Should OPEC And U.S. Shale Collaborate For Survival?

When oil prices increase, shale oil production increases and generally recovers the lost share in production but also surpasses its earlier respective peaks. The analysis in the above mentioned article could provide some critical answers to OPEC, offering some clues on how the cartel could defend its market share. One strategy may be to flip flop oil production in order to navigate increases/decreases in oil prices (although this may run counter to their fundamental policy). For example, OPEC members could freeze oil production or even decrease production and allow oil prices to gradually increase between $50 to $78/bbl for 5 to 8 months (lag to respond by shale oil industry) and then increase their production (for 4 to 5 months) to lower oil prices back down to $50/bbl to dampen the revival of shale oil production. This “flip flop” strategy of production will allow OPEC to fetch an average of higher oil prices compared to their strategy of solely defending market share, while at the same time also keep the shale oil revival in check. In 2018, however, not even this ‘flip-flop’ policy will work due to the significant increase in drilled but uncompleted wells (DUC). For example, the number of DUC’s increased from 4128 in December 2013 to 7609 in January 2018. This gave the shale oil industry a greater flexibility to respond promptly when required. Strategy Wining Short-Term Goals – Collusion Instead of going it alone, OPEC may decide to collaborate with the U.S. shale oil industry. In this partnership, both parties have to agree to some degree as to how much to produce in order to achieve some reasonable annual average oil prices say between $70 to $80/bbl or even more. In theory, this partnership could work, but many independent oil producers might not see the need to comply. Yet another problem is how to determine production quotas, especially for U.S. shale oil producers. It is already difficult enough to control production quota among the few OPEC members. How can one expect oil majors and independent shale oil producers to adhere to certain output quota? If such a strategy could somehow be realized, but parties could be winning. Nevertheless, this policy has its own negative implications. Higher oil prices may speed up the penetration of EVs as they will encourage the autoindustry find ways to bring the production costs of EVs down. Alternative Strategies – New Business Structure Instead of collusion, the industry should realize the facts and act accordingly. The senior executives of the major oil and gas companies know the fate of the oil industry very well, even though they avoid acknowledging it publically. The shrewd executives are already in the process of developing alternative strategies to remain in the business, maybe with a different structure. Eventually executives of NOCs should also realize that continued dependency on oil revenue alone could be self-defeating and may hold them back from their respective national visions. The oil industry has to develop alternative business models to diversify oil based economies sooner rather than later. By Salman Ghouri for Source / More: Follow us: @OilAndGasPress on Twitter | OilAndGasPress on Facebook ]]>