Shale Producers Not Bowing To OPEC

Gualalupe Pass Drilling Rig

Introduction…Even though our President has chosen to bow to foreign dignitaries, so far our U.S. shale producers have not bowed to OPEC.

Saudi Arabia’s attack… When Saudi Arabia launched a global oil-price war last year, many assumed that America’s high-cost shale producers would be the first to retreat.

American companies were quick to idle drilling rigs and lay off workers, but U.S. onshore oil production has gone up since last fall, not down.

As oil minister from OPEC counties met last week, they were grappling with the fact that the world’s new swing producer is different animal from traditional competition.

The new swing producers…Shale producers have more in common with technology start-ups in Silicon Valley than big, often state-controlled, integrated oil companies that dominate the global oil markets.  They are much smaller, more nimble, take more risks and are more tied to the ebb and flow of the capital markets.

One consultant who often speaks with Saudi officials says, “they were surprised at how fast oil prices fell and how resilient shale producers were.”

U.S. Producers are different…In an industry dominated by behemoths, the U.S. oil industry stands out due to fragmentation.  It takes 77 companies to generate 77% of the American crude oil and related liquids.  Combined, this is more production than the world’s 20 largest producers, according to Rystad Energy, a consulting firm.  Only Canada and the U.K. are similarly fragmented.

In contrast, in Russia there are four companies, China three, Brazil one.  In Saudi Arabia, Iran, Mexico, and Kuwait, one state owned company controls 100% of total output.

In conclusion...If you think big government controlled companies are the best way to produce crude oil, then most of the Middle East, Russia,  and China agree.  On the other hand, if you think free enterprise and the American Spirit is the best way to produce crude oil, then Texas, U.S., Canada, and U.K. would agree with you.

If you are inclined to venture into projects that produce current cash flow as compared to future capital gains, drop me a note.
Sources: “Shale Upends OPEC Bloc Party,” Wall Street Journal by Greg Ip. Saefong, June 4, 2015