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OPEC Is Losing The Shale Battle

Jesse Snyder, Financial Post

The prospect of rising US shale production threatens to undermine the efforts of OPEC, which now looks at risk of having ceded market share for no substantial price gain.

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The feeling of restrained optimism that imbued a major energy conference last week was short-lived.

Oil and gas executives in Houston for CERAWeek, an annual conference that draws thousands of energy professionals, expressed confidence in their ability to drive down operating costs to counter lower commodity prices.

The mood, though still cautious, was much lighter than a year earlier when prices were hurtling toward US$30 per barrel.

Now, it seemed, oil markets had entered a period of relative stability amid output declines in some regions.

But on Wednesday, as if in cruel jest, oil prices took their steepest single-day dive in months.

Higher-than-expected inventory data in the U.S. helped push down futures contracts for West Texas Intermediate by five per cent, settling at a 2017 low of US$50.28. On Thursday prices dipped below the US$50 threshold, wiping out hopes that an agreement by OPEC and non-OPEC countries to curb supplies had put a “floor” on prices above the US$40 range.

The drop in prices underscored the seemingly endless uncertainty that has hobbled the industry in recent years, causing companies to dramatically reorient their corporate structures.

“You have to put a business model in place that embraces the volatility,” said ConocoPhillips Co. CEO Ryan Lance.

“We know what to do when prices are higher—the real question is what do you do when prices are back in the US$40-or-so level.”

The lowering of break-even costs dominated discussion. In particular, executives focused on the economics of oily shale basins in the U.S., where production has boomed in recent years despite stubbornly low prices.

“Turning to the U.S. oil and gas industry, it’s just as important to note that our [OPEC’s] collective efforts to reduce global market volatility directly benefit the U.S. industry, which is the bellwether of the global industry,” Khalid Al-Falih, Saudi minister of energy, industry and mineral resources, told energy executives at the conference.

With less capital, Lance said his company is keeping its production flat. Like other oil giants Exxon Mobil Corp. and Chevron Corp., Conoco has focused their portfolios around big projects in U.S. shale basins with faster return cycles.

Many, however, are speculating how much U.S. shale would continue to grow—and whether that growth could adversely impact producers. Continental Resources Inc. CEO Harold Hamm said increasing shale output could “kill” oil markets if producers continue to efficiently pump out more and more crude.

That discussion was particularly focused on the Permian Basin in northwest Texas and southeast New Mexico.

Vicky Hollub, the CEO of Occidental Petroleum Corp., speculated that Permian production could in coming years reach as high as four or five million barrels per day, up from around 2.2 million bpd today.

The prospect threatens to undermine the efforts of OPEC, which now looks at risk of having ceded market share for no substantial price gain.

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