When the OPEC members met in Vienna, on Thanksgiving Day, 2014, Shawn Bartholomae noticed there were few analysts who had expected the leading members to cut production in an effort to raise the price of oil. What many of the observers of the meeting had predicted about the main objectives and who was the central target of OPEC was confirmed.
The leader of the meeting was Saudi Arabian oil minister Ali al-Naimi. Headlines in many papers, such as Reuters were screaming “OPEC declares war on shale producers. The actions taking place at the meetings and the language used by the participants confirmed beyond a doubt that it was the shale producers that the OPEC members had squarely in their sights.
The senior partner of Silver Tusk Oil Co., Shawn Bartholomae states “It is a time for all operators and producers of petroleum to steady the ship. We will keep an eye on all developments and study the impact of each new set of conditions.”
The OPEC meeting has been described as a “wake up call”. While the war on shale seems to have added some focus to the intentions of OPEC, the concept of a wake up call can go both ways. The oil minister of Saudi Arabia, the chairman of the group at the meeting, Ali al-Naimi has specified intentions of re-establishing OPEC as a world leader of the international oil markets. He has expressed his intention to prove that he is able to unify a coalition that was becoming increasingly unruly, this is a critical junction in world history as it has been the cooperation of the members of OPEC that has proven to carry so much clout in the world’s oil markets.
The spokesman for OPEC has expressed his determination to avoid ill-advised price manipulations, and he has pledged to restore OPEC’s credibility in the markets.
It is the changed conditions and the new realities of a complex oil market that the kingdom might have to face up to. It has been noted that if the other 11 members of OPEC do not act in any cohesion and cooperation and adopt the guidelines as set forth by the Saudis , then the credibility of the cartel will have been exhausted. In the past meetings, Saudi Arabia would come to the meetings, and Ali al-Naimi, acting as the head of Saudi Aramco, would call this a crisis meeting, establish and explain the results of their own market studies and analysis , then they would announce the amount of oil that needed to be cut .These new numbers were thus called their “quotas”
Mr. Shawn Bartholomae noticed that after all of the dust had settled, it was the kingdom that had endured the lion’s share of the cuts and they basically had achieved little for themselves but had cut their own production. The Saudis had seen their own productivity cut from 10.5 million barrels per day in 1981 to as little as 2.2 million barrels per day by the end of the year 1985. While willing to make a commitment to curtail production and thus maintain a higher price, the Saudis are understandably growing more reluctant to bear the burden of any future cuts largely by themselves.
In this latest gambit , their intentions emerged on a policy of keeping prices low or even stepping up production somewhat …to manipulate the prices even lower….if the prospects for forcing some of the shale producers out of business did in fact exist. They are eyeing the higher lifting costs of the shale producers as a target. This calculation is the basis for their gamble.
The factors that could serve to throw these calculation out of kilter are many fold. One huge factor that might have made earlier calculations suspect is that North American crude is not as expensive to produce as it used to be. The technologies are improving consistently to make this lifting cost even lower.
Lux Research analyst Daniel Choi has stated:
“Tech startups in energy exploration have raised $7 billion in the past decade, generating now-tiny companies that will use advances in seismic data collection and steam-assisted gravity drainage to lower costs even further.”
While the severity of the dip and the staying power of the affected nations to live with the lower prices is yet to be determined, the shale industry has reason for some optimism.
As Shawn Bartholomae, the senior partner of Silver Tusk Oil Co. has stated “The oil and gas industry, and in particular, the shale industry has already proven it can adapt to new production demands. The petroleum industry has shown a keen sense of innovation. Now the industry may be called upon to prove its toughness”
The industry is bracing for a shakeout. As one might reason, the first casualties of this shakeout could be any weakly financed companies that are operating close to the break even point. The remaining companies who weather the storm might find the plunging prices to be a blessing in disguise. If the new economic environment causes the industry to adapt cost saving measures to operate more efficiently in order to continue profit margins, then this market could make the companies stronger when the prices return.
Mr. Shawn Bartholomae affirms that it is the technological innovations that are shaking up the old structures of the oil markets. These innovations had gotten their start in the Texas fields. The surges of technology and innovations have forged the revolution.
From the Middle-Eastern point of view, one of the most threatening aspects to the kingdom has been the advent of hydraulic fracturing and the horizontal drilling. The production was one threat. The explosion in the growth of the fracturing technology was another. These two technologies, standing alone would pose a big enough threat but it is the continuing evolution of contributing technology such as highly accurate detailed 3-D seismic and MWD (monitoring while drilling), computer coordinated techniques that is transforming the oil and gas exploration world.
Some analysts however are beginning to question the wisdom of the recent moves by Saudi Arabia and their ability to coerce cooperation among its members to use their collective willpower and make them adhere to any lower price ambitions. Just because a rooster crows doesn’t mean he has caused the sun to rise.
The Saudis do appear to be able to get oil out of the ground for a very low lifting cost, in the neighborhood of a mere $2.00 or $3.00 a barrel, but their need for money doesn’t stop at the well head. Their social programs have grown alongside of their oil income. The swollen appetite of these programs has kept them bound to a higher price for their oil. It will not be easy for the ruling members of the kingdom to tell their citizens to simply eat less or reduce the size of their homes, or lower the utility costs in order to accommodate a more stringent national budget.
It is this natural tendency for a socialist form of government and a people to make room for and find a spot for all of the revenues that their oil and gas has produced. This is the bottom line for a national budget which is heavily oil dependent, not some fictitious projected lifting costs. These social demands have quickly created a floor on the amount of money that they need to comfortably survive with unlike America, with a diversified economy with many sources of revenue, their capital source is one way. They remain hooked on their oil fortunes.
The real pain threshold point according to some analysts is much higher than the stated lifting costs. Better education and health care consumes a big chunk of the budget. All governmental employees routinely get a 15% pay raise. The population gets improved unemployment benefits. The government has stood behind and financially supported a subsidized minimum wage hike. Some members of the population were treated to new homes. In one year alone, 2010, this number of new housing constructions was 500,000.
The actual lower level or pain threshold concerning the price of oil in the kingdom could be closer to $100 a barrel.
Shawn Bartholomae speaking as the senior partner of Silver Tusk Oil Co. Goes on to say “There are many elements in the current mix of factors that are working to determine the evolving energy prices. We will approach matters with caution and keep a keen eye on the market and develop our policies accordingly.”
It could be that many analysts are looking in the wrong direction to understand the current oil prices. It is possible that OPEC. While still important to the oil picture, has lost much of their relevance. It is this fight to regain their global position that is at the core of the struggle for oil dominance. It may also be possible that the current situation in the oil and gas markets is a buyer’s market. There could be as many opportunities in the current situation as there are dangers.