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Exclusive - Saudis tell U.S. oil: OPEC won't extend cuts to offset shale - sources
March 9, 2017 / 7:49 PM / 5 months ago

Exclusive - Saudis tell U.S. oil: OPEC won't extend cuts to offset shale - sources

A flag with the Organization of the Petroleum Exporting Countries (OPEC) logo is seen before a news conference at OPEC's headquarters in Vienna, Austria, December 10, 2016.Heinz-Peter Bader/File Photo

HOUSTON (Reuters) - Senior Saudi energy officials told top independent U.S. oil firms in a closed-door meeting this week that they should not assume OPEC would extend output curbs to offset rising production from U.S. shale fields, two industry sources told Reuters on Thursday.

Oil producers led by Saudi Arabia and top non-OPEC exporter Russia are in an uneasy truce with U.S. shale firms after a two-year price war that sent many shale producers to the wall. The Saudis and Russia led a deal to curb output in late 2016 to end a global supply glut that pushed oil prices to a 12-year low.

The resulting rise in oil prices has sparked a rush of new output by shale producers, who this week outlined ambitious production growth plans across the United States.

Speaking at an industry conference in the U.S. energy capital of Houston on Tuesday, Saudi Arabia's Energy Minister Khalid al-Falih said that there would be no "free rides" for U.S. shale producers benefiting from the upturn.

Falih's senior advisors went a step further at the meeting on Tuesday evening with executives from Anadarko (APC.N), ConocoPhillips (COP.N), Occidental Petroleum Corp (OXY.N), Pioneer Natural Resources (PXD.N), Newfield Exploration (NFX.N) and EOG Resources (EOG.N).

"One of the advisors said that OPEC would not take the hit for the rise in U.S. shale production," a U.S. executive who was at the meeting told Reuters. "He said we and other shale producers should not automatically assume OPEC will extend the cuts."

The Saudis called the meeting to exchange views on the market and to gauge the outlook for shale output, both sources said.

Both sources spoke about the meeting on condition of anonymity due to the sensitivity of the matter.

A spokesman for Conoco declined to comment on the meeting. The five other U.S. companies represented at the meeting did not respond to requests for comment.

Saudi energy officials also declined to comment.

The meeting came after OPEC Secretary-General Mohammed Barkindo met hedge funds and shale producers in Houston earlier in the week, seeking to widen talks on how to tame the global glut.

The Organisation of the Petroleum Exporting Countries joined forces with Russia and several other non-OPEC producers last November and pledged to cut production by about 1.8 million barrels per day (bpd) for six months starting Jan. 1.

Falih said on Tuesday that global inventories had fallen more slowly than he expected in the first two months of the year, although oil market fundamentals were improving as a result of the curbs.

On Wednesday, oil prices plunged 5 percent to lowest levels this year after U.S. crude inventories surged to a record high, in part because of rising output from shale producers. The price continued to fall on Thursday.

The inventory rise stoked concern that the glut could persist because shale supply, along with more output from Brazil and Canada, could offset output cuts by OPEC and some non-OPEC suppliers.[O/R]

The U.S. government expects U.S. oil output to rise 330,000 bpd in 2017, mostly from shale, but some analysts and producers are forecasting the increase could be more than double that amount.

OPEC next meets on May 25 in Vienna to discuss supply policy, and is expected to decide there on whether to extend supply curbs implemented on Jan. 1.

In a joint news conference on Tuesday, Falih, Russian Oil Minister Alexander Novak, Mexican Deputy Secretary of Energy Aldo Flores, Iraqi Oil Minister Jabar al-Luaibi and Secretary-General Barkindo, said they were happy with compliance by the pact's members so far.

Unlike the OPEC and non-OPEC state-run producers that have agreed to curb output, there is no mechanism for U.S. independent producers and global oil majors to restrain output. Their imperatives are commercial, and they produce as much oil as they can at profit.

Editing by Simon Webb and Brian Thevenot

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