OPEC Divided Over US Oil Boom
The Organization of the Petroleum Exporting Countries may be heading for a new internal clash--this time over how it responds to the growing challenge from U.S. shale oil.
Rising American output is rewriting global oil-trade patterns and deepening existing fault lines within the powerful exporters' group, limiting its ability to mount a collective response--including possible production cuts--ahead of a crucial meeting in Vienna Friday.
Although no change is expected at the gathering to OPEC's oil production--around a third of total world crude supply--it will mark the first stage of a thorny debate on shale's oil's impact that is already showing signs of dividing the group.
The evidence so far indicates that the revenues of African members, such as Algeria and Nigeria, are suffering the worst effects from the North American oil boom, while Gulf countries, notably Saudi Arabia, pass relatively unscathed.
So while Riyadh plays down the threat, Nigeria has deemed U.S. shale oil a "grave concern."
U.S. crude production has risen to a 21-year-high as a new combination of technologies has unlocked large resources of oil previously trapped in shale rock in North Dakota and Texas. In tandem, exports from three of OPEC's African members: Nigeria, Algeria and Angola to the U.S. have fallen to their lowest level in decades, dropping 41% in 2012, according to the U.S. Department of Energy.
In contrast, Saudi shipments of oil to the U.S. increased 14% in 2012.
This disparity looks set to deepen power struggles that have dominated OPEC in recent years. Iran, Venezuela and Algeria, who need high oil prices to cover domestic spending and offset falling production, have regularly clashed with Gulf countries led by Saudi Arabia, who have the financial strength to withstand lower prices.
OPEC has overcome past rivalries to rally together against an external threat, most notably in 2008 when it agreed to a production cut of more than 4 million barrels a day to stem a price crash during the financial crisis. But the uneven impact of the North American supply surge makes a collective response--such as a coordinated production cut to support prices--more difficult, said delegates on both sides of the divide.
This is amply illustrated by recent comments from leading members of the group.
"I don't think anyone should fear new supplies...The pie is getting bigger and there is enough to go around," Saudi Oil Minister Ali al-Naimi said in a speech last month.
But speaking at a conference in Oxford earlier this month, Nigerian oil minister Diezani Alison-Madueke said, "Shale oil has been identified as one of the most serious threats for African producers," who could lose 25% of their oil revenue as they are edged out of the U.S. market.
Nigeria is hardest hit because its light and low-sulfur crudes compete directly with similar-quality shale oil, unlike Saudi Arabia's heavier and more sulfurous crude.
Other OPEC members who don't serve the U.S. market, such as Iran, are also complaining. Muhammad Ali Khatibi, Iran's envoy to OPEC, told The Wall Street Journal that a combination of rising U.S. shale production and tepid demand is bringing "the price down."
Saudi Arabia can tolerate lower prices, said Amrita Sen, chief oil analyst at London-based Energy Aspects Ltd. "There will be some members, like Venezuela, Iran who will struggle at $90," she said.
Iran needs high prices to offset the loss of $26 billion of oil revenues last year from tough Western sanctions on its exports, according to estimates from the U.S. Energy Information Administration.
Algeria, which has been rattled by frequent riots over food and housing, needs an oil price of $121 a barrel to cover its planned domestic expenditure, according to the International Monetary Fund.
The country's oil and gas revenue fell by 9% in the first four months of 2012, according to government figures. Algerian finance minister, Karim Djoudi, has said that lower revenues tied to mounting U.S. shale production could force the government to cut domestic spending.
"Cutting subsidies without increasing wages could bring tremendous political animosity," and instability, said Geoff Porter, a longtime Algeria watcher and head of security consultancy North Africa Risk Inc.
OPEC is taking some small steps to address its new problem. Behind closed doors, officials say the group is preparing studies to evaluate the impact of U.S. shale oil on demand for its crude--a topic which will be discussed on May 31. "Definitely, we will review nonconventional shale oil from the U.S.," Mr. Khatibi said.
However, there is no agreement even on the size of the challenge. The North American oil boom has created a global oversupply of 1.5 million barrels a day, said Mr. Khatibi. Delegates from Gulf nations--on whom other members would have to rely to cut production because they are the only ones with flexible output--see the excess at no more than 500,000 barrels a day.
The most likely outcome of the May 31 meeting is for production to remain unchanged, said several OPEC delegates.
This inaction could be setting the stage for a future showdown. "We are heading toward some problems," one delegate from a Gulf OPEC member said.
Summer Said contributed to this article.
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