OPEC in a Shale Oil World

OPEC in a Shale Oil World Mohamed Ramady • Wael Mahdi OPEC in a Shale Oil World Where to Next? Mohamed Ramady Wael Mahdi Department of Finance and Economics Regus, Building 12, Level 4 Trust Tower Visiting Associate Professor OPEC & Middle East Energy King Fahd University of Petroleum Correspondent Bloomberg News and Minerals Manama , Bahrain Dhahran , Saudi Arabia ISBN 978-3-319-22370-4 ISBN 978-3-319-22371-1 (eBook) DOI 10.1007/978-3-319-22371-1 Library of Congress Control Number: 2015946616 Springer Cham Heidelberg New York Dordrecht London © Springer International Publishing Switzerland 2015 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifi cally the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfi lms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specifi c statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Printed on acid-free paper Springer International Publishing AG Switzerland is part of Springer Science+Business Media (www.springer.com) Dedicated to our wives, Fatina and Muna, Thank you for your love, patience, and support Foreword Ever since its inception in 1960, OPEC has been the focus of deep-seated insecurity, if not outright hostility, from a wide range of Western oil companies and govern- ments. At that time, the hostility was not surprising given OPEC’s years of acrimo- nious negotiations with Western oil companies and its goal of unifying the policies of its member states with the intent of increasing their oil income and limiting the fi nancial returns to foreign investors. Against this history of contentious relations in an era of resource nationalism, the creation of OPEC was viewed by the international oil companies as a revolutionary challenge to their economic interests and their dominance in the global oil markets. OPEC countries, on the other hand, saw it as the vehicle through which they would fi nally achieve full political and economic independence from Western interests and gain effective sovereignty over their national resources. In fact it took OPEC a full decade before it could actually impose its aspirations in the oil industry and advance the national interests of its member states. This began in 1970 when it succeeded in moving Arabian Light oil prices off their his- toric low of $1.80 per barrel to clear $2.20. This was followed by more aggressive OPEC campaigning, including Libya’s renegotiation of the terms of its oil conces- sions in 1970 and Iraq’s nationalization of its industry in 1972. Additional oil price adjustments followed driven by political events, including the brief Saudi oil embargo of 1973, and by 1974 Arabian Light prices hit $11.60 per barrel, equivalent to $55.60 in 2014 dollars! This rapid escalation in oil prices was to surge even further as a result of the Iranian revolution of 1979 and the breakout of military hostilities between Iraq and Iran the following year. By 1981, Iran’s oil output had dropped from 5.3 million barrels per day (mbpd) in 1978 to 1.3 mbpd, and deep-seated concerns regarding the security of oil supplies permeated global markets. Saudi Arabian efforts to moderate the concurrent surge in OPEC prices were not successful, and oil prices more than doubled from 1979 through 1985, peaking at $36.80 in 1980, the equivalent of $106 in 2014 dollars. Having witnessed oil prices rise to such unsustainable levels, it became clear that OPEC was in fact unable or unwilling to stabilize oil markets which had become vii viii Foreword dominated by near-term commercial thinking and subordinated to geopolitical confl icts. This reality became even more evident when oil demand collapsed in the mid- 1980s following the price surge of previous years. OPEC’s efforts to starve the fl ooded oil markets by reducing supplies and thereby defend prices had the perverse effect of cutting its production from 30 to 16 mbpd by 1985, while new capacity from Mexico, Alaska, the North Sea, China, and Russia took over its original market share. Nor did OPEC’s strategic planning improve during the following decade. Although its production increased gradually into the early 1990s, oil prices remained volatile due to widespread quota violations by virtually all the OPEC member states. A new oil price collapse became inevitable in the mid-1990s when OPEC made an ill-advised effort to raise prices in the midst of the Asian debt crisis of 1996. This led to an extended oil price slump which saw some crude grades selling below $10 per barrel by 1998 for the fi rst time since the 1970s. The crisis was not resolved until the direct intervention of key heads of states from within and outside of OPEC and the collective reduction in OPEC’s production by over 1 mbpd. More crises were to follow, however, starting in 2003 with the growth in Chinese demand for oil in an already overstretched global market. In spite of the many OPEC claims of spare capacity and production capabilities, neither OPEC nor any of the other oil producers could easily provide the increases in conventional oil supplies that China required. It was inevitable that oil markets would tighten again and oil prices surged from $29 per barrel in 2004 to over $111 in 2007, peaking at over $147 per barrel of Brent in July 2008. This rapid escalation in oil prices was again driven by events outside of OPEC’s control and confi rmed the reality that OPEC’s massive oil reserves were irrelevant in volatile markets where rapid increases in oil demand required equally rapid adjustments in oil prices and supplies. As the fi nancial crisis of 2008 took hold and OPEC prices collapsed from $112 in August to $32 per barrel in December, OPEC members met and cut back supplies from what had become a severely fl ooded oil market. This resulted in a production rollback of 3 mbpd and succeeded in lifting oil prices back up over $70 per barrel within mid-year 2009. This reduction in supplies, however, had the unintended effect of signaling that OPEC was again prepared to return to its role of swing pro- ducer and to defend oil prices any time they dropped below a fl oor now deemed to be $70 per barrel. The conviction of the existence of such a presumed fl oor price created a new confi dence among marginal oil producers and allowed a widespread surge in costly oil developments from the deep offshore of Brazil and West Africa, and bitumens from Canada, as well as the fi nancing of unconventional oil supplies from the oil- rich shale basins of the USA. Inevitably, these new realities raised the prospects of a future fl ood of additional oil production including the spread of unconventional oil supplies from vast accumulations of shale oil resources from across the world. If this were to occur, the result would be millions of barrels of costly new oil supplies gradually fl ooding conventional oil markets and marginalizing OPEC’s near- term ability to balance oil supply and demand and attempt to regulate oil prices. Foreword ix Although the prospects for an outlook of this nature remain exceptionally slim for a variety of fundamental factors including offshore capital costs, onshore well productivities, severe shale decline rates, and environmental issues, the very infl ux of these and other new technologies will continue to challenge conventional resources and low-cost oil production. Although it remains to be seen whether these and other challenging scenarios are likely to materialize in the next few years, it is inevitable that such challenges will continue to unfold, and OPEC must reexamine its role in seeking to balance oil supplies and demand in markets where technology is suppressing the signifi cance of its oil reserves. Should OPEC discard its self-appointed mission of defending oil prices and defi ne for itself a more effective strategy that increases its relevance and broad- ens its engagement with the wider spectrum of energy-based industries? The assessments of this and other fundamental questions are the core issues that are raised and explored at length with great expertise by Mohamed Ramady and Wael Mahdi, the two authors of OPEC in a Shale Oil World: Where to Next? They have delved in detail into OPEC’s history of successes, failures, motivation, and challenges and documented the key milestones that have shaped OPEC confi gura- tion over its fi ve decades of history. Their book presents a detailed understanding of OPEC’s capabilities and limitations as they have evolved with time and is a vital resource for anyone wishing to consider OPEC’s and the oil industry’s future options and opportunities. Although the book concludes with many insightful recommendations for revital- izing critical sectors of OPEC as an institution, some of these will remain highly improbable given the loss of national sovereignty that they would entail.

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