Saudis bet ‘drill, baby, drill’ is over, hope to increase prices
Saudi Arabia just made a highstakes wager that the glory days of U.S. shale, which transformed the global energy map in the last decade, are never coming back.
By keeping a tight grip on supply at Thursday’s meeting of the OPEC+ alliance of oil producers, Saudi Energy Minister
Prince Abdulaziz bin Salman showed he’s focused on boosting prices — and confident that this time around it won’t encourage U.S. producers to surge back and steal market share.
“‘Drill, baby, drill’ is gone for ever,” said Abdulaziz, who’s orchestrated the revival of the oil market after last year’s catastrophic collapse.
His swagger comes mixed with a good dose of diplomatic tension: Russia, Saudi Arabia’s most important OPEC+ partner, has tried to convince Riyadh for several months to increase output, fearing that rising oil prices would ultimately awaken rival shale producers. The Saudis are certain the U.S. industry has reformed itself.
If the prince is right, the Organization of the Petroleum Exporting Countries will be able to push prices higher now and recover market share later without worrying that rivals in Texas, Oklahoma and North Dakota will flood the market. But if Riyadh has miscalculated — and it’s got shale wrong before — the danger will be lower prices and production down the line.
The Saudis have so far convinced their allies the strategy will work. After a quick virtual meeting Thursday, OPEC+ agreed to prolong its production cuts, defying expectations of an output hike.
“This is an incredibly bold move on the part of OPEC+ to extend the oil price rally,” said Regina Mayor, global energy sector leader for KPMG.
If history is a guide, however, trouble may be brewing. The OPEC+ coalition, comprising Saudi Arabia, Russia and almost two dozen other oil producers, has in the past underestimated its U.S. rivals, who year after year produced more than most expected.
“This is a risky take,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said Friday in a Bloomberg Television interview.
Under pressure from shareholders, shale producers have promised restraint, putting profits before the growth they pursued during the boom years. Although drilling has risen from the lows of 2020, it’s well below previous levels.
“Shale companies are now more focused on dividends,” Abdulaziz said in an interview after the OPEC+ meeting. “We’ve never had any issue with shale oil. It’s the shale companies which are themselves changing. They are listening to the call of their shareholders.”
Shale executives agree with him -- at least for now.
“A couple years ago it was ‘drill, baby, drill,’” John Hess, the head of Hess Corp., said in Houston this week. “Now, it’s ‘show me the money.’”
Ryan Lance, CEO of Houston-based ConocoPhillips, echoed the sentiment: “I hope there’s discipline in the system. The worst thing that can happen right now is U.S. producers start growing rapidly again.”
Yet higher oil prices may ultimately reactivate the U.S. shale industry. With West Texas Intermediate trading above $60 a barrel, EOG Resources of Houston has announced a big spending increase for next year.
But the reaction of the stock market made Abdulaziz’s case: Investors punished EOG for spending more on drilling, marking down its shares relative to more disciplined rivals.