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The Mystery Behind OPEC’s Meeting With Shale Oil Producers

The Secretary General of OPEC, Mohammad Barkindo, said today that the cartel he oversees, “has broken the ice in reaching out to shale producers in the U.S.” The announcement came as a surprise, since many have assumed that OPEC and shale producers are engaged in a prolonged battle in the oil market. Barkindo revealed that he and key shale oil producers met on the sidelines of this year’s World Petroleum Congress in Istanbul, Turkey.

He said the meeting was useful and productive. It is believed that the OPEC and the shale industry began talking in March at CERAWeek, an annual energy conference in Houston. Reports are that OPEC seeks further, more serious conversations with U.S. shale producers.

Barkindo’s statements leave much mystery. First, there is no unified entity of U.S. shale producers. Individual corporations operate shale wells in the U.S. Some are small wildcatters, some are giants like Royal Dutch Shell and some are in between. They generally all belong to trade organizations such as API, but these do not set production policy. Harold Hamm, the most prominent personality in U.S. shale and the CEO of Continental Resources CLR +1.74% for 40 years, does not and cannot collude with other producers like EOG Resources EOG +1.56%, ExxonMobil XOM +0.01%, Pioneer Natural Resources PXD +0.34% or a tiny wildcatter. He may wish to collude to decrease production, but U.S. antitrust laws forbid this.

In the past, the U.S. has permitted coordination between oil companies for specific causes , such as supplying allied efforts during World War II and negotiating with OPEC over oil prices in 1973. Even if the U.S. government were to grant an exemption today for shale producers to collude along with OPEC and others (Russia, most prominently), cooperation by the large shale firms alone may not be enough control production or raise the price of oil. U.S. shale production is simply too fragmented with too much production by small firms. The small producers, in particular, are too financially precarious to decrease production; they have creditors and anxious investors on Wall Street to face. If the price of oil were to rise, small producers would be even more eager to take advantage of high prices and produce. U.S. shale producers—particularly small ones—face too much debt to abide by any production cut agreement, even if the government permitted it.

Some wonder if Barkindo and OPEC representatives are talking to U.S. shale producers to learn more about the shale business . OPEC, as an organization, wants to understand a prominent competitor. Shale is part of the reason OPEC has not been able to raise prices over the last eight months, despite production cuts. In addition, OPEC nations must be interested in partnerships with experienced shale enterprises as they look more and more and exploiting this aspect of their natural resources.

The real questions raised by Barkindo’s comments are best answered by the unknown U.S. shale producers in these meetings. Which producers are talking to OPEC? What are they discussing? Do they discuss oil production levels? Do they discuss oil prices?

Source: Hellenic Shipping News

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