How the fall in oil prices marked the beginning of a new global rivalry (The Washington Post, USA)
Houston - For many years, he promoted his concept that America would one day dominate one of the most powerful global markets. And when Harold Hamm, the discoverer of huge reserves of shale oil under American soil, stepped on the stage and began his performance in front of several hundred oil luminaries, he never questioned this concept.
“We can expect that the next 50 years will reap the benefits of the shale revolution,” Hamm said this spring. “This is the most important thing that ever happened to America.”
But outside the scene, the American oil industry — and Hamm’s business — were in a state of crisis.
Over the previous six months, Hamm, who founded the giant oil company Continental Resources, has lost 6,5 a billion dollars, or more than a third of its net worth. The industry that Hamm helped create faced the greatest challenge, desperately trying to maintain its profitability, while its rival Saudi Arabia smashes oil prices, and some analysts say it weakens the American oil industry. stories moment.
Behind low prices at gas stations this summer there is a trillion-dollar competition that can swing the geopolitical pendulum in one direction or another. On the one hand, there is the famous entrepreneur of the adventurous warehouse Hamm and other American oil owners who turned the technology of hydraulic fracturing into tens of billions of dollars in net profit and gave hope that Hamm says that the “catastrophic” period of Saudi hegemony will be over. On the other hand, the Saudis and their allies from the Organization of Petroleum Exporting Countries are trying to hold back the strengthening of American oil power and maintain their 40-year domination.
On Tuesday, West Texas Intermediate oil fell in price to 52,11 dollars per barrel (this mark is an American price guideline). The decline compared to the peak price of almost 110 dollars is quite significant. Meanwhile, the number of drilling workers in the country has decreased to 645. This is the smallest number in less than five years: a year ago, 1 500 drilling rigs operated in the US. OPEC last month said it would continue to produce 30 millions of barrels per day, despite low prices. Thus, it gave a powerful signal to its American competitors that it does not intend to reduce pressure on the United States.
And now a new type of pressure has appeared on the scene. Thanks to the decision to conclude a nuclear agreement with Iran, which has more oil reserves than all OPEC countries, with the exception of three, more Iranian oil will appear on the markets in the coming months. Analysts believe that as a result of this, Iran will pump out one million barrels per day or even more. The chance to conclude a nuclear agreement with Tehran in recent weeks has lowered prices by almost 15%, interrupting the price stabilization band that began after a major fall last year.
Even before News about Iran, the clash between American and Saudi energy business circles has created a new volatile force in the global economy and created unprecedented challenges for the two largest oil producers. Saudis need high prices to finance their country, but they have lost control of the market due to the oil boom in the largest economy in the world. After years of easy growth, the United States has faced the need for painful adjustments, including the dismissal of tens of thousands of people. Thus, they hope to maintain their competitiveness in the face of a price downturn.
At stake is not only the prices at gas stations, but also America’s energy independence, as well as the fate of one of its most active industries. The results of the restructuring will ultimately determine what cheap oil is: a slight deviation in the conjuncture or a multi-year trend.
In the past, when oil prices declined, the Saudis and other oil states came into play, cut production, and thereby sought price increases. But this time, prices fell partly due to the fact that energy production in the United States has increased significantly. Instead of supporting the market, Saudi Arabia itself went to increase production, which is why prices collapsed, creating a serious threat to American drillers counting on expensive oil.
“For the past 20-30 years, it seemed that OPEC could snap its fingers and make a difference at its discretion,” said Oklahoma’s Independent Petroleum Association president and Hamm’s acquaintance Mike Terry. “Well, now she no longer has such an opportunity.”
It has been almost a year since the start of the oil competition, and the leading players in the oil capitals from Riyadh to Houston make risky bets, considering their next moves. The Saudis continue to pump, although because of this, instability is increasing in their own oil economy.
For the United States, the danger is that low energy prices will derail their energy revolution, which only a few months ago seemed unshakable, helping to rebuild the still recovering economy.
"This is such a tidal scenario," said ConocoPhillips chairman and chief executive officer of Ryan Lance in Houston, describing the forces that cause problems for oil producers all over the world. “The industry today seems to be fighting for survival.”
Saudi force
The Saudis have an initial advantage in this global rivalry. They have the most readily available oil in the world, including one huge field - Gavar - where more oil is produced daily than in any other OPEC country.
Analysts say that many state-owned oil companies from Venezuela to Nigeria are corrupt. The state oil company of Saudi Arabia, Aramco, is not like that. Her objects shine with cleanliness, she leads an active housing construction, she has classrooms and centers.
At a conference in Houston, in which Hamm participated, and which was organized by the consulting firm IHS, a representative of Aramco said that the Saudis, having great advantages over the Americans, do not intend to give up slack during the downturn. Displaying on the screen the logos of fallen American companies - Kodak, Polaroid, Compaq, Muhammad Saggaf warned: “If we look back, we will see that the history is full of examples of successful companies that were in the lead in the competition, but in a very short time have fallen behind and ended up in the back row ... because their competitors won the innovation race. "
For decades, Saudi domination, oil prices were low, but during the wars in the Middle East and the oil embargo, they made powerful leaps up. In recent years, prices have risen to a new level above 100 dollars per barrel amid rising energy demand in China and India. All this time, American companies have been improving their production technology using the method of hydraulic fracturing in order to extract oil in such regions that it was impossible to think about, what they have to offer in terms of energy resources.
Over time, prices began to decline gradually amid the economic downturn and the growing awareness that open reserves in the US are enough to make America an energy-independent country, and in the long run an oil exporter. Then at the end of November, Saudi Arabia for the first time applied a new strategy, refusing to cut production for the sake of maintaining prices. This decision turned the gradual decline in prices into their free fall.
The Saudis were affected by unpleasant memories of the mid-1980-s, when a decline in global demand led to a similar glut of the market. In an attempt to ensure price stability, the Saudis then cut production from 10 to two million barrels per day. Buyers rushed to other OPEC countries, and the Saudis had to fight for years to get them back.
“We learned from those mistakes,” said Ali al-Naimi, the oil minister of Saudi Arabia, at a conference in Berlin in March. “Today Saudi Arabia and some other OPEC countries do not intend to subsidize producers with higher costs, yielding their market share.”
Aramco declined to comment for this article.
The new Saudi strategy has driven a wave around the world, stopping costly prey everywhere, from the Arctic to South America. In general, lower energy prices hit the oil-dependent countries, increased pressure on state-owned oil companies, caused the currency to fall in Nigeria, and also contributed to a serious economic downturn in Venezuela and Russia.
Some experts say that the Saudis are hoping to cut the tendons to a sharp increase in oil production using the hydraulic fracturing method. If they had not brought down the prices, oil production in the USA could have continued its rapid growth.
“But they would be asked again and again to cut production, and each time they would lose an increasing part of the market,” said IHS analyst Jamie Webster, who deals with global oil markets.
The Saudis have many advantages besides huge reserves. Hundreds of US companies cannot adapt to new conditions as quickly as a single state-owned oil company. Saudi Arabia can deliver its oil to the market in a matter of weeks. American oil producers need six months, or even more, because their oil is more difficult to access. If American companies suddenly decide to increase production, they will have to persuade the laid-off workers to return to the oil fields. In some cases, they will be forced to do this in conditions when these people have already returned to their homes and found a new job.
But Saudi Arabia also faces a difficult choice: there is a change of leadership, and she is involved in a military conflict with neighboring Yemen. Despite many years of attempts to diversify the economy, oil revenues remain the main and primary source of state funding.
Sustained low prices can “drain the kingdom’s savings accumulated during periods of previous price spikes,” according to a report by Khalid A. Alsweilem, a former director of Saudi Arabia’s monetary agency, who was published at Harvard’s Kennedy School.
From poverty to wealth
Hamm was born into a poor family in Oklahoma, becoming the thirteenth child of an agricultural share-worker. At the beginning of his career, he did the dirty work, washing the bottom of the tanks and carrying materials to the drilling. But Hamm was obsessed with great luck, intending to find a treasure in the land, which the authors of the book about the new oil billionaires “The Frackers” are writing about. In 1967, he founded a tiny company, named after his two daughters, learned geology, computer cartography, and eventually began buying cheap land in hard-to-drill areas, such as North Dakota.
In less than 10 years, Hamma Company, renamed Continental Resources, has become an oil giant thanks to a new, but expensive drilling technology, which has enabled the development of previously inaccessible wealth. “Thank God, we had good oil prices at that time!” Said Hamm at one event last September, when oil cost 97 dollars per barrel.
“Once upon a time, everyone thought about the decline of the American oil industry,” said Hamm. “We, if you will, witnessed how America entered a new era.”
However, due to falling prices over the steady growth of the United States - and Continental Resources - doubts began to appear.
Since the autumn of last year, the American oil industry has closed 60% of its drilling. Shares of their companies fell in price, not giving hope of growth. I had to lay off thousands of workers who might not return even if prices rose again. So far, only a small number of companies face the threat of bankruptcy, but they have to struggle with all their might to reduce projects that are no longer viable today. The recession was so severe that it slowed the growth of the entire American economy, which for many years received support from the growth of employment in the oil sector and from investment.
“There was an unreasonable opinion that the market for American oil is limitless,” said Michael Levi, an energy expert at the Council on Foreign Relations. “Because of this, there have been a lot of conflicting common sense investments.”
The prices of previous years - 111 dollars per barrel in 2012, 108 dollars per barrel in 2013 - helped Continental Resources to develop at breakneck speed. In early September, 2014, the company's stock price reached 80 dollars, and the state of Hamm, who owns 68% of these shares, exceeded Rupert Murdoch's wealth.
But then prices began to fall.
Due to lower prices, Continental Resources has become particularly vulnerable because Hamm misjudged the prospects for the oil market. When oil began to fall in price in early November, he considered that it had reached its “bottom rung”. Therefore, he sold off insurance assets worth 433 million dollars, and at the same time he lost his guarantees that he could sell oil at fixed prices.
His company, if you use industry slang, "bare", substituting for the impact of markets. Then, after Thanksgiving, OPEC held a meeting, and the Saudis decided that they would no longer maintain a balance in the market. Hamm probably understood that such a moment would come, but he did not guess how the markets would react. And they are crazy.
“In hindsight, you realize that this was the wrong decision,” said analyst Leo Mariani, who works at RBC Capital Markets, which oversees the energy industry.
Continental Resources declined to comment on Hamm and other company executives on corporate decision making, but answered a few questions via email.
The company's vice president of investor relations and research, Warren Henry (Warren Henry), said in an e-mail message that “no one expected such a rate of price decline, partly because it was caused by OPEC’s refusal to cut production, and not just demand-demand dynamics” .
Today, Continental is a completely different company than a year ago. She became smaller. It puts pressure on suppliers, forcing them to cut costs, and today it has fewer drilling rigs and production sites. In the Bakken Formation, which brought fame and celebrity to the company, Continental today works only in selected places in a small area where oil is the cheapest. Previously, work was distributed across eight countries.
“Last year, I sat at the table and counted 60 trucks per hour,” said Divide resident Jean Nygaard, who leases her farm land to Continental. “Now I’m going to work 45 kilometers and in all this time I can’t see a single car.”
Today, the American oil industry is trying to understand what will happen next. Someone believes that the rise in oil prices is already underway, explaining that many companies have refused to explore new places for drilling. Without exploration, mining can be conducted at the same level for a year or two. But not half a decade.
Hamm believes that the events of the last six months show the viability of the American oil industry. In the first three months of 2015, Continental Resources lost 33 million dollars, but Hamm says that the company will be able to stand on its feet by the end of the year. And if oil prices hit a mark in 70 dollars, it will quickly increase production.
“We adapt well to the new pricing environment,” says Hamm. - This is a great time to work in the American oil business. America will again become an energy superpower. ”
- Chico Harlan (Chico Harlan)
- http://www.washingtonpost.com/blogs/wonkblog/wp/2015/07/15/how-the-plunging-price-of-oil-has-set-off-a-new-global-contest/
Information