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Updated on Friday, December 09, 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
Antler Hill Oil & Gas Ltd.* (AHO.H:TSXV) announced that it has entered into a letter of engagement with Richardson GMP Ltd., in connection with a proposed brokered equity financing. The Offering is expected to be completed pursuant to TSX Venture Exchange Policy.
RGMP will assist Antler Hill on a commercially reasonable efforts basis, to find subscribers for a minimum of 15,625,000 common shares of Antler Hill at a price of $0.064 per common share, for minimum gross proceeds of $1,000,000.
The net proceeds from the offering will be used by the resulting issuer for CAPEX on the resulting issuer's P&NG assets and for general working capital purposes.
Antler Hill also announces that it, together with its wholly owned subsidiary, 2006152 Alberta Ltd., entered into an Amalgamation Agreement dated November 29, 2016, with PetroPhoenix Capital Corp.. The Qualifying Transaction is structured as a three-cornered amalgamation among Antler Hill, PetroPhoenix and Subco, whereby PetroPhoenix and Subco will amalgamate and the shareholders of PetroPhoenix will receive 78,571,878 common shares in the capital of Antler Hill.
Consolidation was approved by the shareholders of Antler Hill at the special meeting of the shareholders of Antler Hill that was held on November 28, 2016.
Antler Hill Oil & Gas is a Calgary based oil and gas company engaged in identification and evaluation of petroleum assets or businesses for acquisition with a view to completing a qualifying transaction. It has a market cap of $0.11 million and approximately 11 million shares outstanding.
ARC Resources Ltd.* (ARX:TSX) announced that it has successfully closed the previously announced sale of its Saskatchewan assets and operations to Spartan Energy Corp., for total cash consideration of $700 million.
The effective date of the transaction is October 1, 2016. The sale includes approximately 7,500 barrels of oil equivalent per day of production as at the third quarter of 2016, and 37,893 Mboe of proved plus probable reserves at year-end 2015.
ARC Resources is a Calgary based conventional oil and gas company with assets and operations in western Canada. Company has a market cap of $8.1 billion and approximately 353 million shares outstanding.
Cenovus Energy Inc. * (CVE:TSX) announced that the company has placed the top tier of climate change performance ranking at the annual CDP Climate Change Report. These results were announced today as part of CDP's Canada Report.
"This CDP ranking is an acknowledgement of our significant efforts to reduce greenhouse gas emissions at our operations and to support policy that encourages actions to address climate change more broadly," said Jon Mitchell, Cenovus Vice-President Environment & Sustainability. "We will continue to transparently communicate the innovative ways we plan our business to be both cost and carbon competitive over the long term."
Cenovus Energy Inc. is a Calgary based Canadian integrated oil company with established natural gas and oil production in Alberta and Saskatchewan. Company has a market cap of $17 billion and approximately 833 million shares outstanding.
Inter Pipeline Ltd. (IPL:TSX) announced the declaration of a cash dividend of $0.135 per share for December 2016. This dividend will be paid on or about January 16, 2017 to shareholders of record on December 22, 2016. This dividend is designated as an "eligible dividend" for Canadian tax purposes.
Since inception, Inter Pipeline has distributed approximately $3.8 billion in cash payments to investors. Inter Pipeline's objective is to provide investors with sustainable monthly cash dividends, with dividend growth upside tied to the development of Inter Pipeline's portfolio of growth projects.
Inter Pipeline is a major petroleum transportation, natural gas liquids processing, and bulk liquid storage business based in Calgary, Alberta, Canada. Inter Pipeline owns and operates energy infrastructure assets in western Canada and Europe. Company has a market cap of $10 billion and approximately 360 million shares outstanding.
Falcon Oil & Gas Ltd. (FO:TSXV) announced on December 9th that Nicolas Mathys is the beneficial owner of 50,551,600 common shares of Falcon, representing 5.49% of Falcon's issued and outstanding shares.
Falcon Oil & Gas Ltd is a Dublin based international oil & gas company engaged in the acquisition, exploration and development of conventional and unconventional oil and gas assets, with the current portfolio focused in Australia, South Africa and Hungary. Company has a market cap of $87.5 million and approximately 921.5 million shares outstanding.
Lightstream Resources Ltd. * (LTS:TSX) announced that the Court of Queen's Bench of Alberta has granted an approval and vesting order for the previously announced purchase and sale of substantially all of the assets and business of Lightstream for the full amount of the claims outstanding in respect of the Company's 9.875% second lien secured notes due 2019.
The Sale Transaction will be effected pursuant to an Asset Purchase Agreement dated November 29, 2016 between Lightstream and Ridgeback Resources Inc. Ridgeback is a new private company established for the purposes of completing a credit bid for the assets and business of Lightstream on behalf of holders of the Secured Notes. Closing of the Sale Transaction is expected to occur on or about December 29, 2016. Ridgeback will own and operate the former assets and business of Lightstream.
Lightstream Resources Ltd. Is a Calgary based oil and gasa company with assets and operations in Canada. Company is delisted from the TSX as it is under court protection.
Questerre Energy Corporation (QEC:TSX) announced that the Company is not aware of any undisclosed material development that would cause today's movement in the Company's share price.
Company notes that the National Assembly in Quebec is scheduled to vote on Bill 106, An Act to implement the 2030 Energy Policy and amend various legislative provisions on December 9, 2016. These amendments include the enactment of the Petroleum Resources Act that will govern the development of petroleum and natural gas resources in Quebec.
Questerre Energy Corporation is a Calgary based oil and gas company with operations in western Canada and the province of Quebec. Company has a market cap of $242 million and approximately 307 million shares outstanding.’
Relentless Resources Ltd.* (RRL:TSX) announced that it plans to complete a non-brokered equity financing of up to 10,000,000 units at a price of $0.05 per Unit for gross proceeds of up to $500,000. The net proceeds of the private placement will be used for general working capital purposes.
Relentless is a Calgary based emerging oil and natural gas company, engaged in the exploration, development, acquisition and production of natural gas and light gravity crude oil reserves in Alberta. Company has a market cap of $3.9 million and approximately 70 million shares outstanding.
Strategic Oil & Gas Ltd. (SOG:TSX) announced on December 9th its recent well results, capital budget for the first half of 2017 and provides a financing update.
Strategic tested a third successful Muskeg well 14-12 at an average rate of 810 boe/d (59% oil) over a 4 day production period. On November 1, 2016 the company announced results from the Muskeg well 2-13 which tested 1,057 boe/d (54% oil) over 7 days. Both new wells have been tied in, equipped with artificial lift and are producing to company owned pipelines and facilities.
During the fourth quarter, the company successfully drilled four Muskeg wells on a pad with an average lateral length of 1,900 meters and 20 completion stages. The first two wells are tied in and producing significantly above the company's type curve. The third Muskeg well 2-27 is equipped, tied in and producing 85 boe/d while still cleaning up. The completion program for the fourth well on the pad has been delayed due to operational issues.
In order to provide funding for the first half 2017 capital program and add financial flexibility, Strategic has undertaken a non-brokered private placement. Company will issue up to 333 million common shares at a price of $0.12 per common share for gross proceeds of up to $40.0 million.
Strategic is a Calgary based oil and gas company with assets and operations in western Canada. Company has a market cap of $60 million and approximately 542 million shares outstanding.
Total Energy Services Inc. (TOT:TSX) announced on December 9th that it has formally commenced an offer to the shareholders of Savanna Energy Services Corp. to acquire all of the issued and outstanding common shares of Savanna in exchange for common shares of Total.
Holders of Savanna Shares who accept the Offer will receive, in exchange for each Savanna Share acquired by Total. Total will mail the Offer and take-over bid circular to Savanna's shareholders. Copies of the Offer Documents may be obtained free of charge at www.sedar.com.
Total is a Calgary based growth oriented energy services corporation involved in contract drilling services (Chinook Drilling), rentals and transportation services and the fabrication, sale, rental and servicing of natural gas compression and process equipment. Company has a market cap of $430 million and approximately 31 million shares outstanding.
Vermilion Energy Inc. (VET:TSX) announced on December 9th a cash dividend of $0.215 CDN per share payable on January 16, 2017 to all shareholders of record on December 22, 2016. The ex-dividend date for this payment is December 20, 2016. This dividend is an eligible dividend for the purposes of the Income Tax Act (Canada).
Vermilion is a Calgary based international energy producer that seeks to create value through the acquisition, exploration, development and optimization of producing properties in North America, Europe and Australia. Company has a market cap of $6.7 billion and approximately 118 million shares outstanding.
* Indicates a late report from the previous day.
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Did you know?
Drilling mud not only cools the drill bit but it prevents the collapse of unstable strata into the hole. It also prevents water from water-bearing strata to enter the hole. Even though it is commonly referred to as mud, it is actually an expensive mixture of chemicals, bentonite, barite and water. The cost of the mud can vary from $50,000 to $275,000 for one oil drilling operation.
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December 9, 2016