Opinion

Alternative Facts About OPEC & U.S. Shale From The Wall Street Journal


Posted in The Petroleum Truth Report on December 19, 2018

The Wall Street Journal's recent editorial “How America Broke OPEC” shows that even high-quality journalism is susceptible to the contagion of alternative facts.

It is a propaganda piece about how the underdog U.S. oil industry miraculously rose from the ashes and kicked OPEC's ass.

Never mind that the U.S. has been an oil super power super forever so the premise of the editorial is bogus to begin with.

How Can U.S. Oil “Win” If It's Broke?

More importantly, how is it possible that the business-focused Wall Street Journal failed to mention that American tight oil—the object of its praise—is broke?

U.S. tight oil lost money in the 3rd quarter of 2018 (Figure 1). Capital expenses have exceeded cash from operations in almost every quarter for the last decade.

That includes the Permian basin darling companies Diamondback, Concho and Pioneer.

Figure 1. Only 33% of tight oil companies had positive cash flow in Q3 2018. Pure Permian players Diamondback, Parsley, Concho & Pioneer had negative cash flow. Apache, Continental, Marathon, EOG, Oxy, Devon & Conoco had positive cash flow. Source: SEC 10-Q filings, Yahoo Finance and Labyrinth Consulting Services, Inc.

There are reasonable arguments that cash flow is always negative during field development. The reality, however, is that tight oil plays are in perpetual field development because of high decline rates. That's a big part of why most companies never make any money.

It also spoils the story about kicking OPEC's ass.

Wells Produce Oil, Not Rigs

The Wall Street Journal confuses tight oil production growth with economic success.

“U.S. crude production has surged 20% in a year and nearly tripled in a decade thanks to advances in hydraulic fracturing and horizontal drilling. American output is rising at the fastest rate in a century. Earlier this year the U.S. eclipsed Saudi Arabia and Russia as the world's largest oil producer.”

How dumb is it to increase oil production when you are losing money on every added barrel?

The Journal then trots out a sad attempt at proof of its impossible thesis (my Figure 2 below). It shows that rigs are becoming more efficient and that more oil per rig is produced as a result.

Figure 2. More efficient oil producers. Source: Wall Street Journal (Dec 15, 2018).

Think about that last sentence and look at their graph again—production per rig?

Rigs don't produce oil. Wells do. This is nonsense!

The number of tight oil wells reaches new records every month as average well output decreases.

Giving the Journal a more-than-generous benefit of doubt about their chart, if more efficient rigs don't result in positive cash flow for the oil companies, why is this chart even relevant?

What Oil Price War?

The Wall Street Journal doesn't support or even re-state its lascivious headline “How America Broke OPEC” because it isn't true.

OPEC produces more than 40% of the world's crude oil and condensate.  If anyone doubts OPEC's power and influence, look up how many articles The Wall Street Journal has written about it over the past year.

The Journal subscribes to the unfounded but widely accepted belief that OPEC has a strategy that involves a price war with U.S. tight oil producers.

“In late 2014, OPEC flooded the market with oil in an effort to break U.S. drillers who were burning cash on mounds of debt.”

The part about cash and debt is true—then and now. The rest is simply untrue.

U.S. and Canadian—not OPEC—production flooded the market in 2014 and caused oil prices to collapse (Figure 3).

Figure 3. U.S. & Canadian unconventional oil production surged in 2014 and caused oil prices to collapse. OPEC+ did not increase output until 2nd quarter of 2015 after prices collapsed. Source: EIA, Cansim, Drilling Info and Labyrinth Consulting Services, Inc.

OPEC did not respond with increased output until the 2nd quarter of 2015, after Brent prices had fallen from $112 to $48 per barrel.

If anyone started a price war—and I don't accept that there ever was one—data points toward the U.S. and Canada—not OPEC. OPEC was merely responding to a market-share challenge as any reasonable business would and it showed considerable restraint before taking action.

Another untrue part of the price-war narrative is that OPEC caused oil prices to collapse by deciding not to cut production in late 2014. Wait, didn't I just show that prices collapsed because of over-production by the U.S. and Canada? Facts often spoil an otherwise good story.

OPEC's decision not to cut production had little or nothing to do with unconventional oil. It reflected an unwillingness to repeat its mistake of cutting 14 million barrels per day between 1980 and 1985 with little effect on prices while decreasing OPEC market share.

Ali Al-Naimi, the former Saudi oil minister said about the decision not to cut production in 2014, “We met with non-OPEC producers, we asked ‘what are you going to do?' They said nothing. We said the meeting is over.”

“Non-OPEC producers” means Russia. When Russia changed its mind in late 2016, production cuts occurred and world oil prices began to normalize.

In an interview in 2016, Al-Naimi said, “It would have been stupid of Saudi Arabia to agree to a cut then [in 2014]. More non-OPEC production would have come [on the markets]. We had no choice.”

Stick to Politics, Not Oil

Oil markets are complicated. I have been trying to understand them for more than 40 years and can only claim partial success. The Wall Street Journal, along with many analysts and politicians, thinks it is has all the answers in its kit bag of American exceptionalism and alternative facts.

The sheik vs shale narrative reflects an immature perspective that sees oil markets in simplistic terms of winners and losers. It fundamentally disrespects the intelligence of OPEC. Attention to data and history should at least cast doubt on the narrative's validity.

I am no apologist for OPEC but I am an advocate for facts.

There are many things to praise about the U.S. oil industry. Making money in tight oil plays is not among them.

The Wall Street Journal generally writes fine editorials.”How America Broke OPEC” is not among them.

—————————————-

I have no positions in oil and gas other than minor equity holdings in two U.S. public companies that are professionally managed with my consent and agreement. I do not consult for any company mentioned in this post.



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