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Endgame for OPEC?

In the wake of the failure to construct a united front against stuttering oil prices at last month’s OPEC summit in Doha, Igor Sechin, CEO of Russia’s state champion Rosneft, mused that the cartel “had practically ceased to exist as a united organization,” branding the oil exporters’ club as “brain-dead and purposeless.” This is not, of course, the first time that OPEC has been plunged into existential crisis, but it may well prove to be its most severe test yet.

Back in the 1980s, North Sea deep water discoveries provoked a similar oil glut to that being experienced across the world right now. OPEC’s instinctive reaction then was to slash production and artificially prop up prices. This time the logic has been very different. “In conformity with the group’s own journey from swing producer to base producer, efforts were instead placed on defending market share,” recounts Widhyawan Prawiraatmadja, Indonesia’s governor to the cartel. “This is because OPEC can’t go out and fight on behalf of others anymore because it’s slice of overall crude production is just too small nowadays,” he reasons.

“The surge in the global supply of unconventionals has effectively curtailed OPEC’s historic ability to balance crude markets,” concurs former Qatari energy minister Hamad al-Attiyah. “In the past, output from shale oil deposits in the U.S. and other non-OPEC nations were pretty much insignificant so OPEC could call all the shots by varying output to manage worldwide crude prices,” he explains, “but with its influence vastly diminished, and current markets oversupplied to the tune of some 1.5 million barrels a day, any analogous action would risk a dangerous erosion of its own already receding market share” especially given that the global hydrocarbons landscape has transitioned from a state of unipolarity (i.e. dominated by OPEC) towards multipolarity, where Saudi Arabia, the U.S, and Russia are now compelled to fight it out for markets to sell to.

opec versus the rest

Predicting that Texan Shale producers would not be able to hold out over a sustained period of low oil prices, OPEC’s most dominant members – Saudi Arabia and fellow Gulf nations – preferred to keep on pumping the black stuff while waiting for the more costly unconventionals to capitulate. Initially such a gamble seemed to be paying off with no less than 59 American shale players declaring bankruptcy. The shale sector as a whole, however, has proved far more resilient than many expected with production keeping uncanny pace amid sweeping, but increasingly effective, cost reduction measures.

Even more alarming for OPEC’s leaders, shale producers enjoy an inherent flexibility that affords rapid responsiveness to fluctuations in market demand. The development of a fresh shale play, although in price broadly comparable to the expense of developing offshore fields, takes under a year to complete with Texan shale enjoying the shortest payback time of all (compared to an average of 7 years for offshore deep water projects). In such circumstances, the US oil industry will have all the tools at its disposal to quickly restart production once demand and prices eventually rebound.

If anything, it is not shale, but deepwater that ends up the biggest loser from an OPEC exacerbated global oil price plunge that bottomed out at 27 dollars a barrel in January. According to Sir Ian Wood, one of the stalwarts of the North Sea oil production, “the British hydrocarbons industry is currently losing around 150 jobs per day and there is growing recognition that as much as half of the remaining 20 billion barrels of oil trapped under deep water across the UK continental shelf may never again prove profitable to recover.”

At the same time as failing to deliver a decisive victory in its battle with Texan shale, OPEC’s strategic pivot towards defending market share, has proved deeply damaging to the group’s internal cohesiveness. While Middle Eastern Gulf petro states can stumble along absorbing the hit, five crude exporting members are left tottering on the brink of collapse if oil prices do not stabilize soon, according to RBC Capital Markets. “Right now we identify 5 sovereign producers – the so-called ‘fragile five’ – that are edging ever closer to the precipice of economic meltdown amid the current low oil price environment: Venezuela, Libya, Iraq, Algeria, and Nigeria,” reveals Helima Croft, global head of commodity strategy. “Each one has been frantically calling for production caps, but so far to little avail,” she adds.

Nor does the future seem to augur any better for the beleaguered organization, with signs suggesting that the even the Saudis now doubt its usefulness. Deputy Crown Prince Mohammed bin Salman’s recently released, game changing blueprint for national development is notable for the stress it accords to shifting the country’s economy away from crude oil dependency. His vision 2030 economic action plan will include the partial privatization of Saudi Aramco, with proceeds to be invested in a USD two trillion sovereign wealth fund, which in turn will make strategic investments in non-oil assets. It also envisions Saudi Aramco doubling its gas production in a clear statement of intent.

“The main take-away from Saudi Vision 2030 is that there’s just no role for OPEC,” affirms Seth Kleinman, head of European energy research at Citigroup. “OPEC without Saudi Arabia, which pumps around 10.27 million barrels per day, just isn’t much of an OPEC anymore…it would become more or less meaningless without its largest producer, ” she concludes.

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