HOUSTON • Saudi oil minister Ali Al-Naimi issued a stark warning Tuesday to global oil executives gathered in Houston, many of them North American producers: Lower your costs or "get out."
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"The producers of those high-cost barrels must find a way to lower their costs, borrow cash or liquidate," the minister told a business audience in Houston during a speech at the IHS Ceraweek event on Tuesday.
"It sounds harsh, and unfortunately it is, but it is the most efficient way to rebalance markets. Cutting low-cost production to subsidize higher cost supplies only delays an inevitable reckoning."
The minister emphasized that OPEC has not "declared war on shale," nor is it chasing greater market share and is seeking to cooperate with other producers.
But OPEC will not yield and implement production cuts as Saudi Arabia does not believe other countries will comply, the minister said. Instead Saudi Arabia, along with Russia, Iraq and Qatar are looking to freeze their production to January levels, provided other countries including Iran agreed.
Cutting low-cost production to subsidize higher cost supplies only delays an inevitable reckoning
"We had one meeting, four countries agreed. We sent emissaries to other countries. It's a lot of talk," Al Naimi said during a panel discussion. "Hopefully some time in March there will be another meeting."
U.S. crude oil prices slid five per cent to under US$32 per barrel after the minister's point-blank refusal to consider cutting production.
Al Naimi blamed triple-digit oil prices for unleashing a wave of investments that has now led to oil trundling along at decades-low prices.
"This went from the Arctic, to Canadian oilsands, to Venezuela's Orinoco tar sands, to deep water frontiers," Al Naimi said in his speech. "It also led to the development of shale oil resources in some parts of the U.S."
The battle between OPEC and non-OPEC countries has intensified as oil prices continue to trundle along decade-low levels, triggering thousands of layoffs, and capex cuts. IHS believes North American producers will have to cut their capex by 64 per cent from 2015 levels to live within their cash flow.
The Saudi minister's message appears to have been heard loud and clear by North American producers.
"There will be a natural process. It will be Darwinian," said Cenovus Energy Inc. CEO Brian Ferguson. "It will be the barrels that can compete, and the companies that can compete, will be the ones that survive."
The Calgary-based executive said he is building a company -it cut its costs by about 30 per cent last year - that is not dictated by OPEC's decisions.
"We have to have a company that can compete on a North American basis in terms of our cost structure.... and have a robust company at US$50 per barrel, plus or minus. And I expect it to be a volatile environment," Ferguson said in an interview on the sidelines of the energy conference.
Other producers in North America are also bracing for a painful downturn.
"ConocoPhillips is planning for the worst-case, and we do not see the (OPEC) freeze working," said Ryan Lance, chairman and CEO of the Houston-based energy giant.
While there are stark differences, OPEC and non-OPEC producers likely agree that the industry is being portrayed as the "dark side."
Al Naimi chided developed nations for dictating what emerging economies can or cannot do to meet their energy needs.
While the minister believes "solar is the answer in the future," he also questioned the "accepted narrative" that emerged from the climate change summit in Paris last December, which saw fossil fuels being labelled as "harmful."
"We should not be apologizing. And we must not ignore the misguided campaign to "keep it in the ground" and hope it will go away."
Al Naimi, who started as an office boy in state-owned Saudi Aramco seven decades ago, said he has seen plenty of cycles - and even joked he owns a 'peak oil' T-shirt, referring to the much-debated theory about how much longer oil and gas will be available in sufficient quantities to support current needs.
But asked about the timing of an oil rebound by Daniel Yergin, vice-chairman of IHS Inc., the veteran minister quipped: "If I knew the answer to that, you and I would go to Las Vegas."
Saudi Arabia has a long-term bet that it can bring the markets to heel, but it has been stumped by the resiliency of other producers and financial market speculation that has led to prices undershooting in the short-term.
"The problem is the short-term is here to stay," the minister noted.