Why OPEC can’t fight U.S shale producers

Despite U. S shale producers offsetting efforts by the Organisation of Petroleum Exporting Countries, OPEC, to tame production and boost price by pumping excess barrels of crude oil into the market, many wonder why OPEC cannot retaliate by also unleashing its stocks.

The reason is not far-fetched. Most OPEC members are being hit by crash in oil price, and desperately need to shoot up prices. The era of the oil boom when members of the cartel had excess money is over, at least for now.

However, in the long term, too much U.S. output could spur OPEC to open the spigots again – so the U. S needs not think it is untouchable.
For example, a U. S company, Lilis Energy Inc LLEX.O aims to expand production sevenfold this year in America’s most active oilfield.

The whir of activity is all the more impressive after the small firm nearly collapsed in late 2015 – amid unrestrained production from OPEC. As per-barrel prices plummeted, Lilis piled on debt and struggled to pay workers.Now – with prices higher after a November OPEC decision to cut output – Lilis thinks it is time to grow fast.

Such resurrections are common these days in the Permian, which stretches across West Texas and eastern New Mexico. They tell the story of the U.S. shale resurgence and the danger it poses for OPEC as it struggles to tame a global glut.

Surging U.S. production has stalled OPEC’s effort to cut supply. Inventories in industrialized nations totalled 3.05 billion barrels in February – about 330 million barrels above the five-year average, according to the International Energy Agency.

Posing a major threat, the Permian boom will be high on the agenda as OPEC oil ministers begin gathering in Vienna ahead of a May 25 policy meeting to decide whether to extend output cuts.

Last week Monday, the world’s top two oil producers and OPEC’s heavyweight Saudi Arabia and Russia, a non-OPEC nation – said they had agreed in principle on the need to continue output cuts for an additional nine months, through March 2018.

That would extend the initial agreement, which took effect in January and reduced production by 1.2 barrels per day (bpd) from OPEC nations and another 600,000 bpd from non-OPEC producers, including Russia.

The pledge to extend cuts marked an evolution in the thinking of Saudi Arabia Oil Minister Khalid al-Falih – in response to surging U.S. output.

After OPEC’s decision in November, Al-Falih expressed confidence that no further supply curbs would be needed because of rising demand.

Then in March, Al-Falih told a Houston energy conference that the “green shoots” in U.S. shale might be “growing too fast” – and warned there would be no “free rides” for U.S. producers benefiting from OPEC production cuts.

But by last week, Al-Falih vowed OPEC would do “whatever it takes” to control oversupply.
Unlike OPEC nations, U.S. firms are barred by anti-trust laws from colluding to control output or prices, leaving market demand as the only check on production.

“I’m really proud American production is offsetting those OPEC cuts,” said Lilis Chief Executive Avi Mirman.

Now it appears the free ride for U.S. shale producers will continue at least into next year.
U.S. oil output has jumped to 9.31 million bpd this year, up 440,000 bpd from 2016, according to U.S. Energy Information Agency estimates.

About a quarter of that production comes from the Permian, where broad-based growth comes from small firms like Lilis, global majors including Exxon Mobil Corp and large independents such as (XOM. N) Parsley Energy Inc (PE. N)

OPEC’s two-year price war sank hundreds of companies and forced majors including Exxon and Chevron Corp (CVX. N) to retrench – but it also and stirred their interest in shale.
Exxon paid nearly $7 billion in February to double its acreage in the Permian.

“We’re really approaching the Permian as a major project,” Sara Ortwein, president of Exxon’s shale-focused subsidiary, XTO Energy, said in an interview.

Across the Permian, the number of rigs this year has risen 30 percent and the number of fracking crews has jumped 40 percent, according to Primary Vision, which tracks oilfield service equipment usage.

That won’t change soon, said Mark Papa, CEO of Centennial Resource Development Inc (CDEV. O), which added to its Permian land holdings this month with a $350 million deal.
“A disproportionate amount of U.S. production growth between now and the end of the decade will come from the Permian,” Papa said in an interview.

In a reversal from the thousands of layoffs in the U. S in 2015, oil companies are hiring briskly.Fracking service provider Keane Group Inc (FAAC. N), for instance, has plans to hire at least 240 workers this year.

For the growth to continue, however, prices will have to rise for rigs and other services, executives and analysts have said.Paul Mosvold, president of drilling contractor Scandrill Inc, has more business than he can handle.

“We’re out of rigs,” he said. “We have been since January.”But he won’t add more rigs unless producers pay more – maybe $25,000 per day, instead of the current $15,000 to $19,000. That may depend on per-barrel prices going up, an unlikely prospect amid expanding supply.

Oil drillers, meanwhile, continue to hunt for new cost-cutting technologies – after already halving the cost of extracting a barrel since 2014.

Parsley is cutting labor costs with sensors on wells that transmit production and maintenance data to its headquarters in Austin, Texas.”We’re constantly getting more efficient,” Mark Timmons, Parsley’s vice president of field operations.