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OPEC Threatens To Kill U.S. Shale

The Organization of Petroleum Exporting Countries will once again become a nemesis for U.S. shale if the U.S. Congress passes a bill dubbed NOPEC, or No Oil Producing and Exporting Cartels Act, Bloomberg reported this week, citing sources present at a meeting between a senior OPEC official and U.S. bankers

The oil minister of the UAE, Suhail al-Mazrouei, reportedly customs lenders at the meeting that was made into law that made OPEC members liable to U.S. anti-cartel legislation, the group, which is to all intents and purposes indeed a cartel, would break up and every member would boost production to its maximum.

This would be a repeat of what happened in 2013 and 201

4, and ultimately led to another oil price falling like the one that saw Brent crude and WTI sink below US $ 30 a barrel. As a result, a lot of U.S. Pat. shale-focused, debt-dependent producers would go under.

Bankers who provide the debt financing that shale producers need are the natural target for opponents of the NOPEC bill. Banks got burned during the 2014 crisis and are still recovering and regaining their trust in the industry. Purse strings are being saved as WTI climbs closer to US $ 60 a barrel, but are still aware that this is a large extent the result of OPEC action: the cartel is cutting production again and the effect on prices is becoming increasingly visible. Related: Pakistan Natural Gas Hotspot

Indeed, if OPEC starts pumping again at maximum capacity, even without Iran and Venezuela, and with continued outages in Libya, it would pressure prices significantly, especially if Russia joins. After all, state oil companies have been pumping to start pumping more.

The NOPEC legislation has little chance of becoming a law. It is not the first attempt by U.S. Pat. legislators to make OPEC liable for its cartel behavior, and none of the others made it to a law. However, Mazrouei's not too subtle threat highlights the weakest point of U.S. shale: the industry's dependence on borrowed money

The issue was analyzed in depth by energy expert Philip Verleger in an oilprice story earlier this month and what the problem boils down to is too much debt. Shale, as Total's chief executive puts it in a 2018 interview with Bloomberg, is very capital-intensive. The returns can be appealing if you are drilling and fracking in a sweet spot in the shale patch. They can be improved by making everything more efficiently but ultimately you need quite a lot of cash to continue drilling and fracking, despite the fact that production costs across shale plays.

The fact that a lot of this cash could come only from banks has been highlighted before: the shale oil and gas industry faced a crisis of investor confidence after the 2014 crash because the only way it knew how to do business was to increase ever-increasing amounts of oil and gas. Shareholder returns were not top of the agenda. This had to change after the crash and most of the smaller players — those that survived — have yet to fully recover. Free cash remains a luxury.

Related: The EIA Cuts U.S. Oil Output Projections

The industry is aware of this vulnerability. The American Petroleum Institute has vocally opposed to NOPEC, almost as vocally as OPEC itself, and BP's Bob Dudley said this week at CERAWeek in Houston that NOPEC "could have severely unintended consequences if it was unleashed litigation around the world." "Severe unintended consequences ”is not a phrase banker like to hear. Chances are they will join the opposition to the legislation to keep shale's wheels turning. The industry, meanwhile, might want to consider ways to reduce its reliance on borrowed money, perhaps by capping production at some point before it becomes forced to do it.

By Irina Slav for Oilprice.com

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