OPEC refusal means oil industry's weakest producers left behind

* OPEC's refusal to cut threatens producers and governments

The refusal of Saudi Arabia and its OPEC allies to curb crude oil output in the face of plummeting prices has set the energy world on a painful course that will leave the weakest behind, from governments to U.S. wildcatters.

A grand experiment has begun, one in which the cartel of producing nations - sometimes called the central bank of oil - has left the market to decide who is strongest and how to cut as much as 2 million barrels a day of supply.

Oil patch executives including billionaire Harold Hamm have vowed to drill on, asserting they can profit well below $70 a barrel, with output unlikely to fall for at least a year. Marginal producers in less profitable U.S. shale areas, as well as countries from Iran to Russia and operations from Canada to Norway will see the knife sooner, according to analysis by Wells Fargo & Co., IHS Inc. and ITG Investment Research.

'We're in a very nerve-racking environment right now and will be for probably the next couple of years,' Jamie Webster, senior director for global crude markets at IHS said Friday in a phone interview. 'This isn't just about additional barrels; this is about barrels that are going to keep coming and keep coming.'

Investors punished oil producers, as Hamm's Continental Resources Inc. fell 20 percent, the most in six years, amid a swift fall in crude to below $70 for the first time since 2010. Exxon Mobil Corp. fell 4.2 percent to close at $90.54 in New York. Talisman Energy Inc., based in Calgary, was down 1.6 percent in Toronto after dropping 14 percent Thursday.

An OPEC production cut would have been the quickest way to tighten the world's oil supplies and boost prices. In the U.S., supply is expected either to remain flat or rise by almost 1 million barrels a day next year, according to the Paris-based International Energy Agency and ITG. That's because only about 4 percent of shale production needs $80 or more to be profitable.

Most drilling in the Bakken formation, one of the main drivers of shale oil output, returns cash at or below $42 a barrel, the IEA estimates.

Many expect any reductions to U.S. output to occur slowly because of a backlog of wells that have already been drilled and aren't yet producing, and financial cushioning from the practice of hedging, in which producers locked in higher prices to protect against market volatility, according to an Oct. 20 analysis by Citigroup Inc.

ITG estimates it will take six months before lower prices slow production growth from U.S. shale, which is responsible for propelling the country's production to the highest in more than three decades.

The market pressure will hit shale companies in different ways. Many have spent years honing their operations to pull the most oil out of every well at the lowest cost, a process that can be as much art as science at the nexus of geology, engineering and infrastructure. That experience means some producers, such as EOG Resources Inc. and ConocoPhillips, can turn a profit at $50 a barrel.

Some companies won't be so fortunate, especially smaller operators that rely heavily on debt and are focused on new areas, where the most efficient production techniques are in the early stages of being understood.

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