The Organization of Petroleum Exporting Countries will once again become a nemesis for U.S. shale if the U.S. Congress passes a bill dubbed NOPEC, or No Oil Producing and Exporting Cartels Act, Bloomberg reported this week, citing sources present at a meeting between a senior OPEC official and U.S. bankers.
The oil minister of the UAE, Suhail al-Mazrouei, reportedly told lenders at the meeting that if the bill was made into law that made OPEC members liable to U.S. anti-cartel legislation, the group, which is to all intents and purposes indeed a cartel, would break up and every member would boost production to its maximum.
This would be a repeat of what happened in 2013 and 2014, and ultimately led to another oil price crash like the one that saw Brent crude and WTI sink below US$30 a barrel. As a result, a lot of U.S. shale-focused, debt-dependent producers would go under.
Bankers who provide the debt financing that shale producers need are the natural target for opponents of the NOPEC bill. Banks got burned during the 2014 crisis and are still recovering and regaining their trust in the industry. Purse strings are being loosened as WTI climbs closer to US$60 a barrel, but lenders are certainly aware that this is to a large extent the result of OPEC action: the cartel is cutting production again and the effect on prices is becoming increasingly visible. Related: Pakistan Aims To Become A Natural Gas Hotspot
Indeed, if OPEC starts pumping again at maximum capacity, even without Iran and Venezuela, and with continued outages in Libya, it would pressure prices significantly, especially if Russia joins in. After all, its state oil companies have been itching to start pumping more.
The NOPEC legislation has little chance of becoming a law. It is not the first attempt by U.S. legislators to make OPEC liable for its cartel behavior, and none of the others made it to a law. However, Al-Mazrouei's not too subtle threat highlights the weakest point of U.S. shale: the industry's dependence on borrowed money.
The issue was analyzed in depth by energy expert Philip Verleger in an Oilprice story earlier this month and what the problem boils down to is too much debt. Shale, as Total's chief executive put it in a 2018 interview with Bloomberg, is very capital-intensive. The returns can be appealing if you're drilling and fracking in a sweet spot in the shale patch. They can also be improved by making everything more efficient but ultimately you'd need quite a lot of cash to continue drilling and fracking, despite all the praise about the decline in production costs across shale plays.
The fact that a lot of this cash could come only from banks has been highlighted before: the shale oil and gas industry faced a crisis of investor confidence after the 2014 crash because the only way it knew how to do business was to pump ever-increasing amounts of oil and gas. Shareholder returns were not top of the agenda. This had to change after the crash and most of the smaller players-those that survived-have yet to fully recover. Free cash remains a luxury.
Related: The EIA Cuts U.S. Oil Output Projections
The industry is aware of this vulnerability. The American Petroleum Institute has vocally opposed NOPEC, almost as vocally as OPEC itself, and BP's Bob Dudley said this week at CERAWeek in Houston that NOPEC "could have severe unintended consequences if it unleashed litigation around the world."
"Severe unintended consequences" is not a phrase bankers like to hear. Chances are they will join in the opposition to the legislation to keep shale's wheels turning. The industry, meanwhile, might want to consider ways to reduce its reliance on borrowed money, perhaps by capping production at some point before it becomes forced to do it.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
However, the reported statement by the UAE’s oil minister Suhail al-Mazrouei suggesting that if the bill was made into law, OPEC would break up and every member would boost production to its maximum is not the right way to confront NOPEC. OPEC’s great power is in its cohesion and in taking action collectively.
Moreover, even flooding the global oil market by OPEC will not totally kill the US shale oil industry as a growing share of the industry is being acquired by oil majors like ExxonMobil, Chevron and Shell which have the financial power and stamina to continue operating without help from banks. While OPEC can slow shale oil production, it will never be able to kill it as Saudi Arabia’s discredited strategy of flooding the global oil market in the aftermath of the 2014 oil price crash showed.
Still, OPEC which is not a cartel and has never been one though its history, has enough firepower to retaliate against the US and inflict damage on the US economy where it hurts most, namely higher oil prices and a the petrodollar.
How could OPEC be a cartel when it was founded as a counterweight against the previous “Seven Sisters” (Exxon, Mobil, Chevron, Gulf Oil, Texaco, BP & Shell) cartel which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their own oil. Since then, OPEC has been a force for good with its efforts to stabilize the global oil market and oil prices for the benefit of the global economy.
One would expect a cartel to curb production in order to raise the price of its product as well as to share market among its members. However, OPEC has never once tried to fix a specific price nor has ever been able to achieve this goal. The fundamentals of the global oil market are the ones that have always determined the oil price helped occasionally by geopolitics. OPEC has no control on these fundamentals and therefore has no control on the movements of prices. For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel nor was it able to stop the 2014 oil price crash.
When it comes to limiting oil supply, a true cartel like the “Seven Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC has never been in such a situation. It only accounts for 42.6% of the global oil market with the rest of the oil-producing nations of the world accounting for 57.4%.
Moreover, OPEC has not since its founding been involved in any disputes related to the competition rules of the WTO.
Therefore, OPEC shouldn’t be unduly worried about the NOPEC Act. It has enough muscle to retaliate against the US. If NOPEC ever becomes a law and the United States tried to sue any OPEC member under the NOPEC Act, OPEC members collectively could retaliate by withdrawing every single penny they keep in the United States and stop investing in the US altogether. They could also stop all their oil exports to the US and even cut their oil production steeply to force prices further up. This will harm the US economy most being the world’s largest consumer of oil. They could also discard the petrodollar and adopt the petro-yuan instead thus undermining the US financial system.
In fact, OPEC should pre-empt and sue the United States at the WTO for manipulation of oil prices to achieve unfair benefits for its economy at the expense of the economies of OPEC members.
And although President Trump might be tempted to threaten OPEC with the NOPEC Act, there are powerful interests lining up against the legislation, including the US Chamber of Commerce, the American Petroleum Institute and much of the domestic oil industry. Even US Secretary of Energy Rick Perry argued that without OPEC’s market management, prices could crash, dealing a blow to supply, which could subsequently raise prices again.
Therefore, the threat to sue OPEC or its members is a lot of hot air.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Who cares what Trump would like.