OPEC Is Dead, What’s Next?

OPEC is dead, Rosneft’s head Igor Sechin has told Reuters. In a fine example of stating the obvious – at least to those who have been keeping an eye on the energy industry – and putting it in context, the chief of Russia’s largest oil company welcomed an era where the oil market will be driven by “finance, technology and regulation.”

Russia and OPEC are natural rivals, although there has been a sense of partnership, especially after the advent of shale in the U.S., when both started pumping more and more crude to preserve their market share.

It was Russia that tried earlier this year to negotiate a production freeze with OPEC, and while some smaller OPEC members were ready to sign on the spot, the organization’s leader, Saudi Arabia, blew the proposal off, demanding that Iran also take part in the freeze.

This was an embarrassing moment for Russia, and in his email to Reuters, Sechin made a point of noting that Rosneft was always against this move, with perfectly reasonable skepticism.

Riyadh has boasted repeatedly that it can wait out the price slump. Of course, the success of this strategy would depend on the length of the slump, but Saudi Arabia has deeper pockets than Russia. Saudi Arabia also has a new economic development program that involves a move away from oil.

The Saudis have all but said outright that their national priorities in energy would always trump OPEC priorities. The country has repeatedly used its influence as the largest producer in the organization to dictate the energy policies of smaller producers, which has been harmful for the latter. And these policies, which can be summed up as “pump as much as you can, don’t let the shale boomers get a breather” have not led to a clear victory. They have not led to a sharp rise in prices, which was expected to take place after the shale producers throw in the towel. But U.S. shale companies have lasted much longer than expected.

Saudi Arabia knows that OPEC is dead. It’s reached the end of its productive life. On Tuesday, Aramco’s chief executive said that the company plans to increase its gas production twofold over the next 10 years. Aramco is betting on gas, and with a very good reason: it’s the cleaner hydrocarbon, and the global economy should start recovering and expanding soon, so gas demand is set for steady growth, at least according to the latest Medium-Term Gas Market Reportby the International Energy Agency.

In light of the priorities laid out in the Vision 2030 plan, it becomes clear that Saudi Arabia no longer needs OPEC. It’s striking out on its own to try and overcome its “oil addiction.” Without Saudi Arabia, which alone pumps some 10.27 million barrels per day (as of April), the rest of OPEC are likely to go their separate ways as well.

Though Sechin did not exactly mourn it, the demise of the cartel that dictated the oil market is not necessarily good news for Rosneft and Russia. If Saudi Arabia gets the know-how to develop itsgas reserves, it could turn into an important rival for Russian, as well as Iranian gas. It’s possible that natural gas will overtake crude in terms of demand in the future. Perhaps an OGEC will replace OPEC?

In the meantime, though, plans were announced to ramp up oil production. Apparently, nothing is certain as of yet, aside from the clear fact that OPEC will never again be reborn into its former glory.

By Irina Slav

sourche: http://oilprice.com/Energy/Crude-Oil/OPEC-Is-Dead-Whats-Next.html