OPEC has major concerns about the U.S. exporting shale oil. Mainly because it feels that it will hinder the cartels plan to raise prices by reducing output.
OPEC, which controls about 40 percent of global oil production, has never dealt with an oil supply source that can respond as quickly to price changes as U.S. shale, OPEC secretary-general Abdalla Salem El-Badri said.
“Any increase in price, shale will come immediately and cover any reduction,” said El-Badri during the annual IHS CERAWeek meeting in Houston.
OPEC may have reason to worry about shale oil production in the U.S. The International Energy Agency (IEA) stated on earlier this week that total U.S. crude output, mostly from shale basins, will increase by 1.3 million barrels a day from 2015 to 2021 despite low prices.
“Anybody who believes that we have seen the last of rising [U.S. shale oil production] should think again,” the IEA said in its medium-term report.
John Hess, CEO of one of the largest lease-holders in North Dakota’s Bakken shale region, said shale might not respond as quickly as OPEC fears. There are some challenges logistically including getting enough rigs and workers to start growing production again, not to mention the financial hurdles.
“The balance sheets of shale producers are in disrepair,” said Hess, whose company recently reported its first annual loss in 13 years. “They’ve got to heal their balance sheets before they will start investing again.”
Last week, OPEC decided to change its strategy due to low oil prices which have caused companies to cut spending on new output development. This could plant the seed for “a very high price” in the future according to El Bardi.
Saudi Arabia and Russia agreed to keep their output at the January level under the condition that the other oil-rich countries do the same. El-Badri said the new policy will be evaluated in three to four months before deciding whether to take other steps.
“This is the first step to see what we can achieve. If this is successful, we will take other steps in the future,” said El-Badri. “The concern is no investment now, no supply in the future. It’s as simple as that. If there’s no supply coming to the market, prices will go up.”
Although U.S. shale production is expected to drop by 600,000 barrels a day this year and 200,000 barrels a day in 2017, it will increase from 2018 onward according to the IEA.
Article written by HEI contributor Aliyah Cole.