OPEC changes approach to US shale oil

VIENNA — The Organisation of Petroleum Exporting Countries (OPEC) which meets on output this week, appears to have changed its approach to US shale oil, which it now welcomes as part of the global energy landscape.

"Shale oil is a phenomenon that will stay with us. We have to live together and find a balance," OPEC Secretary-General Abdullah Al Badri told delegates at a seminar in Vienna on Wednesday, ahead of the group's scheduled production meeting on Friday.

OPEC's decision not to limit output in November was perceived by market traders as a tactical attempt to maintain its share of a market flooded by a vast supply glut, partly caused by US shale.

Over the past five years, OPEC has shrugged off talk that the US shale energy revolution would weaken the influence of the group, whose 12 member nations pump 30 per cent of the world's crude.

The United States has since significantly ramped up its production of oil extracted from hard-to-reach shale, or sedimentary rock, now producing 5 million barrels of oil per day and far less dependent on imports from the crude-rich Middle East.

"We're not thinking or imagining or dreaming that shale oil producers are not going to be there. We want them to be," said United Arab Emirates Energy Minister Suhail Al Mazrouei.

"They are a very good balance for the market. We want everyone to share the responsibility of balancing the market," he told the audience at the seminar, which included chief executives from energy majors BP, Chevron, Eni, ExxonMobil and Total.

World oil prices tumbled between June 2014 and January on the back of faltering global energy demand and worsening oversupply, which many observers regard as being fuelled by booming US shale oil exploration and production.

'Pyrrhic victory' 

OPEC opted to keep its official production ceiling at 30 million barrels per day in November, a strategy backed by kingpin Saudi Arabia aimed at boosting demand, lowering prices and hurting non-OPEC output, particularly US shale producers that have far higher costs.

In the wake of the decision, the global oil market collapsed further to strike six-year low points in late January, but they have since recovered to stand at around $60 per barrel.

Yet Citi analyst Eric Lee argued this was a "pyrrhic" victory for the group.

"Ahead of the OPEC meeting this Friday, some might pronounce OPEC as having 'won' the first round against shale, but in such a framing, it's a pyrrhic victory, with Brent prices down from the peak of $115 last June to $64 at the time of writing," Lee wrote in a research note.

"A better analogy is that shale has been a massive new competitor... and OPEC has had to make room, and take lower prices in order to keep market share," he indicated.

Natixis analyst Abhishek Deshpande said: "It's become apparent that shale oil is profitable around $60-$65 per barrel level."

"We knew OPEC could not restrain US production for too long," he added.

Chevron Chief Executive John Watson, addressing the Vienna seminar on Wednesday, said that the group was facing a "brave new market".

"The difference today is that OPEC is choosing to produce and not managing the market," Watson told delegates.

"Most of the discussion has been around US shale oil, and it has been a remarkable revolution in the United States... We are producing close to 5 million barrels per day that no one expected, and shale oil will be a balancing mechanism to some degree over the next few years," he indicated.

Qatar's energy minister said Wednesday that the global oil market should be "more balanced" in the second half of the year.

"The last nine months or so have been particularly challenging for the oil industry," Mohammed Al Sada said in Vienna. "However, there are a number of reasons to feel optimistic about the general situation going forward... There should be a more balanced market in the second half of this year."

Sada, speaking at a seminar involving industry figures, said however that the market was "not out of the woods yet" and that "still a lot of uncertainty" remained.

Saudi Arabia's oil minister said the recent unrest in the Middle East and North Africa has little impact on oil prices because the market has become "comfortable" with risk.

Questioned about ongoing violence in Iraq, Libya, Yemen and also Saudi Arabia, Ali Al Naimi replied that there was "very, very small" risk premium in the current oil price. 

"This premium is there but fortunately the world is getting very comfortable with the risk," said Naimi, addressing the seminar.

"That is why you see that portion is really very small no matter what is happening... in the most productive part of the Middle East. "They don't seem to be affecting production, shipping, demand, supply... The risk premium is there, but it is very very small because of the variabliity of supplies."

The top oil officials of Iraq and Venezuela said that $75 to $80 a barrel was now a "fair" price for oil, reflecting an emerging consensus on a possible equilibrium for volatile markets.

Asked for his view while speaking at an OPEC seminar in Vienna, Iraqi Oil Minister Adel Abdul Mahdi said he believed $75 to $80 was fair.

"We share the same opinion of the minister of Iraq regarding this issue," Venezuela's Oil Minister Asdrubal Chavez said. Iran's oil minister declined to comment.

Iran's Oil Minister Bijan Zanganeh forecast Wednesday that his country's oil production could be lifted by 1 million barrels per day (bpd) within half a year of Western sanctions being lifted.

Questioned about the Islamic republic's oil output, he told delegates: "We believe that immediately, or after one month of lifting the sanctions, [we will achieve] half a million [extra] barrels per day, and after 6-7 months we will achieve one million barrels."

"Iran, because of the sanctions and limitations, has reduced production and exports," Zanganeh said.

Iran currently exports 1.3 million bpd, against 2.2 million bpd before the sanctions were imposed about one decade ago.

"It's fair we return to the level of the production [which Iran had] before the sanctions," Zanganeh added. "OPEC members countries will consider the return of Iran to the market, and it will not have a negative impact on the market." 

Zanganeh said Wednesday that the group needs to find a "fair price" for its oil.

"OPEC needs an equitable price, a price that would not be harmful to global economic growth and allow investments to continue... and allow for the development of production capacity in member countries thus allowing continuity and stability," he added.