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Updated on Tuesday, August 30, 2016

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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


Athabasca Oil Corporation (ATH:TSX) announced on August 30th that it has received payment of $139 million from Phoenix Energy Holdings Limited (now Brion Energy Corporation, "Brion"), being the principal and interest payable under the final promissory note issued to the Company by Brion. The promissory note relates to Athabasca's prior sale of its 40% interest in the Dover oil sands project to Brion, which closed on August 29, 2014.


Throughout 2016, Athabasca has significantly strengthened its balance sheet through its Light Oil joint venture with Murphy Oil Company and the Thermal Oil Contingent Bitumen Royalty granted to Burgess Energy Holdings L.L.C. Total consideration from these transactions was $615 million, including cash proceeds of $396 million. Company has also reduced its outstanding corporate debt by approximately $250 million by repaying its US$221 million Term Loan and unwinding its US dollar foreign exchange hedge.


Company currently has approximately $608 million in available cash and cash equivalents, an $83 million net cash position and maintains an undrawn $45 million revolving credit facility. Liquidity is further supported by the remaining $214 million Duvernay capital carry balance whereby Murphy will fund 75% of the company's 30% working interest on the first $1 billion of investment ($75 million net exposure) over the next four to five years in this play.


Athabasca Oil Corporation is a Calgary based energy company with a focused strategy on the development of thermal and light oil assets in Alberta's Western Canadian Sedimentary Basin. Company has a market cap of $516 million and approximately 406 million shares outstanding.


Canadian Spirit Resources Inc. (SPI:TSX) announced on August 30th  its interim financial results and Management Discussion and Analysis for the three and six month periods ended June 30, 2016. Company had a negative cash flow $(163,676) and a net loss of $(682,293) in the second quarter of 2016.     


Despite difficult equity markets, the Corporation has raised a total of $4.1 million of equity capital in the period from December 2015 to June 2016. CSRI ended the second quarter 2016 with a strong working capital position and no debt.


Management and the Board of Directors of CSRI are continuing to focus on and pursue strategic alternatives for the Corporation. These include but are not limited to considering alternative financing methods and meeting with potential acquirers or merger partners.


Canadian Spirit Resources is a Calgary based energy resources company. Company identifies and develops opportunities in the unconventional natural gas sector of the energy industry. Company has a market cap of $18 million and approximately 153 million shares outstanding.


CGX Energy Inc.* (OYL:TSXV) announced its unaudited consolidated financial results for the quarter ended June 30, 2016, together with its Management Discussion & Analysis. Full report is available on SEDAR and company’s website. 


CGX Energy is a Toronto based oil and gas exploration company focused on the exploration of oil in the Guyana-Suriname Basin. Company has a market cap of $19.9 million and approximately 110 million shares outstanding.


Cordy Oilfield Services Inc. (CKK:TSX) announced on August 30th its second quarter 2016 results. Company reported a revenue of $2.0 million and a loss of $(0.9) million in the second quarter of 2016.


For the six month period ended June 30, 2016, Cordy's consolidated revenues decreased by $8.3 million, from the comparative period in 2015. This significant drop is partially attributable to Cordy's initiatives in response to the economic conditions in western Canada resulting from suffering commodity prices.


For the second half of 2016, company anticipates a competitive environment, and continued pricing pressures; this will limit topline growth in Cordy's business units. Company will continue to rely on the Environmental Services segment's diversity in the municipal and industrial services sector, until the Oil and Gas industry shows some signs of recovery.


Cordy Oilfield Services is a Calgary based company engaged in energy services & construction throughout Canada. Its operating segments are: Heavy Construction and Environmental Services.. Cordy has a market cap of $1.8 million and approximately 89 million shares outstanding.


Marksmen Energy Inc.* (MAH:TSXV) announced its financial results for the three and six months ended June 30, 2016. The interim financial statements and Management's Discussion & Analysis were filed August 29, 2015 on SEDAR.


Marksmen Energy is a Calgary based oil and gas company with assets and operations in western Canada and Ohio. Company has a market cap of $9.3 million and approximately 78 million shares outstanding.


Marquee Energy Ltd.* (MQL:TSXV) announced its second quarter financial and operational results for the three and six months ended June 30, 2016.Company's financial statements and Management's Discussion and Analysis for the three and six months ended June 30, 2016 are available on SEDAR. Company reported a revenue of $8.44 million and net income of $1.04 million in the second quarter of 2016.


Over the past 24 months, Marquee has drilled and placed on production 18 horizontal wells in the Michichi area of Alberta. Based on the expected well production profiles and cost structure of its recent wells, Marquee estimates a 1.4 year payout for a typical Michichi horizontal well based on current strip pricing. Michichi wells finding and development costs rank in the top quartile relative to competing resource plays.


Marquee Energy Ltd. is a Calgary based, junior energy company focused on high rate of return light oil development and production. Company has a market cap of $26.5 million and approximately 123 million shares outstanding.


Toro Oil & Gas Ltd. (TOO:TSXV) announced on August 30th its financial and operating results for the three and six month period ended June 30, 2016. Full reort is available on SEDAR. Company reported a revenue of $2.4 million and a loss of $(8.9) million in the second quarter of 2016. 


During the quarter, Toro decided to shut-in approximately 70 boe/d of low economic production. Averaged 766 boe/d in production during Q2 2016, of which 62% represents oil and liquids compared to 574 boe/d of production in Q2 2015 and 873 boe/d in Q1 2016. 


During the second quarter of 2016, Toro concentrated on improving the liquidity position of the company through operational and corporate efficiencies and enhancement of the overall cash reserves of the company. 


Toro is a Calgary based oil and gas energy company with operations in the Alberta-Saskatchewan Viking light oil fairway. Company has a market cap of $23 million and approximately 114 million shares outstanding.


Yoho Resources Inc.* (YO:TSXV) announced that it has filed its financial statements for the nine months ended June 30, 2016 and the related management's discussion and analysis on SEDAR.


Company also reported that its annual and special meeting Yoho will be held in the conference room located on the +15 level, 521 - 3rd Avenue S.W., Calgary, Alberta, on September 6, 2016 at 9:00 a.m. (Calgary time) for Shareholders to consider matters with respect to Yoho's annual business.


Yoho Resources Inc. is a Calgary based company with operations in western Canada. Company has a market cap of $29 million and approximately 61 million shares outstanding.


 * Indicates a late report from the previous day.


  More summaries on Oilpatch Review’ page...



Today’s Inspirations

“Those who won’t mind their business soon have no business to mind.”


Quotes are directly taken from a book entitled, ‘Phrase A Day Inspirations’, written by Bernie Shimko.



  Did you know?


The town of Virden is referred to as the oil capitol of Manitoba. In 1951, the town had 16 legal subdivisions that were drilled and successfully produced oil. Pump jacks and oil rigs operated in the town limits amongst the town parks and school playgrounds. These wells produced a quarter of a million barrels of oil in a time span of 14 months in the early fifties.  The town population doubled in two years. Virden sits on one of Manitoba’s largest oil fields named after the town.


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  August 30, 2016

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