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OPEC Threatens To Kill U.S. Shale



The Organization of Petroleum Exporting Countries will once again become a nemesis for U.S. shale if the U.S. Congress passes a bill dubbed the NOPEC, or the No Oil Producing and Exporting Cartels Act, Bloomberg reported this week, citing sources present at a meeting between a senior OPEC official and U.S. Banker

The oil minister of the UAE, Suhail al-Mazroy, has reportedly told lenders at the meeting that if the bill was made into a law that made OPEC members liable to U.S. Anti-cartel legislation, the group that is to all intents and goals really a cartel, would break up and each member would boost production to its maximum.

This would be a repeat of what happened in 201

3 and 2014, and ultimately led to another oil price crash like the one that saw Brent crude and WTI sinks below $ 30 a barrel. As a result, a lot of U.S. shale-focused, debt-dependent producers would go under.

The bankers who provide debt financing for those shale producers are the natural target for opponents of the NOPEC bill. Banks got burned during the 2014 crisis and are still recovering and regaining their trust in the industry. WTI climbs closer to US $ 60 a barrel, but lenders are certainly aware that this is largely the result of OPEC's action: the cartel is cutting production again and the effect on prices is becoming increasingly visible. Related: Pakistan aims to become a natural gas hotspot

Indeed, if OPEC starts pumping again at maximum capacity, even without Iran and Venezuela, and with continued outages in Libya, it would push prices significantly, especially if Russia joins After all, its state oil companies have been itching to start pumping more.

The NOPEC law has little chance of becoming a law. It's not the first attempt by U.S. legislators to make OPEC liable for its cartel behavior, and none of the others has made it a law. However, Al-Mazroey's not too subtle threat highlights the weakest point of the U.S. Shale: the industry's dependence on borrowed money.

The issue was analyzed in depth by energy expert Philip Verleger in a Oilprice story earlier this month, and what the problem goes down to is too much debt. Shale, as Total's chief executive, put it in a 2018 interview with Bloomberg, which is very capital-intensive. The returns can be appealing if you're drilling and fracking in a sweet spot in the shale patch. They can also be improved by making everything more efficient, but ultimately you would need quite a lot of cash to continue drilling and fracking, despite all praise about the decline in production costs across the slalom plays.

The fact that a lot of This oil has just been highlighted before: the oil and gas industry faced a crisis of investor confidence after the 2014 collision, because the only way it knew how to do business was to pump ever-increasing quantities of oil and gas. Shareholder returns were not top of the agenda. This had to change after the crash and most of the smaller players-those who survived-have still to fully recover. Free cash remains a luxury.

Related: The EIA Cuts U.S. Oil Output Projections

The industry is aware of this vulnerability. The American Petroleum Institute has voicedly opposed NOPEC, almost as vocally as OPEC itself, and BP's Bob Dudley said this week at CERAWeek in Houston that NOPEC "could have serious unintended consequences if it unleashed litigation around the world."

"Severe unintended consequences "is not a phrase bankers like to hear. Chances are they will join in the opposition to the legislation to keep the shale's wheels in turn. The industry, meanwhile, might want to consider ways to reduce its dependence on borrowed money, perhaps by capping production at some point before it becomes forced to do it.

By Irina Slav for Oilprice.com

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