Saudi oil min­is­ter to face ri­val US pro­duc­ers as price rout bites

The Pak Banker - - MARKETS/SPORTS -

This week, Saudi Oil Min­is­ter Ali AlNaimi will for the first time face the vic­tims of his de­ci­sion to keep oil pumps flow­ing de­spite a global glut: US shale oil pro­duc­ers strug­gling to sur­vive the worst price crash in years.

While soar­ing US shale out­put brought on by the hy­draulic frac­tur­ing rev­o­lu­tion con­trib­uted to over­sup­ply, many blame the 70-per­cent price col­lapse in the past 20 months pri­mar­ily on Naimi, seen as the oil mar­ket's most in­flu­en­tial pol­i­cy­maker.

Dur­ing his key­note Tues­day at the an­nual IHS CERAWeek con­fer­ence in Hous­ton, Naimi will be ad­dress­ing US wild­cat­ters and ex­ec­u­tives who are stuck in a zero sum game. "OPEC, in­stead of cut­ting pro­duc­tion, they in­creased pro­duc­tion, and that's the predica­ment we're in right now," Bill Thomas, chief ex­ec­u­tive of EOG Re­sources Inc, one of the largest U.S. shale oil pro­duc­ers, told an in­dus­try con­fer­ence last week, re­fer­ring to 2015.

It will be Naimi's first pub­lic ap­pear­ance in the United States since Saudi Ara­bia led the Or­ga­ni­za­tion of Pe­tro­leum Ex­port­ing Coun­tries' shock de­ci­sion in Novem­ber 2014 to keep heav­ily pump­ing oil even though mount­ing over­sup­ply was al­ready send­ing prices into free-fall.

Naimi has said this was not an at­tempt to tar­get any spe­cific coun­tries or com­pa­nies, merely an ef­fort to pro­tect the king­dom's mar­ket share against fast-grow­ing, higher-cost pro­duc­ers.

It just so hap­pens that U.S. shale was the big­gest new oil fron­tier in the world, with much higher costs than cheap Saudi crude that can be pro­duced for a few dol­lars a bar­rel.

"I'd just like to hear it from him," said Alex Mills, pres­i­dent of the Texas Al­liance of En­ergy Pro­duc­ers. "I think it should be some­thing of con­cern to our lead­ers in Texas and in Wash­ing­ton," if in fact his aim is to push aside U.S. shale pro­duc­ers, Mills said.

Last week's sur­prise agree­ment by Saudi Ara­bia, Qatar, Rus­sia and Venezuela to freeze oil out­put at Jan­uary lev­els - near record highs - did not of­fer much so­lace and the global bench­mark Brent crude LCOc1 ended the week lower at $33 a bar­rel and U.S. crude fu­tures CLc1 ended un­changed at just below $30.

Prices fell sharply on Tues­day af­ter Iran, the main hur­dle to any pro­duc­tion con­trol in its zeal to re­cap­ture mar­ket share lost to sanc­tions, wel­comed the plan with­out com­mit­ment. Iraq was also non­com­mit­tal.

Many US in­dus­try ex­ec­u­tives un­der­stand that all is fair in love, war and the oil mar­ket, but "the Saudis have prob­a­bly over­played their hand," said Bruce Vin­cent, for­mer pres­i­dent of Hous­ton­based shale oil pro­ducer Swift En­ergy, which filed for bank­ruptcy late last year.

The fact that OPEC mem­bers are talk­ing to each other of­fers a ray of hope, ac­cord­ing to some in­dus­try fig­ures, an in­di­ca­tion that the king­dom's own fis­cal pain could prompt it to change tact and lead ef­forts to reach a deal. On Tues­day, Stan­dard & Poor's down­graded Saudi Ara­bia's credit rat­ing.

"The pain is at a thresh­old right now. Peo­ple are now will­ing to sit down and talk about pos­si­ble reme­dies to that pain," Mills said. Texas, where oil pro­duc­tion has more than dou­bled over the past five years thanks to the Ea­gle Ford and Per­mian Basin fields, is feel­ing acute pain.

The state lost nearly 60,000 oil and gas jobs be­tween Novem­ber 2014 and Novem­ber 2015, ac­cord­ing to the Texas Al­liance's most re­cent data. Only 236 rigs are still ac­tively drilling wells in the state, down from more than 900 in late 2014, Baker Hughes data showed.

Fi­nan­cial dis­tress among U.S. pro­duc­ers has deep­ened. More than 40 U.S. en­ergy com­pa­nies have de­clared bank­ruptcy since the start of 2015, with more loom­ing as lenders are set to cut the value of com­pa­nies' re­serves, of­ten used as col­lat­eral for credit.

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