It is amusing now to read about such glut of oil after all the talk of a peak oil and the investment that followed now being wiped out. Aivars Lode
But world’s largest oil exporter will continue to work with other oil states to forge agreement to steady production while demand catches up
By Bill Spindle
HOUSTON—Saudi Arabia delivered its starkest message yet to a reeling global oil sector, saying it wouldn’t rescue the industry from low prices by cutting its production.
Ali al-Naimi, Saudi Arabia’s powerful petroleum minister, told the elite of the global energy industry here Tuesday that demand for oil remains strong but that for prices to recover, excess supply will still need to be curbed. That rebalancing, he said, will start as low prices squeeze out the production of oil that is the most expensive to extract and sell.
That production comes from places including U.S. shale fields, Canada’s oil sands and deepwater projects that attracted investment during the years oil was priced over $100. Now it is closer to $30.
Mr. Naimi’s message is a shot across the bow for an industry already struggling to adjust to a price drop of more than 70% since June 2014, to a level at which many producers can’t survive.
Never before has Mr. Naimi, who has dominated Saudi oil policy for two decades, laid out so bluntly the Kingdom’s vision for how the industry should adjust to market conditions. New sources of supply are converging with pressures on oil demand created by China’s slowing economy, growing energy efficiency and, eventually, new power sources such as solar and wind.
“The producers of these high-cost barrels must find a way to lower their costs, borrow cash or liquidate,” Mr. Naimi told the IHS CERAWeek gathering, which included top executives from many of the world’s biggest oil companies and senior officials from big producing countries.
He added that prices hovering above $100 a barrel for years encouraged inefficient producers to grow output, and those barrels will have to leave the market first.
“It sounds harsh, and unfortunately it is. But it’s the most efficient way to rebalance markets.”
Saudi Arabia could produce oil profitably at $20 per barrel, Mr. Naimi asserted, a level well below current prices. “We don’t want to, but if we have to, we will,” he said. Few, if any, other officials or executives in the room could say that about their country or company.
Mr. Naimi’s prescription to rely on market forces marked a reversal from the Organization of the Petroleum Exporting Countries’ traditional role of trying to orchestrate supply adjustments.
His comments come a week after talks among oil producers about freezing output levels helped to kindle a brief rally in oil prices. After he spoke Tuesday morning, the U.S. benchmark fell $1.62, or 4.9%, $31.77 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, traded down $1.50, or 4.3%, at $33.19 a barrel on ICE Futures Europe.
Prices in the $30-a-barrel range aren’t enough to salvage the budgets of oil-dependent economies such as Venezuela, Algeria and Nigeria. Even Saudi Arabia ran a budget deficit of more than $100 billion last year.
Few if any U.S. companies can extract oil profitably at current price levels, and those producing crude from unconventional tar-sands deposits in Canada need far higher prices to make a return on the billions of dollars they invested there.
ConocoPhillips CEO Ryan Lance told conference attendees a few minutes after Mr. Naimi’s speech that oil companies can’t count on a deal between Saudi Arabia and other major producers to halt the oil bust.
“We have to prepare for the worst case,” he said.
Saudi Arabia played a key role in the sharp decline in crude prices by declining to intervene in the global market at a November 2014 OPEC meeting. The decision disappointed those in the industry who had hoped the Kingdom would orchestrate the sort of coordinated output cut by OPEC producers that has pushed prices higher in the past.
Saudi Arabia raised market hopes, and the price of crude, again recently by agreeing with Russia, the world’s second-largest producer after Saudi Arabia, and a few other exporting countries to freeze production at current levels on the condition others support it. Hopes for a rapid agreement were dashed by Iran, which having recently been released from international sanctions has plans to nearly double its production.
Hours before Mr. Naimi’s address, Bijan Zanganeh, Iran’s oil minister, called the Saudi Arabia-Russia pact “ridiculous.” His remarks helped send global prices lower.
The market has struggled with a surplus of more than 1 million barrels a day above demand. That gap was created before 2014 by a near doubling of U.S. output and after that by an increase in production from OPEC members and Russia.
The oil market’s rebalancing will be reflected in a fundamental restructuring of the industry as it comes out of this oil bust, according to Mark Papa, a partner at Riverstone Holdings and former CEO of shale pioneer EOG Resources.
Mr. Papa said the industry will first see “a lot of bodies, a lot of bankruptcies,” but the pain will leave the industry more stable—particularly independent U.S. producers.
“The management teams that survive are going to come out of it and be a lot more conservative,” Mr. Papa said. “As times get better you are going to see that they are not going to stress the balance sheets as much.”