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OPEC Divided Over US Oil Boom

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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.

Copyright (c) 2012 Dow Jones & Company, Inc.

WHAT DO YOU THINK?

Post a Comment Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
Larry | Jun. 1, 2013
Nigeria and the African producing nations have had plenty of time to use their oil revenue to build and diversify their economies. They have no excuse if they have missed or messed up opportunities and should stop expecting other countries to accommodate them. A stable, realistic oil price is essential to the world economy.

Ugochukwu Obinka | May. 31, 2013
Its a good thing that the shale oil is finally being tapped. Seemed like a deliberate attempt to preserve the US oil for uncertain future. It is also a wake up call for the Nigerian government. If money accrued from oil revenue is not properly channeled and utilized the economy will be going nowhere.

Bill Hart | May. 31, 2013
OPEC has dictated to the west for 3+ decades and represents the largest shift of wealth in human history to a collective group of nations that have done nothing to further humanity, but merely exploited what they sit upon without contributing anything to bettering life here. Their suffering is a good thing. However we should at the same time diversify our energy eggs while enjoying this momentary reprieve. Hydrocarbons will be our crutch for at least the next 30 years but anything we can do to reduce our reliance on the output of these despicable members of the planet, the better.

bdoid | May. 31, 2013
Good for the US, we now are getting stronger and have a playable hand in the energy discussion. Bad for the US bcaz people fight wars over these type of things. And the US would be right in the middle of that situation. for example: we cant assume that Algerian rebels wont attack our interests bcaz of unrest in Algeria stemming from their govt slowing domestic spending. And we will spend a lot of money on another war. Im holding my breath. But shale oil is here to stay.

Ike | May. 31, 2013
The stage is set. This may just be the beginning for increase oil output from USA. African oil producers should stop complaining because they are aware this is coming. They should look inwards to reduce corruption and diversify their economy. To me that is the way out.

don | May. 29, 2013
Obama is not liking all the oil being found in the usa. an is hard trying to slow it way down. an will one reason he want let the xl pipe line be put in

biggeorge22 | May. 27, 2013
Let them choke on it! The tide is turning, they knew this day would come and few of them are prepared for it. So sad, too bad!


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