It is time for members of the Organization of Petroleum Exporting Countries to learn what the rest of the oil and gas business already knows: that competition in the petroleum business is no longer mainly a matter of volumes, but rather of money.
Although the future brims with challenges for the exporters' group, popular expectations about its early demise probably are wishful. The industry must wonder, however, when OPEC ever will respond to changes in its market and role therein.
Significance of size
It would be a mistake ever to disregard a collection of countries that controls 75% of the world's crude oil reserves and accounts for 40% of its crude production. But it is a mistake of OPEC to think that its reserves and production shares inoculate it against competition.Indeed, competition is strangling the export collaborators. It now appears that this year's average demand for OPEC crude will slip below last year's level and fall again in 1996. And the reason is not that the market has shrunk but that non-OPEC producers are claiming a growing share of it.
In its September Monthly Oil Market Report, the International Energy Agency projects the call on OPEC crude at 24.9 million b/d for 1995 and 24.8 million b/d for 1996, compared with 25 million b/d last year. Yet IEA expects continued petroleum demand growth: to 69.6 million b/d this year and 71.2 million b/d next year from 68.5 million b/d in 1994.
So OPEC's market share problem is becoming an absolute squeeze on volumes. And IEA's demand expectations may be optimistic. The implications are dire for a group that runs its business on revenues and treats volume and price as the only variables.
Navigating by revenues worked when the two key factors were subject to some degree of management. But manageability of oil prices is not what it used to be. And OPEC, the only entity with sufficient spare production capacity to leverage market balances with supply, has never managed volumes with enduring success.
The rest of the industry has refocused itself on profits, not revenues, and is managing what it can: costs and risks, including price risk. Hence the technology explosion that has lowered geological and mechanical risks, cut costs, and improved oil finding and recovery rates in the past few years. Hence the proliferation of derivative instruments by which buyers and sellers of oil can lock in prices and margins. Competing on the basis of factors under its control, the non-OPEC world is making money on what used to be called low-priced oil and capturing every new measure of demand that appears in the market.
OPEC seems to think it can wait out this competitive siege. Maybe it can. But the wait might be long and painful. As the Centre for Global Energy Studies of London declared last week in its Monthly Oil Report, "As long as other countries are able to offer better terms for upstream investment, the incremental barrel will continue to come from non-OPEC sources."
Some important OPEC producers don't offer terms for upstream investment at all. Most continue to treat their petroleum resources as sovereign assets, manage oil fields as royal checking accounts, and shun financial instruments offering protection against price risk. Then they wonder why production is growing in areas with less robust resource potential.
Where rewards go
OPEC will remain in suffering submission to market forces beyond its control until it decides to compete. That will mean big changes for some members: overcoming a reluctance to trade crude, for example, and exposing sovereign reserves to risk equity from abroad. For the group itself it probably demands a change of mission, from the pretense of price management to, perhaps, promotion of competitiveness and autonomy of individual members.
The market has changed. Its biggest rewards don't go to the biggest competitors; they go to the best. OPEC's new role is to compete like everyone else. Copyright 1995 Oil & Gas Journal. All Rights Reserved.
