Listening to Saudi Oil Minister Al Naimi at CISIS in Washington: Bad news for Venezuela & Iran?

Al-Naimi at CSIS

Al-Naimi at CSIS

 Last week in Washington, I attended a talk by Saudi Oil Minister and head of Aramco, Ali al-Naimi, at CSIS.  Energy and foreign policy veterans from Daniel Yergin to Brent Scowcroft and Dr. James Schlesinger were on hand to hear al-Naimi’s views. You can read the transcript here, or watch the video embedded below.

Al-Naimi’s contrasted his central theme: “the enduring relevance of oil,” to the predictions made for many years by the adherents of “peak oil”–a theory that he said had itself “peaked in 2009” and has now been shown to be “utterly incorrect.”

Bad News for Venezuela and Iran?

Listening to him describe the global impact that the U.S.A. tight-oil “revolution” will have on the market,  plus with Alberta’s heavy oil and so many other new sources from around the globe all coming to market, brought to my mind images of the 1980’s.  The 1980’s were the “lost decade” in Latin America. It strikes me that, if he’s right about the trajectory of the global oil sector, the consequences for OPEC’s “price hawk” faction would be sobering.

The so-called “price hawks” are OPEC states with big populations that reap significantly lower export revenue per capita than OPEC states with small populations (i.e., those that align with the Saudis and, ipso facto, with the USA).  With significantly lower per capita revenues, price hawk states necessarily have little resilience in the face of protracted low prices. (I examined data on this in an earlier blog.)

Well, Al-Naimi did not specifically say prices will be going down in consequence of increased supplies, but he made it clear higher prices are not the Saudi priority:

In 2012, I came out and called for lower oil prices. That’s right: I stressed to the media and others that supply fears were unfounded and that the current prices were not a true reflection of supply-demand fundamentals. Through this effort and other factors, prices did come down. Our number one interest is a well-balanced oil market which leads to a healthy global economy. The objective of Saudi Arabia’s oil policy is not high prices at any cost.

This comes at a time when most commodity market analysts predict not only oil but most primary materials will likely fall in price, with 2013 the inflection point.  This has been the message coming from Ed Morse at Citi (Bloomberg 12 Apr 13), while at Merrill Lynch, for example, the prediction is $50/barrel within two years (NYT, 1 May 2013). Further along these lines are Morse’s predictions of an historic “peak demand” for oil by the end of this decade [WSJ 23Mar13], as opposed to the peak supply predicted by the “peak oil” school.

Whatever the severity or the impact, mid-to-long range, that increased oil production and lower prices may have on the “price hawk” states generally, two among them stand out: Venezuela and Iran. These are states already performing very poorly due to domestic mismanagement (Venezuela) or international sanctions (Iran).  These two are structurally and politically extremely vulnerable to any such market shifts.

I can easily imagine Venezuela and Iran falling into veritable black holes, economically and politically if there is even a moderate replay of the previous “lost decade” with prices dropping significantly below $80/barrel, not to mention $50/barrel.

USA “Energy Independence”: Market v. Foreign Affairs Impacts

Al-Naimi stressed that he welcomed the North American energy revolution. But, that the new tight-oil development in the US does not mean Saudi and Middle Eastern oil would become irrelevant to the North American market.  He stressed that discussions of “energy independence” for the USA represent a “naïve and simplistic view” in that they “conflate two things, … foreign policy and energy policy.”

What he is referring to here is a point that has often been echoed by present and former U.S. officials in recent weeks (and in a featured NY Times Sunday Review, Opinion: The Dark Side of Energy Independence  27April13).  Although the U.S. will likely once again become a net exporter of both oil and gas, this does not mean it will alter its foreign policy role in global energy markets or in maintaining the security of its Middle East oil-producing allies – especially in the Gulf.  The same can be said for its interest in protecting international sea lanes, choke points and strategic oil reserves.

That is to say, as long as there is a global, market-centered energy security system (what this blog calls “The Global Barrel”), the energy fates of all states are tied to one another in a collective manner.  This being the case, one can see that it is indeed “naïve and simplistic,” as al-Naimi put it, to believe that just because the U.S. may not need to import oil, it would not continue to feel a geostrategic imperative to insure the security of the global oil market, especially the security of major oil-producing states and oil-transport lanes.

The Role of Technology in Today’s Oil Developments

Al-Naimi also stressed the role of technology in this US tight-oil production revolution and within Saudi Arabia itself, giving a couple interesting examples.  Indeed, whatever you may think of fracking technology environmentally, this was a complex breakthrough that required integration of several technologies and methodologies plus the ready availability of highly developed, preexisting infrastructure. This was a revolution for which conditions in the US were well suited, just as they were for the creation of Silicon Valley and the IT revolution.

Other regions having tight oil resources simply do not have the capacity to easily follow suit without major participation of foreign firms having this technology.  In tight gas, this is especially evident when one looks in some detail at the relative weakness in infrastructure and of public institutions on the ground in Argentina and China, the two locations of the largest tight-gas reserves after the USA.

Al-Naimi went on to tell some stories about the use of technology within Saudi Arabia to boost oil production.  Anyone who knows the history of the utter disaster, environmentally, that is Lake Maracaibo in Venezuela (whether under the old-PDVSA, or the “new, revolutionary” PDVSA) will find very interesting his story about how Aramco has developed its shallow-water Munifa field.  Let me quote all of this:

MR. VERRASTRO: … Can you speak a little bit about Manifa? And talk about – it’s  just a phenomenal project, as we were discussing upstairs. … It’s 26 artificial islands with production coming on as early as the middle of this year.  But what’s the forecast for that?
MIN. AL-NAIMI: I am looking for if there’s anybody from our upstream group here.  (Laughter.) Well, you know, Manifa is a great example of what technology can do. You know, Manifa was discovered long time ago, and I remember when I was superintendent of production of the so-called northern area, we were producing Manifa at around 50,000 barrels per day, lousy crude then, we thought, and nobody really cared for it, so we shut it down. It’s a huge field. So
we closed it. And as now – I think it was April that the field was brought on. I think they will reach 500,000 by June or July. They are producing now around 200,000. And by midyear next year they will be at 900,000 barrels per day.
But it is an example of what technology can do. The field is not in very deep water. It’s in very shallow water. So a decision had to be made, how are we going to develop this field. Should we use jack-ups, or should we use just normal drilling rigs? So they built these nice islands, and they made big wells. Actually, I think the production string is something like 7 inches instead of the normal 3 ½ tubing. So I mean, that’s the beauty of faith in technology. Have your faith in technology. This oil and gas business will be with us for many, many years. …

Correcting a Prince: Saudi’s don’t See Sufficient Demand Coming Along to Increase their Productive Capacity

However, the most interesting point was, in a way, al-Naimi’s correction of Prince Turkei al-Faisal who, according to al-Naimi, misspoke recently in a speech at Harvard U., when he said that Saudi Arabia was gearing up to produce 15 million barrels/day by 202o.   To the contrary, considering all the new oil coming to market, al-Naimi did not see sufficient market demand coming to legitimize any expanded production capacity in Saudi Arabia even out to 2030.  This goes very strongly to points I made at the start of this blog above, about how much oil is coming to market in coming years.  Again, in closing, I’ll quote him at length:

MIN. AL-NAIMI: I don’t know really what he means by 15 million. He may be thinking about our ability to do that, in other words, not that we’re going to do it but that Saudi Arabia is capable of doing it, building capacity to 15 million.

Now, based on what we see as projection and call on Saudi oil, we don’t see anything like that, even 2030 or 2040. So the need to build the facilities and drill wells to produce 15 million or have the capability for 15 million is not there. We will be lucky to go past 9 (million)
by 2020.

But you can see what’s happening in the oil market. Supplies are coming from everywhere. We – and we are happy for that. It’s coming from all over, the U.S., Iraq, the Caspian area, Brazil, now Africa, so from everywhere. And a lot of liquids are coming besides
oil. You know, when you produce a lot of gas, you also produce a lot of NGLs, so that also feeds into the refineries and satisfies the oil demand.

So we don’t really see a need to build capacity to – beyond what we have today. We have 12 ½ million barrel-per-day capacity. At the production level we are idling at today on 9 million, we have between 2 ½ and 3 ½ million barrels per day spare capacity. So we really don’t need to even think about 15 million.

But I believe he may have meant that Saudi Arabia, based on its reserves, are certainly capable, if called upon one of these days, 15 million. But realistically, and based on all projections that I have seen, including ours, there is no call on us to go past 11 (million), 11.5
(million) by 2030 or 2040. …

(Footnote: Within PDVSA’s leadership in Caracas, there still persists this self-assured notion that even if, one after another. PDVSA’s IOC and NOC partners walk away from the unrealistic terms PDVSA offers them, and no matter how low production falls as a consequence, nevertheless: “We don’t worry, because they will come back. We are the ones that have the oil.”  Sometimes this is put more crudely, saying that the heavy oil in the Faja is “the last Coke (a-Cola) in the desert.”  Such is the self-illusion persisting there after years of chavista (and some opposition figures too) dogmatically believing in “Peak Oil” and “permanent high prices.”)

Well, you get the point.

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6 responses to “Listening to Saudi Oil Minister Al Naimi at CISIS in Washington: Bad news for Venezuela & Iran?

  1. Very interesting to see that how vocal the Saudis are as far as their strategy and own price/demand projections goes. Yet one should always take public statements coming from that country with a grain of salt.

    Personally, I think a sub-$80 oil price is not too realistic, as it will stall a lot of the marginal projects on which today’s production growth estimates partially are based on (e.g. North Sea, Alberta heavy oil, Brazil deep-water). Tight oil (e.g. Bakken) needs around $100/bbl to break even, and a majority of current E&P investment decisions founded on price premises in this vicinity. Thus it will be in the Saudi’s interest to support prices (cut production) in this range.

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    • Hello Are

      You raise a serious consideration. However, I think your $100/barrel break-even price for Tight oil is quite high. Let’s look for some good references on this.

      Tom

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  2. I will right away snatch your rss as I can not to find your e-mail subscription link or e-newsletter service. Do you’ve any? Kindly let me know so that I may just subscribe. Thanks.

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  3. Tom, I will send you a research report from a local stock brokerage that I use. Herein, tight oil is set at break-even levels of $55-$100 based on a methodology that yields a NPV of 0 with a 10% WACC and $10/bbl Brent-WTI spread.

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  4. $100/barrel as the upper end in Alberta sounds better. However, I am still dubious that $55 i the low end. That is a lot higher than the same type of heavy-oil (“tar sands”) developments in Venezuela.

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