Yesterday I was on the Neil Cavuto show on the Fox Business Network with Sandra Smith where the discussion centered on OPEC market share, which will hit its lowest level in almost 10 years. OPEC is finally acknowledging that shale gas and the oil revolution is giving them some sleepless nights. What is more, it could be a lot more serious than they want to believe. At one point in yesterday's conversation, I suggested we might see the demise of OPEC as a cartel in the next ten years or so, which seemed to take Neil by surprise. Neil pointed to the fact that there have been many who have suggested OPEC’s demise and it failed to happen.
In the past when OPEC’s back has been against the wall, like the late-1990s, energy prices and demand rebounded to save them from the ash heap of history.
Yet this time may be different. Why? Because OPEC is not the only game in town! This is a new era! An era of breakthrough technologies like the miracle of fracking, which set the stage for a record amount of oil discoveries last year and the promise of many more to come this year. With the change in the energy mix and oil being found in many new places along with new gas discoveries, OPEC will not be able to coerce the global oil market like they have before.
Global oil demand will rise, perhaps dramatically, in the future, yet at the same time it is unlikely that OPEC will have the ability to control prices or move the markets like they have before. OPEC already realizes this and that is the real reason why OPEC continues to produce as much oil as they can. They know that in the very near future every barrel they choose not to pump there will be another producer waiting anxiously to fill that void as technology unleashes an explosion of new oil discoveries. Fracking is OPEC’s worst nightmare.
OPEC is already losing its best customer, the good old United States of America, as its oil production will overtake the former global swing producer, Saudi Arabia. On top of that, OPEC is fighting the renaissance of new oil discoveries that will make major producers out of places like Brazil and Australia just to name a few. In Brazil proven oil reserves of oil and natural gas are now 14.4 billion barrels, one of the top ten in the world. Just the other day it was reported that close to 233 billion barrels of oil has been discovered in the Australian outback, that if developed will give the Saudi’s even more competition to supply the growing demand from the emerging markets. A report estimated that 16 million acres of land in the Arckaringa Basin in South Australia contain between 133 billion and 233 billion barrels of shale oil trapped in rocks. It is likely that only 3.5 billion barrels will be recovered easily but OPEC better hope that they keep prices low enough or the competition will stiffen.
Those OPEC meetings in Vienna won’t be what they used to be. In fact the truth is that OPEC as of late has had very little success propping up oil prices. Oil prices have been propped up more by global central banks than anything that OPEC has done. OPEC is producing at near a record high, not so much because they want to keep prices low but because they fear for their future. The jig is up and OPEC won’t be able to control it like they did before. Not only will they lose market share, they will have to deal with a constant changing energy mix that will dissuade them from alienated their customers by withholding supply.
OPEC is falling victim to technology. The shale gas revolution has major users turning away from OPEC’s major product and switching over to a much cheaper and cleaner fuel like natural gas. With fracking, this fuel is becoming more abundant and supply over time will continue to grow. Oil will have to become more competitive as users that now have a choice will make the switch to natural gas. We have heard from the biggest consumer of diesel fuel in the United States, Burlington Northern Santa Fe, that they will start using liquefied natural gas in their engines.
Now I know it sounds crazy, this thing about OPEC and their demise, but it is very likely to happen. In the past when I dared suggest that oil prices that were then trading in the $20s could go to $40.00, many said that could not happen. But it did. When oil prices were soaring and people were predicting $200.00 a barrel and I said beware that we could see a major crash, many said that was crazy too. But it did. When I suggested that the U.S. could become energy independent by fracking, many said that was crazy. But that's happening too. So the idea that OPEC could become a broken cartel — why would that be crazy? In fact OPEC's influence is already receding and there are many other forces that are ready to take their place! So, OPEC, enjoy your last hurrah and good riddance.
Natural gas continues to rock. In the short end demand is supporting prices. Naureen Malik of Bloomberg News reports, “Near-record natural gas demand from U.S. electricity generators is driving prices back up toward $4 for the first time since September 2011 even as output climbs to an all-time high for the sixth straight year. Producers including Duke Energy Corp., NRG Energy Corp., Southern Co. and Dynegy Inc. say they plan to run their gas- fired units this year at close to the top rates of 2012. Plants burned 24.96 billion cubic feet of gas a day last year, up 4.21 billion from a year earlier and a bigger gain than in the five previous years combined. Gas futures have rebounded 94% since trading at a 10-year low last April as utilities switched from coal and unusually hot weather spurred cooling demand. Power-plant consumption of gas may come close to, or even exceed, 2012 levels as the fuel retains a cost advantage over coal in the eastern U.S. and the economy grows, according to BNP Paribas SA and ConocoPhillips. That contrasts with an Energy Information Administration projection that demand for gas will slide 7.5% this year.
The EIA also is reporting that nuclear outages in 2012 were generally higher than in recent years because of extended forced and planned outages at four nuclear power plants, and they continued into the new year. Coupled with the beginning of spring refueling outages, outage levels in early 2013 are above those seen in the previous five.
Big picture the demand outlook is improving as U.S. exports will start to happen. In a small way they are already happening! The Energy Information Administration is telling us that U.S. natural gas exports to Mexico have already reached a record high in 2012. This was a country we were looking to depend on for natural gas just a few years ago. U.S. natural gas exports to Mexico grew by 24% to 1.69 billion cubic feet per day (Bcf/d) in 2012, the highest level since the data collection began in 1973. With imports now accounting for over 30% of its total supply, Mexico's natural gas use is also at its highest level ever.
Natural Gas consumption is rising faster in Mexico than natural gas production, and as a result, Mexico is relying more on natural gas imports from the United States. Between 2007 and 2011, natural gas consumption in Mexico rose 4% per year on average, while average annual natural gas production climbed only 1.2%. Growing demand in the industrial sector drove the increases in natural gas consumption in Mexico to a record-high level in 2011, according to Petróleos Mexicanos (PEMEX)—the state-run oil and natural gas producer in Mexico.
Before 2006, almost all of Mexico's natural gas imports came from the United States. More recently, Mexico has diversified its supply sources by importing liquefied natural gas from Nigeria, Qatar, Indonesia, Peru, and Yemen, although the vast majority of their natural gas imports continue to come from the United States.
Source: U.S. Energy Information Administration, based on Office of Fossil Energy.
Pipeline shipments from Texas to Mexico between 2009 and 2012 rose 34% on average per year to 1.3 Bcf/d, which was about 75% of the U.S. natural gas exports to Mexico in 2012. Most of the U.S. exports to Mexico departed the country from Hidalgo County in southwest Texas, where the supplies were likely coming from the Eagle Ford play.
Source: U.S. Energy Information Administration
Several U.S. pipeline export projects that could support additional natural gas exports to Mexico have been announced. According to company announcements, these projects are expected to be completed by the end of 2014 and, if they are all built, could add up to 3.5 Bcf/d of additional export capacity to Mexico, doubling existing capacity.
This additional capacity would serve an expected increase in natural gas demand from Mexico's electric power sector. Mexico plans to add about 28 gigawatts of new electric generating capacity between 2012 and 2027, mostly in northern Mexico, according to Comisión Federal deElectricidad (CFE)—Mexico's state-run electricity provider. CFE estimates that this could raise natural gas needs for power generation by 5.1 Bcf/d. This level of growth would likely require increased natural gas imports from the United States.
