How the U.S. Shale Boom Is Splitting OPEC Apart

For decades, OPEC nations have, for the most part, enjoyed a good living. As long as oil prices remain high, they can recover billions of barrels of oil at relatively low cost and sell it to the rest of the oil-thirsty world.

But the North American shale oil boom is shaking things up for the cartel. In fact, the surge in U.S. and Canadian oil production resulting from the application of new drilling technologies threatens to reduce OPEC's share of the global oil market this year to its lowest level in more than a decade.

Does that imply gloom and doom for all OPEC countries? Hardly. That's because the impact of the North American energy boom isn't spread evenly among the group. While some members may only experience a slight financial impact, others could be in big trouble. Let's take a closer look.

A tale of two OPEC members
To explore this growing divide within OPEC, perhaps no two member countries offer examples as polarized as Saudi Arabia and Nigeria.

The kingdom is clearly the top dog; it produced nearly 10 million barrels of crude oil per day last year, making it the second-leading global producer, behind only Russia. Indeed, Ali al-Naimi, Saudi Arabia's oil minister and OPEC's de facto leader, recently said that Saudi Arabia welcomes the U.S. shale oil boom because the supply increase could help stabilize the global oil market.

But the Nigerians aren't so upbeat. And rightfully so. At a conference in the nation's capital city of Abuja earlier this year, officials expressed grave concerns about the country's falling oil exports. "Shale oil and the increase in their gas production is already affecting our exports to the United States," said Diezani Alison-Madueke, the nation's oil minister.

Indeed, Nigerian crude oil exports to the U.S. have plunged by about 50% since July 2010, displaced by oil of a similar quality gushing from U.S. shale plays such as North Dakota's Bakken, where companies continue to report staggering growth in production.

Kodiak Oil & Gas (NYSE: KOG  ) , an oil and gas junior with operations focused almost exclusively in the Bakken, said its oil production grew by 250% last year, while Northern Oil & Gas (NYSEMKT: NOG  ) and and Halcon Resources (NYSE: HK  ) , two other Bakken-focused operators, saw output grow by 93.4% and 173.2%, respectively.

As a result of this surge in U.S. oil production, several refiners have virtually eliminated foreign imports of Nigerian light oil. For instance, Valero (NYSE: VLO  ) has replaced all light oil imports with domestically produced oil at its Gulf Coast and Memphis refineries, while Phillips 66 (NYSE: PSX  ) recently said it expects to process 100% North American crudes at its refineries nationwide within "a couple of years."

OPEC's varying production costs
But that's not all. Not only is Nigeria at risk because of plummeting crude exports, but it's also not nearly as well equipped as Saudi Arabia to handle lower oil prices. That's because breakeven costs of oil production vary widely within the cartel, with some countries able to get by with much lower oil prices than others.

According to estimates by PFC Energy, a Washington-based energy research and consulting firm, Nigeria requires an average price of $87 a barrel to fund its import bill this year, while Saudi Arabia needs to fetch just under $70 a barrel to make ends meet.

Given that oil and gas exports account for roughly 80% of Nigeria's government revenues and more than 90% of foreign exchange earnings, that leaves Nigeria extremely vulnerable to a sharp and sustained decline in global crude oil prices. In fact, the IMF recently noted that if oil prices fall to between $80 and $85 per barrel (as an annual average), it would wipe out Nigeria's Excess Crude Account balances within a year.

But that's not to say the Saudis wouldn't be hurt from a sustained decline in oil prices, either. While they're less vulnerable because of lower breakeven costs, their petroleum sector still accounts for roughly 80% of budget revenues, 45% of GDP, and 90% of export earnings. Indeed, Prince Alwaleed bin Talal, chairman of Kingdom Holdings and nephew of King Abdullah, has warned that excessive reliance on oil revenues makes the kingdom particularly vulnerable to oil price shocks.

"If the price of oil was to decline to US$78 a barrel there will be a gap in our budget, and we will either have to borrow or tap our reserves," he said. "Saudi Arabia has SAR2.5 trillion in external reserves, and unfortunately, the return on this is 1 to 1.5 percent. We are still a nation that depends on the oil and this is wrong and dangerous."

The bottom line
The U.S. shale revolution is exacerbating an existing divide between OPEC member countries. While Saudi Arabia and other Gulf states have the financial resources to cope with lower oil prices, countries such as Nigeria and Angola desperately need high oil prices to balance their national budgets. Yet no OPEC member, not even Saudi Arabia, is immune to a sustained oil-price collapse.

OPEC's worst nightmare
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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2013, at 3:14 PM, jaimajenna1 wrote:

    Nigeria's problem is lack of law and order, period.

  • Report this Comment On October 26, 2013, at 4:59 PM, Pennsoldier56 wrote:

    Are we suppose to feel sorry for all those OPEC countries that are now feeling the pinch of reduced exports to us? After all the years they've been screwing us, I don't think so.

  • Report this Comment On October 26, 2013, at 11:35 PM, gasblogger wrote:

    You need to factor in natural gas as an alternative to oil. That is an even more important issue than oil itself. It can run any engine and costs about one fifth as much. See Useful References for the Natural Gas Revolution:https://docs.google.com/document/d/19Yf0MWpo91vrlu-mmJtjB1ER...

  • Report this Comment On October 27, 2013, at 2:58 AM, angrytaxpayer123 wrote:

    Hopefully the Saudi "royals" will be killed and eaten by their subjects, the same ones who piloted the planes on 9/11 in NYC. Same for the Nigerian "leaders", a more corrupt group would be hard to find.

  • Report this Comment On October 27, 2013, at 3:15 AM, oregonbyron wrote:

    It is far past time to shut these money grabbers down. It is good to see we are finally starting to do things in our own country again. To bad it can't be that way in every situation. In place of shipping everything over seas, because of the greed of the Unions and such in this nation that don't know when enough is enough. The unions shot us down and the companies moved out for cheap labor. Time to wake up and bring our jobs back home if people will use their heads in place of their greedy pocket books.

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