Shift to shale could fracture Opec’s world

The doves won at Opec last week, but while it concentrates on trying not to rock the eurozone, it should take note of what the shale revolution may mean for oil and gas prices

Terry Macalister
The Observer, Sunday 17 June 2012

A key decision on the immediate future of Europe was made last week not to a soundtrack of car horns and street protests in Athens or Madrid, but to the hum of air conditioning in an office block in the centre of Vienna.

Some had feared that, in a self-serving attempt to halt a recent 20% slide in the price of oil to $97 a barrel, the Austrian-based Organisation of Petroleum Exporting Countries (Opec) would deliver a nasty blow to the chances of economic revival.

But the meeting was a damp squib – although a very welcome one to British politicians and many others outside the room. The doves, led by Saudi Arabia inside faction-ridden Opec, won the day as the cartel, which has more than once triggered global economic earthquakes with its decisions, decided not to cut production levels.

The organisation later made it clear, however, that it would be working hard to cut its own overproduction from 31.6m barrels per day to 30m, and insisted a $110 oil price was “no threat” to the world economy.

Analysts at Cheuvreux, brokerage arm of Crédit Agricole, say they still expect crude prices to average $108 this year – below the $111 seen in 2011 but more than 30% up on 2010 prices. And that spells trouble, given the rough rule that every $10 increase in oil prices wipes 1.5% off a country’s gross domestic product.

Despite all the talk about renewable energy the world’s major economies remain helplessly dependent on petrol for transport, and gas – whose cost is pegged to oil – for power generation. High oil prices raise inflation, increase food and other industry costs as well as helping to drive up household energy bills at a time when UK North Sea tax receipts are dented by oil and gas output falling at record levels.

Some believe the recent relative success of the US economy is down to a fall in the price of natural gas due to the shale gas “revolution”.

And while global oil prices are often impacted by geopolitical tensions, such as stand-offs between the US and Iran over nuclear intentions, much still depends on Opec.

Opec’s latest summit might have been low key, but it was significant. Behind closed doors there was a huge split over who will lead this volatile organisation when the secretary general’s post comes up for grabs at the end of this year. Also, Opec was forced to confront the major threat presented by the development of shale and other “unconventional” oil. Abdullah al-Badri, a pragmatic Libyan, has led the organisation since 2007, but traditional allegiances have been shaken up by the Arab spring and by changes in Iraq, which has moved closer to Iran’s hawkish oil policies.

The two declared candidates for the top job are Saudi Arabia’s longtime Opec governor, Majid al-Moneef, and Thamir Ghadhban, energy adviser to Iraqi prime minister Nouri al-Maliki.

The different approaches of these two men were highlighted by arguments last week over which path to take over production quotas. Saudi Arabia was calling strongly for the organisation to keep on pumping oil to help the recession-hit countries of the west; Iraq and Iran wanted tougher quotas to push up crude prices.

Over the past decade the heavy oil users of America and Europe have relied largely on Saudi Arabia – still the world’s largest oil exporter – to win consensus and compromise from the cartel. Some fear that if the secretary generalship goes to Iraq – or Iran, which has also talked of putting up a candidate – this could change.

But while arguments about the right candidate raged inside Opec’s headquarters, an outsider brought news that could shake the organisation even more profoundly. At a conference that took place before Opec’s policy-setting meeting, the chief executive of US energy giant ConocoPhillips, Ryan Lance, shocked ministers with his prediction that “North America could become self-sufficient in oil as well [as gas] by 2025”.

The shale revolution has sent the price of North American natural gas down over two years to below $2 per million British thermal units, compared with $18 in the Far East. This development – courtesy of new drilling techniques and “fracking” – has disturbed big gas exporters such as Russia but has largely been ignored by Middle Eastern oil producers.

Lance said the US was now turning its attention to the oil contained in shale sand deposits as well as deepwater reserves in the Gulf of Mexico. He pointed out that his country imported 4.5m barrels a day of Opec crude last year, 20% of the cartel’s exports and almost half the US’s import needs.

Opec ministers took a relaxed view of the shale oil threat. “Oil from the Middle East will always find a home,” Kuwaiti oil minister Hani Hussein told Reuters. Rafael Ramirez, his Venezuelan counterpart, scoffed at the idea of shale oil coming “to the rescue of consumers, allowing them to shake off the yoke of Opec”.

But Paul Stevens of the Royal Institute of International Affairs at Chatham House in London says he believes Opec needs to be aware of it, not just because of America but because shale reserves could be exploited in other key markets, such as China. “If you had talked about North America ever being self-sufficient in oil five years ago,” he says, “you would have been laughed out of court.”

But this situation has changed – to the west’s advantage. US oil prices have slumped from above $100 a barrel in March to near $80, although North Sea Brent blend – most commonly used as a global price indicator – is still around $97. This is not so much about the development of shale or tar sands but about a slump in demand due to the stricken global economy.

Opec finally went along with the Saudi line, for fear a rise in prices could tip Greece and Spain over the edge and destroy global oil demand.

Analysts at investment bank Credit Suisse warned recently that even Brent could slump as low as $50 this summer if confidence in Europe evaporates.

Stevens himself believes it could fall even further if confidence in the future economic and oil growth collapses: “You just have to look at what happened in 2008 when oil was $147 a barrel and within six months had fallen to $33. It is perfectly feasible to envisage a rerun of this situation.”


    Do not kid yourself that this is all about shale production. The U.S. has normal oil fields which eclipse Saudi Arabia and these will be exploited to take production away from the Middle East. Saudi Arabia is going down shortly and good riddons to greedy swines who assassinate free-energy producers just as much even more than Western Intelligence, all of course run by The Worshipful Company of Fuellers for the powerful Livery Patent Pool at New Jerusalem governed by the Vatican. Lets not forget the Rocky Mountains, Bakken and Gull Island which all eclipse energy output of Saudi Arabia. Also do not forget all the oil in the Falklands which also eclipses Saudi Arabia and been known about since the 80s. Why do you think theres so much bickering over the region right now? That will all be controlled by The Worshipful Company of Fuellers using their Fortress America lock-down agenda.

    -= The Unhived Mind

    Lindsey Williams – 2012 The Beginning of The End – Full 3 DVD Set – October 2011


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