How to Push Back Against OPEC

How to Push Back Against OPEC

Everyone has fears, and OPEC is no different. OPEC should be scared, real scared, of America's oil boom. In a previous article I pointed toward the Bakken and the Permian Basin about to bring online an additional 2 million barrels of crude oil output a day by 2025, which will probably be higher because that implies the Bakken hitting and plateauing at 1 million bpd, which in reality it will probably surpass.

Continental Resources has been able to drill deeper laterals to increase the amount of recoverable oil per well by around 40-60% in the Bakken. The Bakken and the Permian Basin has OPEC scared, but there are other plays out there that have OPEC tossing and turning at night.

Emerging plays
While every investor is well aware of the Bakken and Eagle Ford's recent oil revolution, other moves are being made all around us. Linn Energy LLC is investing in the Granite Wash, a play between Oklahoma and Texas.

The wells that Linn Energy has been able to bring online have been producing roughly 70% liquids, and it has plenty of rigs in the area to tap into those liquids. Four rigs are up and running on the Oklahoma side of the play, and five are running on the Texan portion. In total Linn Energy estimates that there are 600 horizontal drilling locations in its panhandle acreage.

While the Granite Wash isn't going to post amazing oil output like the Bakken, each new well that is brought online makes OPEC's headache that much bigger. As each play brings more production online, the sum of parts gets pretty big.

Linn Energy also has a stake in the Jonah Field up in Wyoming, which it purchased from BP back in 2012. This play's reserves are 73% weighted toward gas, 23% NGL, and only 4% oil. While crude isn't the major focus of this play, it does put downward pressure on global natural gas prices once the U.S. starts exporting LNG.

Qatar is a member of OPEC and a major LNG exporter, so it will have to deal with the additional competition in the coming years.

A new competitor
Back in the early 2000's most saw the U.S. as importing more and more LNG each year. But once the shale revolution brought bountiful levels of gas into the picture, U.S. LNG imports dried up and the market did a complete 180. Now the US is going to start exporting LNG, which will throw a big wrench into OPEC's control of the gas market.

Cheniere Energy is going to have a processing plant up and running by 2015, which will start producing and exporting LNG. Cheniere Energy's Sabine Pass project has received approval to export to both FTA and non-FTA nations, which allows it to tap into very profitable markets like Japan.

While OPEC may have thought it was going to export to Europe, North America, and Asia with competition primarily coming from Australia and Russia, the landscape has since changed. Now North America has turned from a revenue stream to a major competitor in the field.

Cheniere Energy is glad to lend a helping hand to balance out the United States' trade balance while leaving OPEC members restless at night. OPEC will no longer be able to extort Asia for $16-$20 mmBtu, because North America can undercut it with the help of companies like Cheniere Energy.

Cheniere Energy has already signed a 20-year contract with a subsidiary of BG Group to sell 4.2 million metric tons a year once Train 1 comes online. In total, Cheniere Energy's Sabine Pass plant will ship out 16 million metric tons a year of LNG from four different processing plants.

Cheniere Energy plans on shipping to markets in Asia and Europe, with the potential to add an additional two million metric tons a year in processing/shipping capacity through a fifth processing plant.

This goes against OPEC's plan for global energy dominance and raises concern about what cheap North American LNG, which trades at a steep discount to global prices, will do to their margins. Cheniere Energy has no problem making OPEC sweat as it waits anxiously to see how many LNG exporting licenses the U.S. government will give out.

Final thoughts
OPEC has had a good run for several decades without too much competition, but now non-OPEC members are sticking their foot out and wreaking havoc on OPEC's master plan. OPEC should be afraid that North America, one of its best customers, will turn on it.

Another company sticking it to OPEC
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