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Originally posted by Strychnine
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Was this article from the Guardian? I read one the other day from there that was almost identical. -
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Sorry it was from the Telegraph...I copied and pasted below.
Saudi Arabia may go broke before the US oil industry buckles
It is too late for OPEC to stop the shale revolution. The cartel faces the prospect of surging US output whenever oil prices rise
By Ambrose Evans-Pritchard
9:59PM BST 05 Aug 2015
Comments1547 Comments
If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.
The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.
The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.
Bank of America says OPEC is now "effectively dissolved". The cartel might as well shut down its offices in Vienna to save money.
If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. "It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run," said the Saudi central bank in its latest stability report.
"The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience," it said.
One Saudi expert was blunter. "The policy hasn't worked and it will never work," he said.
By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.
Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.
The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year - and not only by switching tactically to high-yielding wells.
Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. "We've driven down drilling costs by 50pc, and we can see another 30pc ahead," said John Hess, head of the Hess Corporation.
It was the same story from Scott Sheffield, head of Pioneer Natural Resources. "We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days," he said.
The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. "The freight train of North American tight oil has kept on coming," said Rex Tillerson, head of Exxon Mobil.
He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.
Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.
The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 - since the threshold keeps falling - they will crank up production almost instantly.
OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for "clean fracking" in China as plasma pulse technology cuts water needs.
Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia's giant Ghawar field, the biggest in the world.
Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.
Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.
The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The 'fiscal break-even price' is $106.
Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.
He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up - entirely reliant on imported weapons - that will propel Saudi Arabia to fifth place in the world defence ranking.
The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. "Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon," said Jim Woolsey, the former head of the US Central Intelligence Agency.
Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.
The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.
Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.
The Saudi buffer is not particularly large given the country's fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. "We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years," he said.
Standard & Poor's lowered its outlook to "negative" in February. "We view Saudi Arabia's economy as undiversified and vulnerable to a steep and sustained decline in oil prices," it said.
Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.
"We were lucky before because the oil price recovered in time. But we can't count on that again," he said.
OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.
In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers - and the solar industry - to come of age. The genie cannot be put back in the bottle.
The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices - far from clear - they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.
Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.
The government can slash investment spending for a while - as it did in the mid-1980s - but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.
Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.
Diplomatic spending is what underpins the Saudi sphere of influence in a Middle East suffering its own version of Europe's Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.
We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.Comment
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6 of those were oil directed.Originally posted by Ruffdaddy View Post
But wtf is their plan? Oil has still fallen over the past month. <$44 today.
And supply is still retarded
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This is a guess based on what ive heard from different meetings and overall data analysis...but it looks like in some regions, it doesnt take that high of a price to make a profit. This may be a result of more focused drilling on higher return plays. We know a lot of inefficient rigs were pulled, and the efficient ones were focused on high reward reqions.
Furthermore, rig rates are now down what...30%? So take the $60ish/bbl estimate for profitability in many strong plays and knock off that 30%...we get damn near $40 even. Im not sure if completions and fracking have taken that big of a hit...but i cant imagine its that far off.
Combine reduced expenses per well with higher output regions and only the most efficient rigs, and we can truly believe that these low prices are still profitable.
OR...companies thought the decline was over, the price will climb back over 60, and they want to build their fraclog. Its still possible that the iran deal will fail and prices jump back.Comment
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Thats just my guess...whats yours strych?Comment
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Somebody once said be fearful when others are greedy! I'm kinda scared cause I see lots of greedComment
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The last time I checked my crystal ball, prices will begin to rebound in 2017 and stabilize to around $75.Comment
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Originally posted by Ruffdaddy View Post
Damn i wasnt far off here. It does seem like production as a whole has dropped similarly to the drop in rig rates. Efficiencies are increasing and the breakeven is below 60 for a lot of wells out there.
"In a note to clients this week, analysts at Credit Suisse noted that ConocoPhillips and Total have both said the cost of production for US shale will fall 30%, and that 80% of shale oil produced will make financial sense to produce with prices below $60 a barrel at the end of this year."
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Long story short: this is the new norm and $75 oil wont' be back for a while.Comment
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Yep, theres just no domestic shortage. That means its pretty much impossible for opec to manipulate prices as they have in the past. Without a geopolitical conflict, this is where we will be for a long time. On the positive, we have seen a slight upturn with our clients.Comment
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The First Post-Sanctions Iran Oil Contract Has Been Signed
Eni's chemicals subsidiary Versalis has become the first European company to ink a contract with Iran after the July 14 deal between the P5+1 and Iran, according to an official report issued by National Iranian Petrochemical Company (NIPC) cited by mehrnews.com.
The Technology Transfer Deal
The Technology Transfer Contract comes after Versalis, Italy's largest chemical company by production volumes, sales and headcount, agreed to join a trilateral contract of Technology Transfer (TTC), together with two commissioning agencies - Italy's Tecnimont and an Iranian firm, with Iran's NIPC.
Versalis says on its website that it manages the production and marketing of an extensive portfolio of petrochemical products and is a leading manufacturer of intermediates, polyethylene, styrene and elastomers.
Versalis says it recently repositioned its business with a greater focus on a market-oriented product portfolio, the strengthening of research and licensing and the expansion of its global presence by focusing more on the development and optimization of business, in particular elastomers, with a portfolio that will be enhanced by an integrated offer with products from renewable sources.
The Italians Meet With The Iranians
Eni CEO Claudio Descalzi, Italian Foreign Minister Paolo Gentiloni, and Italy's Minister of Economic Development Federica Guidi were among the hundreds of representatives who visited to Tehran last week. The representatives held meetings with two ministers of Hassan Rouhani's cabinet, mehrnews.com reports.
The Italian major had a $550 million agreement to help the Islamic Republic develop its Darkhovin oil field, anticipated to produce 160,000 bpd, prior to halting operations in 2010 due to sanctions pressure.
No Interest Expressed By American Companies Yet...
Iranian Oil Minister Bijan Zanganeh said last week that new contracts for potential IOCs will be formally outlined in December during an investment conference in London. Per the new terms, the National Iranian Oil Company will establish joint ventures with foreign companies, which will be compensated with a portion of the output.
Over the weekend, Zanganeh said that "all international" oil companies will be able to submit bids for projects in the country's oil sector. He said, however, that no interest has yet been expressed by American firms: "We have received no requests from any American company so far." US firms are prohibited from bidding on participating in Iran's oil sector until sanctions are lifted, which could be sometime this December or early next year.Comment
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I wonder if Iran plans to use a strategy that is similar to what Venezuela did - utilize the Italian's money and expertise to develop the oilfields, nationalize them, and then toss the Italians out at the end of a gun and keep all of the profits for themselves.Originally posted by Strychnine View Post
That's a short sighted strategy that only works until the oil fields get depleted and they need more investment money to fix them. No one will be willing to invest at that point.Comment
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Good call. That would not surprise me.Originally posted by mikeb View Post
Shit, Mexico did the same thing too in the early 1900s. Now no international companies want to go in there b/c they can't take possession of the product and they aren't guaranteed a cut of it, and now bc the federal govt relies so much on Pemex revenue for the national budget Pemex itself doesnt have the resources to buy up talent and technology to keep moving forward. They're in a bad place b/c of a strategy exactly like what you mentioned.Comment
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