Rational planning and compromise - a better way?

OPEC Bulletin Commentary January-February 2015

Over the last half century, modern technology has been a powerful force of transformation. It has changed the way we live, offering new innovations and state-of-the-art processes that, in one way or another, have touched most everyone going about their daily lives. Nowadays, no new year seems to pass without some new-fangled application bursting onto the scene with major implications for science, industry and the public at large. It is a huge, fluid and interlinked process that can — and does — affect all walks of life and will no doubt continue to astound in the years ahead as even more advances are made.

These technological applications, which have given us ever-smarter phones, self-parking cars and even the possibility to fly to Mars (although it is only a one way ticket at present), have also helped the oil industry make great developmental strides. Most importantly, modern scientific methods have created a whole host of solutions to problems that once seemed unsolvable. For example, today’s engineers can now retrieve petroleum resources from depths on the sea bed once considered unimaginable and produce ever cleaner petroleum-based products in keeping with a healthier environment.

One such process to sweep the industry, which became apparent about five or six years ago, is the exploitation or ‘fracking’ of unconventional, so-called tight oil, which is crude extracted from petroleum-bearing formations of low permeability, often shale or tight sandstone. This revolutionary oil source has lain dormant for decades, but today, through the use of modern technology, it has become a game-changer, albeit most probably only in the short term. The fact is, the advent of this new resource, which the United States and Canada, in particular, are exploiting to the full, has upset the oil market applecart, as it were.

The relatively sudden and, it must be said, unexpected, exploitation of tight oil has taken the industry by surprise, adding such large quantities to the world’s already sufficient conventional crude supplies that the global oil market is now oversupplied. And it is primarily because of this extra crude that international oil prices have fallen by 50 per cent since last summer. This price slump, although welcomed by the consumers, has far-reaching implications for the entire oil industry and casts a huge shadow over future capacity investment.

OPEC, like any responsible stakeholder, is concerned about current developments. The Organization is the first to welcome any new source of energy. It is fully cognizant of the fact that with global energy demand expected to expand considerably in the years ahead, the growing number of consumers — especially coming from Asia and the developing world — will likely need all available sources, conventional or otherwise, to meet their needs.

But surely there has to be a rational use of any new additions, especially if their introduction has the effect of destabilizing an already smooth-running market, as has been the case with tight oil. Looking at developments over the last decade, one can plainly see how the industry came to be immersed in its current dilemma. In 2005, OPEC crude production stood at 29.58 million barrels/day. It then rose to around 30m b/d the following year and went on to average that level over the next eight years, in line with its current self-imposed production ceiling. Stability personified.

However, over the same time-span, non-OPEC output grew from 49.6m b/d in 2004 to 55.9m b/d at the end of 2014. That is a rise of 6.3m b/d, or almost 13 per cent. All but 200,000 b/d of this growth has come from the US and Canada — chiefly as a result of their all-out exploitation of tight oil. Good fortune for North America; not so good for others associated with the industry which has already seen countless thousands of workers lose their jobs as a result of the perceived downturn in activity.

These indisputable facts notwithstanding, certain commentators persist on laying the blame for the current price demise at the doorstep of OPEC for choosing to protect its market share — a stable, fair and responsible share at that — at its Conference in November last year. Compounding this irony, others clearly expected it to cut production once again to restore market stability, a sacrifice OPEC Members, who are developing countries themselves, have made on several occasions in the past.

It is at times like these that the Organization feels compelled to remind all parties that make up the international oil sector that this is exactly why, from day one, the Organization has been committed to establishing serious dialogue, transparency and cooperation with the other main stakeholders — especially the producers and the consumers. Only by openly and regularly discussing the latest market developments can such instances as the latest oil price decline be prevented from occurring. After all, ALL parties agree on one thing — an unstable oil market with wildly fluctuating prices serves no one’s interest.

It is a further irony that in producing to the maximum and effectively driving the oil price down, the future of tight oil in North America is now in question, due to the high cost of its extraction compared with the exploitation of OPEC’s conventional crude reserves. Perhaps, rational planning and a good helping of compromise would have brought a far better outcome — for everyone.

OPEC Bulletin January-February 2015

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