Rom
9:16 NKJV So
then it is not of him who wills, nor of him who runs, but of God who shows
mercy.
U.S.
shale trumps the will and deeds of our president.
Saudis
risk playing with fire in shale-price showdown as crude crashes
- Telegraph Ambrose Evans-Pritchard http://j.mp/aepGoShale or http://www.telegraph.co.uk/finance/oilprices/11263851/Saudis-risk-playing-with-fire-in-shale-price-showdown-as-crude-crashes.html
A deep slump in prices might
heighten geostrategic turmoil across the Middle East
Opec hints it could raise oil supplies for
first time in four years
As late as last year, Opec was dismissing US
shale as a flash in the pan Photo: EPA
Saudi Arabia and the core Opec states are
taking an immense political gamble by letting crude oil prices crash to $66 a
barrel, if their aim is to shake out the weakest shale producers in the US. A
deep slump in prices might equally heighten geostrategic turmoil across the
broader Middle East and boomerang against the Gulf’s petro-sheikhdoms before it
inflicts a knock-out blow on US rivals.
Caliphate leader Abu Bakr al-Baghdadi has
already opened a “second front” in North Africa, targeting Algeria and Libya –
two states that live off energy exports – as well as Egypt and the Sahel as far
as northern Nigeria. “The resilience of US shale may prove greater than the
resilience of Opec,” said Alistair Newton, head of political risk at Nomura.
Chris Skrebowski, former editor of Petroleum
Review, said the Saudis want to cut the annual growth rate of US shale output
from 1m barrels per day (bpd) to 500,000 bpd to bring the market closer to
balance. “They want to unnerve the shale oil model and undermine financial
confidence, but they won’t stop the growth altogether,” he said.
There is no question that the US has entirely
changed the global energy landscape and poses an existential threat to Opec.
America has cut its net oil imports by 8.7m bpd since 2006, equal to the
combined oil exports of Saudi Arabia and Nigeria.
The country had a trade deficit of $354bn in
oil and gas as recently as 2011. Citigroup said this will return to balance by
2018, one of the most extraordinary turnarounds in modern economic history.
“When it comes to crude and other hydrocarbons,
the US is bursting at the seams,” said Edward Morse, Citigroup’s commodities
chief. “This situation is unlikely to stop, even if prevailing prices for oil
fall significantly. The US should become a net exporter of crude oil and
petroleum products combined by 2019, if not 2018.”
Opec has misjudged the threat. As late as last
year, it was dismissing US shale as a flash in the pan. Abdalla El-Badri, the
group’s secretary-general, still insists that half of all US shale output is
vulnerable below $85.
This is bravado. US producers have locked in
higher prices through derivatives contracts. Noble Energy and Devon Energy have
both hedged over three-quarters of their output for 2015.
Pioneer Natural Resources said it has options
through 2016 covering two- thirds of its likely production. “We can produce
down to $50 a barrel,” said Harold Hamm, from Continental Resources. The
International Energy Agency said most of North Dakota’s vast Bakken field
“remains profitable at or below $42 per barrel. The break-even price in
McKenzie County, the most productive county in the state, is only $28 per
barrel.”
Efficiency is improving and drillers are
switching to lower-cost spots, confronting Opec with a moving target. “The
(price) floor is falling and may not be nearly as firm as the Saudi view
assumes,” said Citigroup.
Mr Morse says the “full cycle” cost for shale
production is $70 to $80, but this includes the original land grab and
infrastructure. “The remaining capex required to bring on an additional well is
far lower, and could be as low as the high-$30s range,” he said.
Critics of US shale may have misunderstood its
economics. There is a fast decline in output from new wells but this is offset
by a “long-tail phase” for a growing number of legacy wells. The Bakken field
has already reached 1.1m bpd, and this is expected to double again over the
next five years.
Other oil projects around the world may be more
vulnerable to a price squeeze, including the North Sea, the ultra-deepwater
ventures in the Atlantic off Brazil and Angola, Canadian oil sands, or Russia’s
contentious plans for the Arctic in the “High North”. But the damage will be
gradual.
In the meantime, oil below $70 is already playing
havoc with budgets across the global petro-nexus. The fiscal break-even cost is
$161 for Venezuela, $160 for Yemen, $132 for Algeria, $131 for Iran, $126 for
Nigeria, and $125 for Bahrain, $111 for Iraq, and $105 for Russia, and even $98
for Saudi Arabia itself, according to Citigroup.
Opec may not be worried about countries such as
Nigeria, but even there a full-blown economic and political crisis could turn
the north into a Jihadi stronghold under Boko Haram.
The growing Jihadi movements in the Maghreb –
combining with events in Syria and Iraq – clearly pose a first-order security
threat to the Saudi regime itself.
The Libyan city of Derna is already in the
hands of the Salafist group Ansar al-Shariah and has pledged allegiance to
Islamic State. Terrorist movements in the Egyptian Sinai have also rallied to
the black and white flag of IS, prompting Egypt’s leader Abdel al-Sisi to call
last week for a “general mobilisation” of all leading Arab and Western powers
to defeat the spreading movement.
The new worry is Algeria as the Bouteflika
regime goes into its final agonies. “They have an entrenched terrorist problem
as we saw in the seizure of the Amenas gas refinery last year. These people are
aligning themselves with Islamic State as part of the franchise,” said Mr
Newton.
Algeria exports 1.5m bpd of petroleum products.
Its gas exports matter more but the price of liquefied natural gas shipped to
Europe is indirectly linked to oil over time.
It is an open question what will happen to
Algeria, Iraq, and Libya if oil prices hover at half the budget break-even
costs for a year or two, given the extreme fragility of the region and
political risk of cutting subsidies.
The Sunni Salafist tornado sweeping across the
Middle East – so strangely like the lightning expansion of Islam in the mid-7th
century – is moving to its own inner rhythms. It is not a simple function of
economic welfare, let alone oil prices.
Yet Saudi Arabia’s ruling dynasty tests fate if
it is betting that the Middle East’s fraying political order can withstand a
regional economic shock for another two years.
Related
Notes
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I2C 141201aa Rom9v16 Shale trumps O | I2C | 141201
0919 | Rom9v16 Shale trumps O
