The Organization of Petroleum Exporting Countries will once again become American shale nemesis if the US Congress approves a NOPEC bill, or No Oil Producing and Exporting Cartels Act, Bloomberg reported this week, citing sources present at a meeting between a senior OPEC officials and US bankers.
The UAE oil minister, Suhail al-Mazrouei, reported to the lenders of the meeting that if the bill had been made law making the members of the OPEC liable to the anti-cartel legislation of the states United, the group, which is in effect a cartel, would separate and each member would bring the production to the maximum.
This would be a repetition of what happened in 201
The bankers who provide the debt financing the shale producers need are the natural goal for the opponents of the NOPEC law. The banks were burned during the 2014 crisis and are still recovering and regaining confidence in the sector. The ropes of the bag are loosened while WTI is approaching 60 US dollars per barrel, but lenders are certainly aware that this is largely the result of the OPEC action: the cartel is cutting back production and effect on prices is becoming increasingly visible. Related: Pakistan aims to become a natural gas hotspot
In fact, if the OPEC should resume working at maximum, even without Iran and Venezuela, and with continuous interruptions in Libya would put pressure on prices significantly, especially if Russia joins. After all, his state-owned oil companies had a desire to start pumping more.
NOPEC legislation has little chance of becoming a law. It is not the first attempt by US lawmakers to make the OPEC responsible for his behavior in the cartels, and none of the others has made a law. However, the not-too-subtle threat of Al-Mazrouei highlights the weakest point of the American schist: the dependence of the industry on borrowed money.
The problem has been analyzed in depth by the energy expert Philip Verleger in an article on Oilprice at the beginning of this month and what problem is boiling up to is too much debt. Shale, as Total's managing director said in a 2018 interview with Bloomberg, has very high capital. Returns can be tempting if you're punching and fracking in a weak spot in the shale patch. They can also be improved by making everything more efficient, but in the end you would need quite a bit of money to continue drilling and fracking, despite all the praise for falling production costs through shale works.
The fact that a lot of this money could only come from the banks: the oil and shale gas industry has faced a crisis of investor confidence after the 2014 accident because the single the way he knew how to do business was pumping ever-increasing amounts of oil and gas. Shareholder returns were not at the top of the agenda. This had to change after the accident and most of the smaller players – those who survived – have yet to fully recover. Free cash remains a luxury.
Related: EIA cuts projections on oil outing in the United States
The industry is aware of this vulnerability. The American Petroleum Institute has vocally opposed NOPEC, almost like OPEC itself, and Bob Dudley of BP said this week at CERAWeek in Houston that NOPEC "could have serious unintended consequences if it triggered litigation throughout world."
"Serious unintended consequences" is not a phrase that bankers love to hear. It is likely that they will join in opposition to the legislation to spin the shale wheels. The industry, meanwhile, may want to consider ways to reduce dependence on borrowed money, perhaps limiting production to a certain point before it becomes obligated to do so.
By Irina Slav for Oilprice.com
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