

Finally, one or more new pipelines to Canadian east and west coast tide-water such as Energy East and Eagle Spirit, and/or the Trans Mountain pipeline expansion, will bring significant new volumes of crude from the oil sands to compete in international markets within five years.

By Mike Priaro for Oilprice.com

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