VIENNA: First, they ignored each other. Then, they went into a bruising fight. Finally, they are talking, albeit with opposing agendas.

The history of the relationship between the Organisation of Petroleum Exporting Countries (Opec) and the US shale oil industry has evolved a great deal since the cartel discovered it had a surprise rival emerging in a core market for its oil around five years ago.

US shale bankers came to Vienna this week and Opec is readying a trip for its top officials to Texas in a bid to understand whether the two industries can co-exist or are poised to embark on another major fight in the near future.

“We have to coexist,” said Khalid al-Falih, Saudi Arabia’s energy minister, who pushed through Opec production cuts in December, reversing Riyadh’s previous strategy to pump as much as possible and try to kill off US shale with low oil prices.

Opec and non-Opec countries led by Russia agreed on Thursday to extend oil output curbs by nine months to March 2018, keeping roughly 2 per cent of global production off the market in an attempt to boost prices.

But Opec now realises supply cuts and higher prices only make it easier for the shale industry to deliver higher profit after it found ways of slashing costs when Saudi Arabia turned up the taps three years ago.

In the Permian Basin — the largest US oilfield — Parsley Energy Inc, Diamondback Energy Inc and others are pumping at the fastest rate in years, taking advantage of new technology, low costs and steady oil prices to reap profits at Opec’s expense.

Opec’s latest calculus acknowledges the global clout of shale but seeks to hinder its growth by keeping just enough supply on the market to hold prices below $60 per barrel.

“All shale companies in the US are small companies,” said Noureddine Boutarfa, who represented Algeria at the meeting. “The reality is that at $50 to $60 a barrel, (the US oil industry) can’t break beyond 10 million barrels per day.”

That is the level many analysts estimate US oil production will reach next year, in what would be a 1m bpd rise, a staggering jump for an industry marked during 2015 and 2016 by scores of bankruptcies and thousands of layoffs after a two-year price war with Opec.

Still, that extra volume may not be enough to meet rising global demand or offset natural declines in traditional oilfields, which Opec is banking on.

Published in Dawn, May 28th, 2017