Part 2: OPEC at war with itself, not Texas
Aug. 8, 2016
By Trevor Hawes
The current oil downturn, which has lasted a year and a half and counting, has often been blamed on OPEC. The cartel has been accused of attempting to upend the North American oil industry by keeping production levels high and, thus, driving prices down.
In the second part of his interview with the Reporter-Telegram, Railroad Commissioner Ryan Sitton gives his perspectives on the U.S. as an OPEC competitor and who he thinks the cartel is really at war with.
Coming Tuesday, Sitton shares insight into the controversial Trans-Pecos pipeline, which will deliver natural gas to Mexico though the Big Bend region. On Sunday, Sitton talked DUCs, gluts and why it seems the RRC is always being reviewed for sunset.
MRT: The talk is that OPEC is fighting a war with American producers. What’s your perspective?
Sitton: First of all, I agree that it’s not possible for OPEC as a group to knock out Texas oil producers because the Texas oil producers can produce oil cheaper than a large portion of the OPEC producers. Venezuela is a huge OPEC member produces millions of barrels of oil. Their cost of production is more expensive than Texas. However, Venezuela subsidizes its production, and its production has scaled way back because it doesn’t have the cash to develop based on current oil prices.
When you talk about guys in the oil business why companies like Concho and Diamondback are doing well, they say, very simply, “They’ve got the best rocks.” When you go into the Midland and Delaware basins, companies can get high production and long-term production with the wells they’re drilling, and the economics are still viable even at $40 a barrel.
So, OPEC as a group cannot take out our producers.
MRT: Is the U.S. OPEC’s biggest competitor?
Sitton: I believe that the bigger competition is not between OPEC as a group and the Texas oil producer — it’s within OPEC. In other words, Saudi Arabia, Kuwait and the (United Arab Emirates) — which are the only countries in OPEC that have any sovereign wealth — are trying to get the other OPEC nations to actually regulate their production. What has happened historically is that the Saudis have said they’re going to cut back production to maintain prices. The others have said that sounds great but don’t cut back their own production.
The big story a few months ago is that Saudi Arabia a few months ago replaced its oil minister (with Khalid al-Falih). Did you know he’s a proud Texas A&M Aggie? He’s an Aggie mechanical engineer and was educated in the United States. The event that happened just before they replaced the old oil minister was that Saudi Arabia couldn’t get the deal done that they wanted to get done. So the takeaway is that among the OPEC nations as a whole, there’s quite a bit of strife there. They’re competing internally trying to see who will be held accountable for actually cutting production and curtailing instead of just asking Saudi Arabia to be the only one who does.
So in the midst of all that is while those guys are fighting amongst themselves and Venezuela and other countries that don’t have cash are pulling production offline, the opportunity for North America as a whole is to take a big leap forward in our leadership in the energy markets around the world. As a group, Canada, Mexico and the United States could easily push its production to 15 million barrels of oil per day. If the OPEC nations broke up, we as a network could become the largest oil producing organization in the world.
MRT: With Venezuela’s troubles, have there been any issues at Venezuela-owned refineries on the Gulf Coast?
Sitton: As far as I know, there aren’t any operational issues, but we’ll see.
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