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The Organization of Petroleum Exporting Countries will once again become the enemy of American shales if the US Congress passes a bill called NOPEC, or a law banning petroleum production and export cartels, reported Bloomberg this week, citing sources present at a meeting between a senior OPEC official and US bankers.
UAE Oil Minister Suhail al-Mazrouei told lenders at the meeting that if the bill becomes a law making OPEC members accountable for US anti-cartel legislation, the group is for all practical purposes a real goal. cartel, would separate and each member would increase production to its maximum.
This would be a repeat of what happened in 2013 and 2014 and eventually led to another drop in oil prices like the one that saw Brent crude and WTI go down below $ 30 a barrel. As a result, many debt-laden and shale-focused American producers have collapsed.
Bankers who provide the debt financing needed by shale producers are the natural target of opponents of the NOPEC bill. The banks were burned during the 2014 crisis and are still recovering and regaining the confidence of the sector. The purse strings are loosening as the WTI approaches $ 60 a barrel, but lenders are certainly aware that this is largely the result of the action of the company. OPEC: The deal reduces production again and the effects on prices are becoming more and more visible. Related: Pakistan wants to become a hotspot for natural gas
Indeed, if OPEC started to pump again at full capacity, even without Iran and Venezuela, and the breakdowns continued in Libya, prices would be under significant pressure, especially if Russia joined it. After all, its national oil companies were eager to start pumping more.
NOPEC legislation is unlikely to become law. This is not the first time that US legislators have assumed responsibility for OPEC for its understanding behavior, and none of the others have made the law stand out. However, the not-too-subtle threat of Al-Mazrouei highlights the weakest point of the American shale: the dependence of the sector vis-à-vis the money borrowed.
The issue has been thoroughly analyzed by energy expert Philip Verleger in an article on the price of oil earlier this month. The problem is the problem, it is too heavy a debt. Shale, as told by Total's CEO in an interview with Bloomberg in 2018, is very capital intensive. Returns can be attractive if you drill and break into an ideal spot in the shale field. They can also be improved by making everything more efficient, but in the end, you will need a lot of money to continue drilling and fracturing, despite all the praise for declining production costs in shale deposits.
We had already pointed out that a lot of this money could only come from banks: the shale gas and shale gas industry was facing a crisis of investor confidence after the crash of 2014, because the only way to do business was to pump more and more people. quantities of oil and gas. Shareholder returns were not at the top of the agenda. That must have changed after the crash and most of the small players – those who have survived – are not yet fully recovered. Free money remains a luxury.
Related: EIA reduces oil production projections in the United States
The industry is aware of this vulnerability. The American Petroleum Institute verbally opposed NOPEC, almost as much as OPEC itself, and Bob Dudley of BP told Houston's CERAWeek this week that "NOPEC could have serious unintended consequences". he unleashed disputes all over the world.
"Severe Unexpected Consequences" is not an expression bankers like to hear. It is very likely that they will join the opposition to the bill to spin the shale wheels. In the meantime, industry may want to consider ways to reduce its reliance on borrowed money, perhaps by limiting production at some point before being forced to do so.
By Irina Slav for Oilprice.com
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