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Updated on Friday, December 16, 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
Bonavista Energy Corporation * (BNP:TSX) announced that a quarterly dividend of $0.01 per common share will be paid in cash on January 16, 2017 to common shareholders of record on December 31, 2016. The ex-dividend date is December 28, 2016.
Bonavista is a Calgary based oil and gas company with assets and operations in western Canada. Company has a market cap of $1.2 billion and approximately 249 million shares outstanding.
Canadian Energy Services & Technology Corp. (CEU:TSX) announced that it will pay a cash dividend of $0.0025 per common share on January 13, 2017, to the shareholders of record at the close of business on December 30, 2016.
Canadian Energy Services & Technology is a Calgary based provider of technically advanced consumable chemical solutions throughout the lifecycle of the oilfield. Company has a market cap of $1.9 billion and approximately 262 million shares outstanding.
Crescent Point Energy Corp. * (CPG:TSX) announced that the dividend to be paid on January 16, 2017, in respect of December 2016 production, for shareholders of record on December 31, 2016, will be CDN$0.03 per share. These dividends are designated as "eligible dividends" for Canadian income tax purposes.
Crescent Point is a leading North American light and medium oil producer headquartered in Calgary. Company has a market cap of $9.9 billion and approximately 541 million shares outstanding.
DIVERGENT Energy Services Corp. * (DVG:TSX) announced that it has elected to satisfy the interest obligation in the amount of $144,931.51 due on December 31, 2016. This will be accomplished by the delivery of 762,797 common shares of the corporation at a deemed price of $0.19 per common share to the holders of debentures.
DIVERGENT Energy Services is a Calgary based energy services company. It has a market cap of $ 17.7 million and approximately 98 million shares outstanding.
Delphi Energy Corp. (DEE:TSX) announced the closing of its strategic agreement with our existing working interest industry partner to accelerate the development of Delphi's world-class, liquids rich Deep Basin natural gas play at Bigstone in Northwest Alberta.
Delphi has received approximately $31.3 million in cash (including closing adjustments) for the Partner's equalization of certain working interests relating to various transaction assets. In addition, our Partner has paid approximately $10.9 million to Delphi for the Partner's carried obligation of the joint drilling program that is underway. Total gross proceeds will be used to reduce the Company's overall bank debt.
Delphi Energy Corp. is a Calgary based producer of liquids-rich natural gas. Company has assets and operations northwest Alberta. Company has a market cap of $236 million and approximately 156 million shares outstanding.
DualEx Energy International Inc. * (DXE:TSXV) announced that at its Annual General and Special Meeting held today, shareholders voted in favo r of changing the name of the company to Return Energy Inc. It is also consolidating the common shares of the company on the basis of one new return common share for each ten DualEx common shares held immediately prior to the consolidation.
The board of directors of the company believes that the consolidation should enhance the marketability of the common shares as an investment and should facilitate additional financings to fund operations in the future.
DualEx Energy International is a Calgary based oil and gas company with operations in western Canada. Company has a market cap of $3.8 million and approximately 250 million shares outstanding.
Eagle Energy Inc. * (EGL:TSX) announced its December 2016 dividend. The cash dividend to be paid on January 23, 2017, in respect of the period from December 1, 2016 to December 31, 2016, for shareholders of record on December 30, 2016 will be $0.005 per common share of Eagle. The ex-dividend date is December 28, 2016. Eagle's dividend has been designated as an "eligible dividend" for Canadian income tax purposes.
Eagle is an oil and gas energy corporation based in Calgary and with development and exploitation potential in Alberta, Texas and Oklahoma. Company has a market cap of $31 million and approximately 43 million shares outstanding.
Enbridge Inc.* (ENB:TSX) announced that the shareholders overwhelmingly approved the required resolutions in connection with the merger transaction between Enbridge and Spectra Energy Corp at the Special Meeting of shareholders. At a separate meeting today in Houston, Texas Spectra Energy Corp shareholders also approved the previously announced merger.
Al Monaco, President and Chief Executive Officer, Enbridge Inc. commented, "We are pleased with the results of today's vote, and we thank Enbridge and Spectra shareholders for their overwhelming support and confidence in our future. This marks an important milestone toward creating North America's premier energy infrastructure company, with the size, scale and scope that will launch Enbridge into a unique global investment category.”
Both companies continue to work to meet closing conditions and the required regulatory applications are progressing. Clearance has been received under the Canada Transportation Act (Canada) to complete the Transaction and the Committee on Foreign Investment in the United States. Pending the satisfaction of the remaining conditions and approvals, the Transaction is expected to close in the first quarter of 2017.
Enbridge is a Calgary based energy transporter which operates the world's longest crude oil and liquids transportation system across Canada and the U.S. Company has a market cap of $53 billion and approximately 939 million shares outstanding.
Granite Oil Corp. * (GXO:TSX) announced that a dividend of $0.035 per common share will be paid in cash on January 16, 2017 to shareholders of record on December 31, 2016 with an ex-dividend date of December 28, 2016. This dividend has been designated as an "eligible dividend" for Canadian income tax purposes.
Granite Oil Corp. is a Calgary based oil and gas company which owns and operates discovered Alberta Bakken oil pool in southern Alberta. It has a market cap of $193 million and approximately 34 million shares outstanding.
Northern Blizzard Resources Inc. * (NBZ:TSX) announced a cash dividend of $0.02 per common share for December 2016. The dividend will be payable on January 16, 2017 to shareholders of record on December 30, 2016. This dividend has been designated as an eligible dividend under the Income Tax Act (Canada).
Northern Blizzard is a Canadian crude oil production and development company focused on maximizing oil recovery from its large-scale low viscosity heavy oil resource base in Saskatchewan. Company has a market cap of $469 million and approximately 123 million shares outstanding.
Peyto Exploration & Development Corp.* (PEY:TSX) announced that the monthly dividend with respect to December 2016 of $0.11 per common share is to be paid on January 13, 2017, for shareholders of record on December 31, 2016. The ex-dividend date is December 28, 2016. Dividends paid by Peyto to Canadian residents are eligible dividends for Canadian income tax purposes.
Peyto Exploration & Development is a Calgary based oil and gas company engaged in the exploration, development and production of oil and natural gas in Alberta's Deep Basin. Company has a market cap of $5.7 billion and approximately 165 billion shares outstanding.
TORC Oil & Gas Ltd. * (TOG:TSX) announced that a dividend of $0.02 per common share will be paid on January 16, 2017 to common shareholders of record on December 31, 2016. The ex-dividend date is December 28, 2016, with payment to be made in cash or common shares at the election of the shareholder. This dividend has been designated as an "eligible dividend" for Canadian income tax purposes.
TORC Oil & Gas Ltd. is a Calgary based company active in the acquisition, exploration, development and production of crude oil and natural gas in Western Canada. Company has a market cap of $1.5 billion and approximately 183 million shares outstanding.
WesternZagros Resources Ltd. * (WZR:TSXV) announced that Jonathan Oestreich has been appointed to Western Zagros's Board of Directors as an independent director effective immediately. Mr. Oestreich has also been appointed to the Board's Audit Committee and the Health, Safety, Environment, and Security Committee. In conjunction with this appointment, 500,000 options have been granted to Mr. Oestreich on December 14, 2016 with an exercise price of $0.10.
David Boone, Chairperson of the Board, said "We conducted a search for someone who would further strengthen our board's breadth of financial talent and background, and we are delighted to have identified such an exceptional individual. I'm confident that Jon is going to make an important and positive impact on our company. After the June 2017 Annual General Meeting, Jon will succeed Randall Oliphant as Chair of the Audit Committee as Randall will be stepping down at that time."
WesternZagros is an international natural resources company focused on acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros has a market cap of $43.5 million and approximately 512 million shares outstanding.
Whitecap Resources Inc.* (WCP:TSX) announced that a cash dividend of Cdn. $0.0233 per common share in respect of December operations will be paid on January 16, 2017 to shareholders of record on December 31, 2016. This dividend is an eligible dividend for the purposes of the Income Tax Act (Canada).
Whitecap Resources Inc. is Calgary based oil company that pays a monthly cash dividend to its shareholders. Company has a market cap of $4.4 billion and approximately 368 million shares outstanding.
* Indicates a late report from the previous day.
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Did you know?
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December 16, 2016