Analysts Differ on U.S. Shale's Sustainability but Doubt OPEC's Prospects of Market Control

Friday March 9, 2018

As U.S. shale continues to dominate headlines, analysts disagree on how long and how impactful its juggernaut path will be, but they seem to agree on one thing: the much-ballyhooed "marriage" between the Organization of the Petroleum Exporting Countries (OPEC) and Russia will have limited effect on circumstances.

Michael Worth, CEO of Chevron, told CNBC that his company is continuing to see "great gains" in shale, having grown its position in the Permian Basin by 10 percent — from 2 million to 2.2 million acres: "We're in early innings in terms of shale really performing," he said, adding that Chevron's break-even price this year is $50 per barrel or better, without any asset sales.

Meanwhile, Richard Spears, vice president at Spears & Associates, reported that the Permian Basin in West Texas and southeastern New Mexico claims nearly $2 out of every $10 spent globally on oilfield services and equipment, and that spending is expected to climb 50 percent this year to a record $45 billion.

He remarked, "The oil is a half day's drive from the global headquarters of most oil companies, sits smack in the middle of the world's largest consuming nation, the natives are friendly, and the government's 'take' is light: we are confident that the Permian will grow from here."

Spears' remarks were published by Bloomberg with a title that warned, 'Watch Out, OPEC.'

By contrast, Mark Papa, former CEO of EOG Resources, doubts U.S. production will keep growing as fast as the market thinks: "The impression of U.S. shale as the big bad wolf is perhaps a bit overstated," he told delegates to CERAWeek in Houston.

He went on to explain that "You've got basically resource exhaustion that is beginning to take place: it's no secret that you've only got three shale oil plays in the U.S. of any consequence; the rest of them don't amount to a hill of beans."

Papa also remarked that Permian production will not be able to satisfy the world's growing appetite for oil.

Whether or not the U.S. boom continues, Mohammad Barkindo, secretary general for OPEC, is taking no chances: at CERAWeek he again touted a prospective long lasting relationship between his cartel and Russia as an "insurance policy" against future volatility and cycles.

His remarks were backed by Mohammed Saleh Abdullah Al-Sada, minister of energy and industry for Qatar: he said, "A year earlier we opened channels with Russia, and again we found they were thinking alike; we found once we agreed among ourselves, Russia was very positive."

But once again, OPEC's strength was questioned, this time by Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch: he believes the union is doomed to fail because "the fact that the  Saudis are pegging to the U.S. dollar and the Russians have a floating currency means in the long run the Saudis want more dollars and the Russians want more barrels.

It's worked out well for the last year and a half, and they are investing in each others' countries, [but] at the end of the day, if the Russians extend the deal into 2020, they lose more market share to the U.S., and I don't think they're willing to do that."

If OPEC has reached a point where even the U.S. mainstream press is taking jabs at its efficacy, it has also repeatedly failed of late to impress traders with its seemingly endless upbeat rhetoric about cutback compliance among members and promises of long-term cooperation between nations with regards to avoiding another global crude glut.