Imagine a roomful of young oil executives from Persian Gulf oil producing countries, educated in business school in the States, engaged in this conversation:

“We are the only industry in the world in which the low-cost producer is the one that cuts back on production,” says one. “Is this rational?”

Another asks, “Are all the other industries in the world stupid, or are we stupid? Should the low-cost producer be the swing producer?”

Bill White, the former mayor of Houston and an advisor to many Middle Eastern executives and oil majors as chairman of Lazard Ltd., has been involved in such conversations over the years, and he believes it's this mindset—in part—that is playing out on the global scene now.

White shared his insights with the Houston Energy Finance Group in January, when oil prices were at their lowest in this cycle as Saudi Arabia blithely continued pumping barrels into a glutted marketplace.

“Is this a power play between Saudi Arabia and Iran?” he asked the group, as the industry fearfully anticipated the impact of Iran’s production re-entering the marketplace with the lifting of sanctions. “I don’t think so. Does Exxon, BP, Chevron or Total say it’s important to make way for Iran’s production, so let’s cut our production?”

No—even the idea sounds absurd. So why, he asked, should the Saudis be expected to curtail for anyone else? Instead, high-cost producers such as deepwater explorers and shale players are in the crosshairs to make their production economic in a beaten-down price environment, or make the cuts on the margin.

“It’s not part of some big geopolitical plot,” White said. “They [the Saudis] just want to get back to their 2013 production levels, and they’re doing that.”

Other OPEC countries are getting a taste of their own medicine as they beg the kingdom to make cuts when they themselves were defiant toward agreed-upon cuts over the decades, letting Saudi Arabia do the downshifting. Now, finance ministers in Ecuador, Venezuela and Nigeria, desperate for revenue to breathe life into their economies, are trying to move cargoes at any price, he said, and only choking back production when they don’t have buyers.

“These countries that are so reliant on oil to run their economies and pay their bills don’t have any choice,” said Deborah Byers, Ernst & Young U.S. oil and gas leader and managing partner. Byers addressed the IPAA Private Capital Conference around the time of White’s comments to the energy forum.

That necessity has resulted in millions of barrels of crude sloshing around in floating storage, she said, delaying a price recovery in the near term. Add in 40 million Iranian barrels in storage waiting to be unleashed, and the glut gets worse before it gets better. That spells danger for debt-laden E&Ps.

“The concept that OPEC in June is going to come in and somehow rescue us in the oil patch isn’t likely to materialize, because OPEC as a pricing mechanism doesn’t seem to be working. There isn’t an alignment of priorities.”

And that isn’t a bad thing, she suggested.

“Really, you’re in a free market now. That’s what we’ve always wanted. We don’t have an artificial pricing mechanism—and therein lies the opportunity.”

It may be hard to recognize opportunity in a storm, but the value arbitrage is in the paradigm shift. For decades, the world operated through a lens of scarcity, and the operator that could find reserves the fastest was rewarded the most.

The new view is one of abundance, where margins matter.

“Now investors want capital discipline, cash flow and returns. Management teams that can deliver the best margins have the most desirable assets,” said Byers.

Especially for shale, the valuation gap in today’s world goes beyond the quality of the reservoir or one person’s view of the price curve. Innovation, nimbleness and technology deployment can pay dividends.

“There is value beyond the reservoir itself. Management teams that have been successful want to be paid for that,” she said.

As assets come out of bankruptcy through liquidation or restructuring, the value capture for management teams that know the space and know how to mobilize quickly is going to attract the most capital, Byers said. “It could be a couple of guys that know what they’re doing and where the value is.”

It won’t be assets solely from bankrupt companies coming into play, Bill White noted. Supermajors, too, are struggling to find enough cash flow to pay the sacrosanct dividend.

“They are selling noncore assets, which, by the way, are any assets you’re looking to sell,” he said. “The best deals might not be distressed companies after all. They might be supermajors doing a noncore disposition for a ‘strategic’ purpose: to maintain their dividend.”

And for independents that diligently practiced capital discipline during the days of drunken capital spends, opportunity is nigh.

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