OPEC Did Not See Her Coming

Price of oil is now at a 6 year low. Translated, it only means that the price was lower 6 years ago. Translated further, it means that drillers, well owners and producers who invested with a high cost of production in the last 6 years are now out on a limb. It means that oil producing countries who are addicted to spending to prop up their own regime are out on a limb. It means that there is an opportunity to weed out the inefficient competitors and come out smelling like a rose. Opportunities follow the trail of blood.

Famous for the 1973 oil embargo, OPEC has, for all intense and purposes, ran its course. It is no longer taken seriously. Collectively OPEC is still producing 30 million bbls but increasingly, individual members are having a mind of their own. What then could replace OPEC?

The 3 amigos of US, Canada and Mexico set tongues wagging, when the respective oil ministers met on 15 December 2014. Was the meeting a precursor to a cartel, a friendship pact or just a chilling out among friends? By comparison, the production of the 3 amigos is 20 mm bbls while OPEC is 30 mm bbls. Not quite there yet but 3 Amigos have a huge potential in increasing production. Canada oil sands production locomotive in particular seems to have missed the news that there is an oil crisis.

The group, North America Venezuela Petroleum Exporting Countries, NAVPEC, consisting of US, Canada, Mexico and Venezuela, would have a better critical mass than the 3 Amigos.

US refining capacity at 17.8 million bbls per day is increasing as capital expenditure go against the grain of the present oil bust. Usage is running at 93%. The Gulf Coast market is relentlessly wooed by heavy Canadian crude, Mexico Maya heavy crude and Venezuelan extra heavy crude as all heavy crude seem to lead to the Coast by all means creating a bottleneck of sorts. Canada, without keystone, still has many alternatives in the potpourri of pipeline network from Alberta to Gulf Coast, plus rail, barges, ships, and anything that can handle, heat and di-diluent the gooey stuff at the off-loading point. Mexico would have to contend with growing Canadian crude encroaching on the same refiners sitting pretty there. Now is the time to have a hard look at how oil is transported as transportation and distribution costs could mean a make or break for oil producers at today's busted prices. The cheapest method from source to refinery is by pipeline. A future pipeline from Venezuela via Mexico plus the laying of Keystone XL would be the last dishes of a full course, in a confluence of the world's largest supply of heavy crude to the world's largest heavy crude refining centre. Export of the ever increasing production of Light Tight Oil, LTO, could be swapped for heavy crude import under a provision of the export ban, without the need to reconfigure the heavy crude refineries to accept light crude. With the high discount associated with heavy crude and the Mid-West heavy crude refineries already flooded with Canadian crude, a flurry of pipeline activities is happening at the Gulf to channel Canadian crude to the Gulf sink while waiting for Keystone XL, a 800,000 mmbbl p/d conduit.

This once generous Socialist country, Venezuela, had grandiose plans to help its poorer neighbors by selling oil at a discount complete with plans to deliver the subsidized fuel. Whether the motive was to buy friends or otherwise is not important. What is important is the planning and infrastructure in place. The Trans Caribbean pipeline aka Antonio Ricaurte gas Pipeline could reverse flow, convert to carrying oil or add an oil line to deliver oil & gas to Colombia. Plans were drawn to extend the pipeline all the way to Nicaragua and further on to Mexico's Yucatan Peninsula. From Mexico the pipeline would travel by land or by the Caribbean Sea. Even though the Caribbean sea route was meant to disseminate oil & gas to the Caribbean Islands and members of Petrocaribe, the Gulf Coast heavy crude refining capacity of 2.4 million bbls per day, and rising, is well poised to receive Mexican and Venezuelan crude by pipeline.

Chronic protests, inflation up to 100%, GDP contracting by 7%, dwindling purchasing power has dulled a nation that was used to Government handouts. With sanctions in place, US declaring it a National Security Risk, an opposition leader in jail, an official defecting to US and a warlord lurking in the background, Venezuela is surviving on borrowed time.

When all things fail, there is always the military exercise. No harm taking a leaf from North Korea's book. Better still, lob a couple of missiles into the sea, nothing like a bit of fireworks to portray a sense of festivity to the populace but when a people whose favorite pass time seem to be tweeting photos of empty supermarket shelves, fireworks are furthest from their minds.

With a foreign reserves of $21 billion, bond repayment of $24 billion within 5 years, a handout galore policy, Venezuela would run out of money by end of 2015. Fellow OPEC nations would not be offering a helping hand as they have problems of their own. China has already extended $5.5 billion worth of loans with slim chance of repayment on maturity. The route to Venezuela's survival is to approach US for an oil for food deal, agree to compensate all nationalized businesses and open up its oil reserves for joint development including its national treasure, Orinoco, under the framework of a new umbrella NAVPEC, at the same time withdrawing from OPEC.

A reverse flow to Latin America tracking former Venezuelan President Chavez's 5200 mile vision of the Great Gas Pipeline of the South would be a perfect start to a new era of oil & gas diplomacy. First mooted by Chavez in 2005. it is environmentally and financially challenging but with oil majors participating due to a lack of upstream investment appetite, such a project estimated to cost $20 billion would not be far fetched. It creates demand and spurs economic growth. besides, it would channel overflowed natural gas from North America to South America without building expensive LNG plants. South American nations with stranded natural gas reserves, due to a lack of capex, would only be too happy to tap into the distribution system.

Oil & gas producing countries outside the Americas could very well be all but locked out of this market. US interest in Latin America has already taken off on 26 January 2015 by US Vice President's invitation to Petrocaribe nations to the Caribbean Energy Security Summit in Washington DC. EU, UN and World Bank representatives joined the meeting.

At the sideline, OPEC could only watch with trepidation. To justify its existence as a community minded caring group , OPEC declared that it is not a cartel, but neither is NAVPEC nor the 3 Amigos.

Its demise is near, unless it has the staying power to announce to the world that it ain't over till the fat lady sings, the lady, the Valkyrie, who presides over the fallen, and the fallen in this case could very well be OPEC.