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Updated on Friday, September 23, 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
Encana Corporation (ECA:TSX) announced on September 23rd the completion of its public offering of 107,000,000 common shares of Encana at a price of US$9.35 per share, for gross proceeds to Encana of approximately US$1 billion.
Encana intends to use approximately half of the net proceeds received from the sale of the Shares to fund a portion of its 2017 capital program. The remaining proceeds will be used to enhance Encana's balance sheet flexibility by repaying indebtedness under its credit facilities.
Encana is a leading North American energy producer based in Calgary. Company has a market cap of $10.6 billion and approximately 850 million shares outstanding.
Front Range Resources Ltd.* (FRK:TSXV) announced that it has closed its previously announced public offering of $20 million of common shares of the cCorporation at a price of $0.70 per common share and common shares issued as "flow-through shares" within the meaning of the Income Tax Act (Canada) ) at a price of $0.81 per flow-through share.
In conjunction with the closing of the offering, the company closed a non-brokered private placement of $2 million of common shares at a price of $0.70 per common share and flow-through shares at a price of $0.81 per flow-through share.
The gross proceeds from the sale of flow-through shares issued pursuant to the offering and the concurrent private placement will be used by the company, pursuant to the provisions of the Income Tax Act (Canada), to incur eligible Canadian exploration expenses.
Front Range also reports that it has increased its 2016 capital budget to approximately $10 million. The 2016 capital expenditures will be directed towards the drilling and completion of the 3-23 Well.
A drilling licence has been obtained for the 3-23 Well and lease construction is underway. The 3-23 Well, with a projected total measured depth of approximately 6,000 metres at a true vertical depth of approximately 3,700 metres, is expected to spud mid October 2016, subject to rig availability and weather conditions. The 3-21 Well is expected to be drilled in the first quarter of 2017.
Front Range Resources is a Calgary based oil and gas company. Front Range has a market cap of $22 million and approximately 25 million shares outstanding.
Paramount Resources Ltd. (POU:TSX) announced on that it has monetized part of its holdings of 33.5 million common shares of Seven Generations Energy Ltd.which were acquired in August as partial consideration for the sale of the Company's Musreau/Kakwa assets. Paramount has monetized an aggregate of 24.7 million 7G shares through sale transactions for gross proceeds of approximately $735 million. Company has received approximately $310 million in cash and will realize the balance of the proceeds in late December 2016.
The proceeds will initially be held as cash and used to fund the continued development of the Company's oil and gas properties. Paramount's financial resources and access to capital markets also provide the Company with the ability to participate in strategic acquisitions and capitalize on new opportunities.
Paramount recently completed the first extended reach lateral well in a 25 well Montney drilling program at Karr-Gold Creek. The slickwater completion placed 5,000 tonnes of proppant over 50 stages and the well commenced production on September 5th.
The remaining wells in the program will be executed over the next 9 to 12 months. Production volumes from these wells will flow to the company's existing 40 MMcf/d 6-18 compression and dehydration plant at Karr-Gold Creek and be processed at a downstream third party facility. The 6-18 plant is currently being expanded from 40 MMcf/d to 80 MMcf/d, with the incremental capacity scheduled to come on stream in the second quarter of 2017.
Paramount is a Calgary based corporation that explores for and develops conventional petroleum and natural gas prospects in Alberta and British Columbia. Company has a market cap of $1.6 billion and approximately 106 million shares outstanding.
Pattern Energy Group Inc. * (PEG:TSX) announced its commitment to acquire a 90 MW interest in the operating 180 MW Armow Wind power facility in Ontario, Canada from Pattern Energy Group LP. Pattern Energy will acquire the interest in Armow Wind for a total cash funding commitment of approximately US$132 million. The acquisition will be funded with available liquidity and is expected to close within 45 days.
Mike Garland, President and CEO of Pattern Energy commented, "The commitment to acquire Armow Wind, on the heels of our successful equity offering last month, demonstrates our ability to use our available capital for accretive projects. We anticipate closing another acquisition from our identified ROFO list in the coming months. Looking ahead, our identified ROFO list includes 11 projects totaling 942 MW, providing clear visibility to 36% growth on our existing portfolio."
Pattern Energy Group Inc. is an independent power company. Pattern has a market cap of $2.8 billion and approximately 88 million shares outstanding.
PetroMaroc Corporation plc (PMA:TSX) announced that PetroMaroc and Sound Energy continue to work together collaboratively to ensure the smooth transition of the Sidi Moktar Licences.
Since March 2016, there have been a number of developments that have impacted the terms of the Sale and Purchase Agreement, including Sound Energy's recent share price increase. In order to ensure that the company's and Sound Energy's respective interests are protected in a reasonable and fair manner, the parties have entered into a amending agreement.
PetroMaroc will receive all proceeds from sale(s) up to 50 pence per Consideration Share and sale proceeds in excess of 50 pence per Consideration Share will be shared equally between PetroMaroc and Sound Energy. In addition, the long stop date for completion of the Acquisition has been extended to December 31, 2016, or such later date as is necessary to satisfy the remaining conditions precedent.
PetroMaroc is a Toronto based independent oil and gas company focused on its significant land position in Morocco. Company has a market cap of $11.6 million and approximately 105 million shares outstanding.
Tidewater Midstream and Infrastructure Ltd. (TWM:TSXV) announced that its Board has declared a dividend for the third quarter of 2016 of $0.01 per common share payable on or about October 31, 2016 to shareholders of record on September 30, 2016. The ex-dividend date is September 28, 2016. This dividend is an eligible dividend for the purpose of the Income Tax Act (Canada).
Tidewater is a Calgary based company engaged in the acquisition of oil and gas infrastructure, including gas plants, pipelines, NGLs by rail, export terminals and storage facilities. Company has a market cap of $427 million and approximately 285 million shares outstanding.
* Indicates a late report from the previous day.
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Did you know?
In 1929, Dr. Karl Clark headed the Alberta Research Council and set up hot water extraction plant on Clearwater River to extract oil from bituminous sand. Clark discovered numerous ways to improve oilsands extraction. Later that same year, Dr. Clark received a patent for his hot water extraction process for separating oil from bitumen. Unfortunately, the Great Depression halted the project.
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September 23, 2016