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Updated on Wednesday, October 26, 2016
The perils and consequences of OPEC’S Strategy to regain its lost market share
Some have suggested that crude oil prices have bottomed out and oil prices are about to recover. This rational is based on supposition that the Organization of the Petroleum Exporting Countries have achieved its objective and is ready to reduce its output but....
Looking back to OPEC’s last meeting in December 2015, the cartel intensified its strategy to put the squeeze on non-OPEC oil producers. The cartel removed member export limits in its December meeting. Cartel members are now free to pump oil into the world markets at their discretion.
There is a reason why OPEC will continue to pursue its strategy; it’s a do, or die situation. It is no longer in control of global oil markets. Once a very significant oil exporter, OPEC has lost 40% of its markets that it once held. The cartel is desperate to increase its market share, or face the possibility of crumbling into oblivion.
The cartel’s biggest fear is the success of the North American shale oil. Technological advances in horizontal drilling and hydraulic fracturing spurred American oil companies to develop huge tight shale reserves in the Bakken, Eagle Ford, Niobrara and Permian oil plays. North Dakota became a major oil producer in two short years; the success in Texas shale plays is just short of astounding.
United States, which was not long ago the largest crude oil importer, is now in a striking distance of becoming an oil exporter. A forty year old law which prohibits oil exports is the only obstacle the U.S. oil industry faces. American oil companies have lobbied Obama administration to rescind the antiquated law and the initial political process has begun. Success is obviously imminent.
OPEC officials are alarmed by the major developments in the American and Canadian oil fields and the political movements in Congress. Spearheaded by the Saudis, the cartel members gathered in Vienna on November 28, 2014 to stop the momentum of North American oil development before it was too late.
At the end of the Vienna meeting, OPEC’s General Abdulla El Badri announced to reporters, "We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the markets behave. We are not sending any signals to anybody; we just try to have a fair price.”
While Al Badri spoke fuzzy rhetoric to satisfy the western reporters, OPEC had quietly declared war on U.S. shale development. The cartel was determined to proceed and flood the oil markets, depress oil prices and cripple the shale oil industry. Spearheaded by the Saudis, OPEC opened their taps and began to flood the global markets.
Saturating the global market place, the markets reacted and began their downward trek. The cartel denied its actions and placed all of the blame on non-OPEC overproduction and diminishing global crude oil demand.
OPEC’s general secretary Abdulla El Badri stated that it was not OPEC’s responsibility in controlling global oil output.
EL Badri later offered a solution to the crude oil oversupplies. He suggested that the cartel would be willing to discuss the matters if all global producers agreed to a cut in their oil production. Non-OPEC producers ignored his proposal and the cartel only turned the taps further to increase the world oil supplies.
Before the media, OPEC officials would reassure reporters that oil demand and supply was only a short term away from being balanced. Months went by and the oil glut continued to increase without any sight of a supply and demand balance. OPEC rhetoric continued to flow and it was clearly noted by the cartel that it was not at fault.
The glut was now being influenced by other factors. A stagnant economy in China lessened the Pacific giant’s demand for energy and set the stage for another slide in oil prices.
Analysts who once predicted that China would surpass United States as the largest oil consumer began to focus more at the global oil glut and China’s struggling economy.
Unforeseen electronic difficulties and investor mistrust in China’s fledging stock markets created further uncertainty in that nation. Investors dropped Chinese stocks in desperation.
Peking resorted to desperate actions. It closed stock markets to cool off investors. The Chinese government devalued the yen at an unprecedented intervals but the desired outcome had fallen far short of expectations. China’s industrial engine stalled and its economy began to struggle.
Events in China soon began to influence the global oil markets. China’s economy went into a tailspin and energy demand dropped. The global oil glut further increased.
Unforeseen political events began to unfold and complicate commodity markets: Russia invaded Eastern Ukraine, western nations intervened in Syria’s internal problems to stop advancing extremism, Paris climate change talks focused on controlling carbon emissions and finally, U.S. reached an agreement with Iran to allow nuclear inspections.
Western sanctions imposed on Iran were lifted. That nation once again would return to export its crude oil for desperate cash that nation needed. Iranian government soon pledged to regain all of its lost markets.
The conclusion of Paris climate talks initiated further uncertainty. Participating nations agreed to cut carbon emissions and Canadian oilsands were once again under attack. Stricter operating guidelines would have to be implemented.
Western governments began to look at carbon tax to reduce fossil fuel consumption. The Obama administration is planning on imposing a $10 per barrel tax on crude oil.
Depressed oil demand and poor petroleum energy outlook is having a profound effect on the oil and gas industry in Canada and the U.S. Low oil prices have already driven many stalwart oil companies into curtailing future expenditures and activities. Smaller oil companies are being forced into bankruptcy, restructuring or looking at unplanned mergers.
Oil producers in North America are seriously hurting. Drilling activity has plummeted from records of several years ago. Producing wells are being shut down and future activities are being put on hold.
We as consumers are enjoying lower fuel costs now, but when the oil glut disappears, there are strong possibilities of a very serious global oil shortage and escalating energy prices.
Aggressive and cash strapped oil companies have gone bankrupt. Oil exploration and development has all but stalled.
Commercial crude oil stockpiles in the U.S. are at an eighty year high and domestic demand has stabilized. These oil inventories have now surpassed a half billion barrels, and are at an eighty year high. Depletion of these inventories may take well into next year to gradually be depleted.
Iran is now entering the global oil markets. That Mideast oil producer has been shutdown from most of the world oil markets by western sanctions. Iran intends to claw back its share of the oil markets. Despite that nation being an OPEC member, it intends to forge its own destiny. There are signs that it will not take orders from Saudi Arabia or OPEC.
Iran may play a key role in what happens in the oil market place in months to come. Iran has built up huge stockpiles of crude oil in storage, possibly as high as 500,000 barrels. It has huge undeveloped oil reserves and is determined to develop them quickly.
It is doubtful that the Saudis and OPEC will be able to control Iran. There are signs that serious strains are building. Iran could become cartel’s delinquent and pump oil at its discretion.
Russia is another oil producer that should not be overlooked or underestimated. That nation has been exporting oil at record volumes and at times exceeding those of Saudi Arabia. While Russia is not an OPEC member, it has close connections with the cartel and often sits as a welcomed observer at OPEC meetings in Vienna.
Russia’s economy is not a diverse economy and it relies heavily on oil exports to foot Kremlin’s revenues. While that nation’s desire is for higher oil prices and more revenues, it has little choice but to pump as much oil as possible to keep that nation’s economy afloat.
The biggest question is how long OPEC and non-OPEC oil producers maintain their output at prices far below production cost. Saudi Arabia has low production costs, some estimate at $8 per barrel.
Elsewhere, oil producers are not that fortunate as the Saudis. U.S. shale production costs are dropping but are still in the range of $60 to $75 per barrel. Oil from the Canadian oilsands cost $35 to $45 to bring to the surface. Production costs from Venezuelan tar sands are even higher.
Oil production in Canada and in U.S. can be stalled but it will not crumble. Larger oil companies have already prepared to endure for the long run. North American oil industry will continue despite the loss of many smaller and less profitable oil companies.
U.S. has learned from the past that dependency on OPEC oil is far too risky. Domestic shale oil production is bound to flourish as lower cost technology evolves, global supplies decrease and oil prices rise.
Continued low oil prices are not sustainable to the global oil industry. The erosion of many oil producers may result in a serious global oil shortage in the near future. It is these oil producers who have taken larger risks and made significant contributions that pose the most significant loss.
OPEC intends to claw back its market share at the expense of non-cartel producers. It is difficult to envision that these actions are not seriously hurting members such as Algeria, Angola, Nigeria, and Venezuela. Saudi Arabia and some of the other Arab producers may weather the storm but the poorer members are getting desperate.
The oil cartel could be facing a far more serious problem than it envisioned. There is a possibility of dissension amongst its poorer members. The punishing strategy which OPEC has employed on non-OPEC producers could have far more dire effects on the cartel than it bargained for.
By Jim Klemchuk
Interesting to note:
Global oil production in 2015 was 95.7 million barrels. EIA estimated that global oil consumption in 2015 was 93.8 million barrels per day. Estimated crude oil surplus for 2015 reached 1.5 million barrels per day, for years’ total of 547.5 million barrels .
While global oil production last year was at an all time high, Energy Information Administration reported that OPEC’s oil output averaged at 39.1 million barrels per day and non-OPEC nations’ production averaged at 56.8 million barrels per day in 2015. Estimated OPEC and non-OPEC oil production for the first quarter of 2016 has averaged 95.9 million barrels per day.
Energy Information Administration forecasts that global oil consumption will continue to rise. EIA estimates that global oil demand will average 95.19 million barrels per day in 2016 and grow to 96.6 million barrels per day in 2017.
‘Shouts & Toots’ from the Oil Patch
Alset Energy Corp.* (ION:TSX) announced that it will keep its financing open until October 31, 2016 to raise up to $1 million on a best efforts basis.
Alset Energy is a Thunder Bay, Ontario based exploration company focused on exploring and acquiring mineral properties containing the metals needed by today's high-tech industries. Company is actively exploring in Mexico and Canada. Company has a market cap of $4.9 million and approximately 39 million shares outstanding.
ATCO Ltd. (ACO.X, ACO.Y:TSX) announced on October 26th its third quarter results. Company reported its third quarter adjusted earnings for 2016 of $64 million compared to $66 million in 2015. Earnings attributable to Class I and Class II Shares was 70 million.
ATCO's consolidated financial statements and management's discussion and analysis for the third quarter ended September 30, 2016 will be available on the ATCO website and SEDAR.
On October 13, 2016, ATCO declared a fourth quarter dividend for 2016 of 28.50 cents per Class I Non-Voting and Class II Voting Share, a 15 per cent increase over the quarterly dividends declared in the same period of 2015. ATCO's annual dividend per share has increased for 23 consecutive years.
ATCO is a Calgary based company which gathers, stores, transmits and distributes natural gas. Company is also engaged in manufacturing, logistics and noise abatement. ATCO has a market cap of $4.8 billion and approximately 101 million shares outstanding.
Ballard Power Systems Inc. * (BLD:TSX) announced its consolidated financial results for the third quarter ended September 30, 2016. Company reported revenue was $20.6 million in the quarter, an increase of 29% resulting primarily from growth in Heavy Duty Motive product shipments and the addition of Portable Power. Net income was ($4.2) million in the quarter, an increase in loss of 1% from Q3 2015. Adjusted net loss per share2 was ($0.02), a 10% improvement.
Randy MacEwen, Ballard's President and CEO commented, "Ballard achieved important progress on a number of strategic fronts during the quarter, as well. On our China strategy, we announced and closed a manufacturing license and joint venture transaction valued at a minimum of $170 million over 5-years and entered into a strategic alliance framework agreement and MOU with Broad-Ocean. Audi AG accelerated certain development activities under our long-term Technology Solutions program. In addition, we signed an agreement with Toyota Tsusho for the distribution of Ballard products in Japan."
Ballard Power Systems Inc is a Vancouver based company engaged in the design, development, manufacture, sale and service of fuel cell products for a variety of applications, focusing on commercial stage and development stage markets. Company has a market cap of $527 million and approximately 175 million shares outstanding.
CNOOC Limited (CNU:TSX) announced on October 26th its key operational statistics for the third quarter of 2016. Company reported it achieved total net production of 117.7 million barrels of oil equivalent, representing a decrease of 7.7% year-on-year, mainly due to the decline of production volume in oil and gas fields and weak demand in the domestic downstream gas market.
During the period, the Company made one new discovery and drilled ten successful appraisal wells offshore China. During the third quarter, Weizhou 6-9/6-10 comprehensive adjustment project and Enping 18-1 oilfield commenced production. The four projects that were planned to come on stream in 2016 have all commenced production.
For the third quarter of the year, the unaudited oil and gas sales revenue of the company reached approximately RMB30.75 billion, representing a decrease of 15.2% YoY. Company's average realized oil price decreased by 13.5% YoY to US$42.26 per barrel, while the average realized gas price was US$5.22 per thousand cubic feet, down 18.6% YoY.
Mr. Yang Hua, Chairman and CEO of the company, said, "In view of the market challenges during the third quarter of the year, the company endeavored to lower costs and enhance efficiency, as well as made proactive efforts in all fields. In addition, the company is confident in meeting the full year target of its key operating indicators."
CNOOC Limited is a Hong Kong based Chinese oil and gas company. CNOOC has a market cap of $1.9 billion and approximately 10.5 million shares outstanding.
Changfeng Energy Inc. (CFY:TSX) announced on October 26th that Sanya Changfeng Offshore Natural Gas Distribution Co., Ltd., a wholly-owned subsidiary of Changfeng, sold the Company's indirect interest in Caofeidian Evergrowth Energy Co., Ltd. The purchase price for the Joint Venture was satisfied through a cash payment of approximately RMB $13.0 million (CAD$2.6 million).
Changfeng expects to realize an investment loss (including Changfeng's share of the loss of the Joint Venture) of approximately CAD$1.3 million (before giving effect to any adjustments resulting from foreign currency translation) on the Joint Venture in 2016. Changfeng had also previously loaned RMB $2 million to a subsidiary of the Joint Venture and expects to recognize an impairment loss of RMB $2 million (CAD$402,000) in its financial statements with respect to this loan.
Changfeng Energy Inc. is a natural gas service provider with operations located throughout the People's Republic of China. Company has a market cap of $18.4 million and approximately 61 million shares outstanding.
Point Loma Resources Ltd. (PLX:TSXV) announced on October 26th that it has closed the previously announced private placement with Mackie Research Capital Corporation. Point Loma has closed the Offering in the amount of $1.7 million in common shares of the Corporation issued on a "flow-through" basis under the Income Tax Act (Canada) with respect to Canadian Exploration Expense "CEE" at a price of $0.35 per FT common share.
Point Loma has increased its production since inception and is now averaging approximately 500 barrels of oil equivalent per day (40% oil & natural gas liquids and 60% natural gas), a 300 percent increase since completing the asset and corporate transactions on June 28, 2016.
Point Loma is a Calgary based oil and gas development and exploration company focused on horizontally exploiting conventional oil and gas reservoirs in west central Alberta. Company has a market cap of $7.6 million and approximately 21.6 million shares outstanding.
* Indicates a late report from the previous day.
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Did you know?
The U.S. military consumes more oil than Sweden, Portugal, or the Philippines and twice as much oil as the entire nation of Ireland. It is estimated that the American military uses 340,000 to 350,000 barrels of oil per day. In 2008, the Pentagon spent over $15 billion on its fuel bill and in 2009, it requested the government for an additional $3 billion.
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October 26, 2016