Most people are at least somewhat familiar with OPEC, their members and their purpose. The Organization of Petroleum Countries has been in existence since 1960 and was established to enable the cooperation of leading oil-producing and oil-dependent countries in order to collectively influence the global oil market and to maximize profits. Its first five members, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela were later joined by 7 other countries to shape what we view as OPEC today. These 12 member countries accounted for almost 40% of global oil production, with the Middle East alone accounting for over 67% of OPEC’s total production.

For the purposes of this article, whenever a country is referenced as being a member of OPEC, then that is exactly what it becomes. The individual company need not be assigned membership; rather any business entity originating in one of the 12 member countries brings one under the OPEC umbrella. There is no individual membership available to individual (not state-owned) operators.

OPEC single-handedly changed the global system of oil production in the 60’s and 70’s, producing s system of oil production in favor of oil-producing countries and away from a system of dominant Anglo-American oil firms (the “Seven Sisters”). This was basically a oligopoly. In a series of steps in the 1960s and 1970s, OPEC restructured the global system of oil production in favor of oil-producing states and away from an oligopoly of dominant Anglo-American oil firms (the "Seven Sisters"). In the 1970s, OPEC restricted oil production, causing a dramatic rise in prices with far-reaching consequences on the global economy.

Who here is old enough to remember Jimmy Carter’s term in office? Long lines and empty gas stations became a very visible part of his legacy. 1979 was a particularly bad,year, attributed primarily to Iran’s decision to curtail production from 5.8M bbls/day in July 1978 to less than a half million bbld/day six months later. Supply and demand my friends, and we were demanding a heck of a lot more than was being supplied.

Since the 1980s, OPEC’s influence has lessened with regard to world oil-supply and oil-price stability, as there is frequent cheating by members on their commitments to one another, and as member commitments reflect what they would do even in the absence of OPEC.

The formation of OPEC marked a turning point toward national sovereignty over natural resources. The 70’s started out with the war between Israel and the Arabs and ended with the Iran hostage situation. The entire decade involved the de-colonization of the region and, with the fall of the Shah, “Anglo-Americans” as they were called, were no longer welcome in many countries. Other countries sought to decrease their dependence on, and allegiance to, America. We have not been a popular ally unless you live in Israel. That is just the socioeconomic world that we live in today. Thankfully, due to shale production, we have since become an even bigger producer than any OPEC member. They still yield considerable influence over prices and supply, but they will never have the kind of power that they enjoyed 40-50 years ago. Did you know the Permian now produces more oil than all of Iraq?

It first came to my attention this week that countries of Middle-Eastern origin have been, and will continue to invest in US shale exploration. On April 10, it was announced that Mubadala Energy, based in Abu Dhabi, but active in 11 oil producing countries, has acquired almost 25% in equity from Kimmeridge Energy. Mubadala acquired the assets in Kimmeridge’s SoTex HoldCo. via the issuance of new equity. Interestingly enough, I was unable to find a reputable source putting a figure on the deal but you can believe it was substantial. This was my first introduction to members of OPEC investing in American Shale.

They claim to have “an ambitious expansion strategy” and specified mentioned having interest in Kimmeridge’s highly scalable upstream gas and LNG business (currently producing upstream gas) as well as a pre-FID (final investment decision) LNG project. SoTex also holds 2 portfolio companies, being Kimmeridge Texas Gas, an upstream unconventional gas operation in the Eagle ford, and Commonwealth LNG, which owns the LNG portfolio. The proposed LNG facility will have capacity of 9.3M Metric Tons per year (MTY). Kimmeridge claims to be building “America's first integrated gas independent, delivering low-cost natural gas from wellhead to water and meet burgeoning demand for responsibly-produced LNG across global markets”.

Little did I know this has been going on for decades. Among the first memorable transactions was with China’s SINOCHEM, who, in early 2013, entered into a $1.7B joint venture with Pioneer Resources to acquire a stake in West Texas’ Wolfcamp Shale play. Yeah, I know……they’re not OPEC. However, they are far from our best friend and it showed that American producers were none-too-concerned about where they money came from, so long as it was flowing. This investment highlights a renewed trend toward foreign joint ventures. Since 2008, foreign companies have entered into 21 joint ventures with U.S. acreage holders and operators, investing more than $26 billion in tight oil and shale gas plays. And, yes, Middle Eastern investment here is much more than one would anticipate.

As for OPEC investment in US Shale, it all started in 2013 when Saudi Arabia’s ARAMCO began its pursuit announcing its intentions to enter into a $13B agreement in negotiations with an unnamed suitor. It was during the first 5 months of 2017 however, when ARAMO announced $50B worth of agreements with nearly a dozen US-based companies including Schlumberger and Halliburton. This followed a rash of agreements executed between the US and Saudi Arabia, covering everything from oil rigs to advanced drilling equipment which they believed would transform their operations. So far, so good and look for them to appear in more acquisitions and mergers here in a number of shale basins.

Investment in shale plays in the United States totaled $133.7 billion between 2008 and 2012, as part of 73 deals. Of this total, joint ventures by foreign companies accounted for 20% of these investments. The balance consists of outright acquisition (i.e. Australian BHP Billiton Oil Co’s acquisition of Petrohawk Energy Corp.—or were joint ventures among American companies (such as Hess and Noble Energy with Consol Energy) and financial institutions.

For the most part, foreign investment in these joint ventures involved buying a percentage of the host company's shale play acreages through an upfront cash payment with a commitment to cover a portion of the drilling cost. Some refer to this as a “drill-carry” agreement. Foreign investors in joint ventures pay upfront cash while committing exploration capital to cover the cost of drilling extra wells within an agreed-upon time frame, usually between 2 to 10 years. The best example I can think of regarding this was Chesapeake’s agreement with TOTAL out of France regarding the Utica Shale.

Both U.S. and foreign companies benefit from these deals with U.S. operators get financial support, and foreign companies gaining experience in horizontal drilling and hydraulic fracturing. Plus, foreign companies are afforded the opportunity to operate in a stable market with a sound legal system and low political risk. With the size and existence of new unconventional reservoirs unknown, exploration and development opportunities are decreasing worldwide. While foreign companies may pay sizable initial costs through joint ventures, these deals can be considered a cost of entry to the development of hydrocarbons through the latest technology.

Most of the recent joint venture deals with foreign companies shifted from the dry natural gas plays to more liquids-rich areas such as the Eagle Ford, Utica, and Wolfcamp—a trend similar to domestic operations. All shale plays contain some liquids, but those with a higher liquid-to-gas ratio are more attractive because of the higher value of hydrocarbons that have crude oil and petroleum liquids in addition to natural gas.

Now…..back to the Mid-East. As early as 2017, Saudi Arabia let it be known that they were shopping for natural gas assets in several shale basins, including the Permian and Eagle Ford. Their initial production marks the first time ARAMCO had any output outside the kingdom. It also marked their concession that the American shale output could not be manipulated using typical OPEC tricks. So why the sudden interest?

Investing in US shale would give the Saudi’s access to America’s ability to stop and start production at a moment’s notice and gain integral knowledge to use on their home turf. Despite all their oil, Saudi Arabia is short on natural gas. The solution? Explore and produce from tight formations that exist at home. The only way to get it without imports is to tap into shale. It’s a little-known fact that much of the Mid-East holds vast unexplored shale formations. Whereas they once used roughly a million bbls/day of oil in the summer to combat the extreme temperatures, the Kingdom is striving to switch to natural gas for energy production and sell its more valuable oil overseas. If they can make the switch, economically it should be a no-brainer.

Currently importing almost 12M tons of LNG per year just for energy production, the Saudi’s would be foolish not to pursue its shale assets for natural gas. With NatGas prices staying below $4/M BTU, and as low as $1.43 in the Northeast, it nothing short of cheap, especially compared to oil. Look for more and more foreign E&P companies seeking to do business here, and you should not be surprised if a substantial amount come from the Mideast. So far? No harm, no foul, but one would be wise to keep an eye on the situation.