Monday 18 June 2018

Saudi 'must decide response to shale'

Riyadh, June 1, 2013

If Opec is eventually forced to trim its oil exports in response to the shale boom, Saudi Arabia will have to shoulder most of the production cuts, said an expert.

Past experience suggests Saudi Arabia would have to absorb about two-thirds of any cutbacks even though it accounts for only one-third of the organisation's exports, remarked leading Reuters market analyst John Kemp. T.

Riyadh's views about the acceptability of current prices, and whether to cut production to sustain or move them higher, will therefore remain decisive, as they have throughout the last three decades.

Saudi Arabia's role in the organisation has always been unique, observed Kemp.

Saudi Arabia has expanded its production capacity relatively easily over the past 30 years, while political instability, sanctions and war have left other major producers such as Iran, Iraq, Venezuela, Nigeria and Libya with stagnant or declining output.

Unlike its main allies - Kuwait and the UAE - Saudi Arabia has a large and comparatively poor population, so it is much more vulnerable to any reduction in oil revenues, he added.

The kingdom has as much interest in relatively high prices as other members. But it has a unique stake in production growth, since it has both the capacity to capture marginal demand, and knows it will shoulder the bulk of any cutbacks needed to defend prices, said the expert.

In recent months, some analysts have openly wondered if unilateral production changes by the Saudis have sidelined the rest of Opec, or alternatively how the organisation as a whole will respond to the threat posed by fast-growing shale in the US and rising conventional output from Iraq as well as non-members.

Both questions make the mistake of assuming the organisation has functioned in the past, or will function in future, as a "cartel" of near-equals. Opec has never functioned like this, and is very unlikely to start doing so any time soon, stated Kemp.

Opec is not, in any real sense, a "cartel" that routinely allocates production, investment or customers. Since the 1980s, it has instead functioned as a framework through which Saudi seeks contributions from other members for its own decisions to cut production (with more or less success), he noted.

It also provides analytical support, and an opportunity for dialogue, which is particularly valuable for the smaller and less sophisticated members, said Kemp.

In the next five years, the decision about if and how to respond to North American shale, as well as rising output from Iraq and Latin America, belongs to Saudi Arabia alone.

If the kingdom's policymakers do decide to act, they will undoubtedly seek some degree of burden-sharing, and have to decide whether to threaten a volume war to secure it.

Saudi officials resist the idea the kingdom should play the role of "swing producer", and always push for more equitable burden-sharing, pointed out the Reuters expert.

In practice, however, Saudi Arabia has secured only limited contributions to voluntary production restraint from other members.

In 1985-86, 1998-99, 2001-02 and again in 2008-09, Saudi Arabia was decisive in pushing members to cut production in order to stabilise prices, and in every case ended up accepting more than its proportionate share of the export reductions, he stated.

Data on Opec members' oil production and exports remains poor in terms of its timeliness, completeness, consistency and accuracy. Assessing the level and distribution of cuts is consequently difficult.

Its members usually frame their agreements in terms of production, though it is exports that matter most for prices, said Kemp.

The organisation's membership, and hence its export profile, has changed significantly over time, with Gabon and Indonesia leaving the system, Ecuador suspending its membership between 1992 and 2007, and Angola joining in 2007.

Recent moves to improve transparency, such as the Joint Organisations Data Initiative (JODI), supported by Opec and the International Energy Agency (IEA), among others, have resulted in only modest improvements in the data.

Opec, IEA, Jodi and the US Energy Information Administration (EIA) all have differing estimates for Opec countries exports and/or production levels, with varying levels of completeness.

The result is a good deal of confusion. However, the time series all tell the same basic story. In every instance of restraint, Saudi Arabia cut much harder than other members.

Saudi Arabia's share of total OPEC exports has averaged about 33 percent since the mid-1980s, and been very stable at this level since 2000.

But among core Ope members (excluding Gabon, Indonesia, Ecuador and Angola) the kingdom's share of export reductions has ranged from 62 per cent in the early 1980s and 70 per cent in 1999 to 38 per cent in 2000-2002 and 58 per cent in 2008-2009.

Saudi exports currently account for a higher than usual share owing to sanctions on Iran, as well as continuing production problems in Libya and Nigeria. So the first tranche of any future production cuts will almost certainly come from the kingdom, either within or outside the organisation's formal system.

For now, Saudi policymakers profess to be unconcerned about rising oil output in the US and elsewhere, and content with the current level of prices, which are close to their preferred level of $100 per barrel.

The sustainability of prices at $100 per barrel remains hotly debated. Estimates for the long-term cost of oil range from $70 (based on North American shale plays) to $105-110 or even more (based on rapid cost inflation for more technically challenging mega-projects) depending on which sort of supplies will be needed to meet the marginal demand.

There is also considerable uncertainty about the potential of shale plays outside the United States, supplies from Iraq, and the continued reduction in oil demand resulting from energy efficiency measures in the United States, the European Union and key emerging markets such as China, said Kemp.

If the shale revolution can be sustained in the United States, and successfully exported to other countries, some combination of Opec production cuts or lower oil prices to encourage demand and forestall more investment, will be inevitable by 2015-2016.

If and when the time comes, the key decisions will be made in Riyadh - not at Opec headquarters in Vienna, and not in the capitals of other members.-Reuters

Tags: Saudi | US | Opec | Shale |

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