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Saturday, December 15 , 2018, 12:09 am | Fair 47º

 
 
 
 

Letter to the Editor: Doha Ends in ‘Aloha’

The recent convocation of Oil Producing and Exporting Countries in Qatar's capital city Doha (“ad-DAW-ha”) has been the subject of much speculation among those interested in the fate of oil production worldwide.

The financial press devoted a lot of space wondering if, how and when these notable oil producers/sellers would “freeze” production, meaning cease selling their product beyond a specified amount starting on a specified date.

Many thought such a freeze critical to arresting the slide in crude oil prices by limiting its supply. Led by Saudi Arabia, OPEC had often done this in the past.

Perhaps most vitally interested in Doha's outcome were those involved in shale oil production. Shale's drilling techniques – fracking, cyclic steam injection and acidizing – are much more expensive than conventional means, and their practitioners have suffered dramatically from the plunge in oil prices from a high of $112/barrel in mid-2014 to a low of $29/barrel in early 2016.

Brent Crude has since risen to the mid-$40/barrel, so Doha's outcome has been a source of anxiety and speculation for those who have a financial interest in oil production or who might consider having such an interest: producers, service industries, lenders, investors.

Though there was much media talk about the possibility and effects of a freeze, some knowledgeable observers believed such an outcome was never going to happen, and would have had a limited effect had it occurred.

In this view, Saudi Arabia has always made known it would not agree to a freeze unless it were a unanimous OPEC decision, an event it knew would not happen and didn't want to happen.

OPEC member Iran, whose recent pact with the US has enabled it to sell its oil again, needs oil profits to help sustain itself and would never have participated in a decision to eliminate, or substantially curtail, that possibility.

Saudi Arabia is still intent on crushing, or maiming, shale oil production, which was threatening that country's petroleum livelihood since high prices enabled the success of unconventional drilling. “The Saudis have understood for some time if it tried past tactics it would backfire because the resultant increase in the price of oil would support its shale competitors, allowing them to boost market share.” (Gary Bourgeault, seekingalpha.com, April 19, 2016)

So at Doha there was no agreement; nothing happened. All parties went home, perhaps to try another time - a middle-east “Aloha.”

What's next then? At this moment how should we view the financial viability of oil production in the world? Is the price of Brent Crude going up, down or sideways and, in any of these cases, when?

Some think the answer depends on how soon, if ever, the industry can “rebalance,” i.e., successfully reduce the cost of doing business so that lower prices still provide profits.

Having this as goal has prompted many producers to sell what they describe as “non-core” assets, presumably helping them to continue financing operations. But there are those who think investors should be careful to examine any producer's claim along this line, reasoning that most such cutbacks have already been made, and disposal of more essential assets puts a company at risk of no longer being a viable player: seeing its earnings decrease, its ability to provide dividends shrink and its market share erode.

If – most specifically referring to shale oil production – such an industry-wide rebalancing is achieved within a year, the investment picture for unconventional oil/gas producers would be fairly bright. But an investment bet on this scenario carries considerable risk, since things can get much worse before they get better and specific companies may fail in the interim.

If an industry-wide rebalancing is actually possible, and if current conditions make it unlikely to be achieved before the second half of 2017, then an investment decision regarding any oil/shale developer will certainly depend in large degree on its liquidity: how much money the company has, how much can it realize by selling non-essential assets, how much does it have the standing to borrow, either from institutional lenders or through high-interest bonds? Its degree of liquidity certainly influences its ability to stay afloat during that unstable period.

Another concern that might prompt a wait-and-see approach before oil/gas investment is whether Iran would actually accelerate its proposed oil output, which could easily spur the Saudis to do the same, fearing loss of product share – all of which would add to the global oversupply that has brought oil prices down.

Further reasons why oil prices will be under pressure for some time to come: “ ...shale producers are maintaining production at much higher levels than competitors believed they could, the global economy is slowing down, ...”

“If companies haven't significantly reduced drilling costs over the last couple of years, and don't have a strong amount of liquidity, … If the price of oil remains lower for longer, in many cases there is no guarantee producers will remain solvent.

“We're not just at the stage of whether or not a dividend will be retained, we're closer to the stage of whether or not the company will survive or not and if we'll get our capital back if we're holding common stock.” (ibid.)

Of course there are other views.

None of the contributors to this forum, some of whom declared confidently in 2105 that oil/gas prices would obviously soon rebound (“You can count on it.”) accepted a challenge to name an oil company stock buy and, within one day, publicize here its purchase price.

The opportunity still exists to display one's market prescience. My own decision was to move my IRA to a mutual fund that excludes fossil fuel investment.

Of course, all the considerations above are presented from the point of view of an “insider,” i.e., someone who doesn't, or doesn't want to, acknowledge the massive effect climate change will increasingly have on the viability of oil/gas producers/suppliers worldwide.

The diminishing hope that fossil-fuel-induced spewing of carbon dioxide and methane into the planet's atmosphere and oceans can be halted before irreversible warming overwhelms us has simply made clearer that at some point government, social and/or economic pressure will force oil companies to keep their product “in the ground,” devastating their earnings and market share.

Recent financial news, shareholder lawsuits and government investigations have revealed oil companies' deceit as to their understanding of the above, an understanding not shared, as regulations require, with investors.

William Smithers
Santa Barbara

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