Was The Bakken Collateral Damage? -- October 12, 2015

On October 3, 2015, I posted this note which caught me by surprise. I assumed it was just a Saudi official with typical "political" talk. The story surprised me because it was not in line with what everyone else was reporting. This is the news item that caught me by surprise:

But this story is probably the most important: Saudi Arabia will maintain spending. From Rigzone/Reuters:

Saudi Arabia is continuing with its investments in the oil and gas industry as well as solar energy despite the current drop in oil prices, the kingdom's oil minister was quoted as saying on Friday.

That part about solar energy? I think you can ignore it. With regard to oil production, we'll let the numbers speak for themselves.

In fact, this is the new reality which has been posted more than once on the blog:

Read the rest of the story at the link and see if the writer said anything more or less than what I wrote over the weekend:

• Saudi is losing about 10% of their cash reserves annually by giving away oil for $50/bbl (but the article above suggests it could be significantly more)
• Saudi apparently had an unsuccessful 5-year, $35 billion program to significantly hike crude oil production
• Saudi recently completed two new refineries
• Saudi has huge desalinization electricity demands -- and growing annually; oil used to produce electricity
• Saudi recently canceled huge solar energy projects
• Saudi put on hold all new capital-intensive projects in addition to aforementioned solar energy projects
• Saudi has been told explicitly by President Obama that the US has no responsibility to guarantee Saudi Arabia' security
• Saudi has major terrorist threat in Yemen
• Saudi has embarked on major weapons acquisition program to defend itself against regional neighbors
• sanctions on Iran recently lifted resulting in a) Mideast nuclear arms race; and, b) $100 billion in "new" money for Iran to pursue military objectives (I thought it was $156 billion but this article says $100 billion).

I didn't post it because it was simply background noise without a historical picture to compare, but last week there was a story of the crude oil rig count globally. With minor exceptions, the only country with more rigs, month-over-month, is Saudi Arabia. [Later, a reader tells me, with regard to Saudi Arabian rig count: the Saudis had 125 rigs working in September, up from 120 in August and up from 119 a year ago.]

Regular readers are aware that despite huge outlay in capital, Saudi Arabia has not significantly increased production, and any production increase could easily be offset by increased domestic consumption, including the new refinery (or is it refineries) that Saudi has recent brought on-line in the desert.

Now, with a story that is more likely to be more accurate than the political talk by the Saudi oil minister, Oilprice is reporting:

Saudi Arabia has reportedly resorted to spending cuts to cope with a budget deficit caused by the steep decline of oil prices over the past year.

Bloomberg reported Oct. 8 that the Saudi Finance Ministry has directed government agencies not to embark on any new spending initiatives for the rest of the year. It also froze government hiring and promotions, suspended the purchase of furniture and vehicles and urged revenue collectors to accelerate their operations.

The primary reason for the spending cuts is the drop in oil prices since June 2014, from over $110 per barrel to around $50 today; oil accounts for around 90 percent of Saudi revenue.

But the kingdom’s finances also have been strained by its involvement in wars in Syria and Yemen.

As a result, Saudi Arabia’s ratio of debt to GDP is in danger of rising to 33 percent in five years, according to a new report by the International Monetary Fund (IMF). The report says the Saudi budget has gone from a surplus to a deficit of more than 20 percent of GDP, more than twice as deep as those that beset the United States and Britain in 2008 and 2009, the darkest period of the recent recession.

I don't think the demise of the Kingdom of Saudi Arabia is likely to happen in my lifetime (as suggested by one of the stories at one of the links above), but Saudi Arabia is facing a number of headwinds, the least of which is the low price of oil right now. They have ISIS and other terrorists to contend with; they have an "Iran without sanctions" to contend with; they know the US is no longer a reliable ally; and, oh by the way, their major global competitor, Russia, has just moved into Syria.

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Was The Bakken Collateral Damage?

Updates

November 9, 2015: a Wall State Journal update on "yieldcos." Not good news.

Original Post

 

I don't recall if I ever posted my thoughts on this or now; it would be difficult to find, if I did.  I've always thought Saudi's biggest concern was "intermittent energy" (wind/solar) and the world, especially China, buying into the "global warming/climate change" scam.

When the Kingdom elected to flood the market with oil, they hoped a) to stop the intermittent energy movement; and, b) get the world "hooked" on crude oil again.

Now we have this story from The New York Times: intermittent energy financing has hit a snag (if you hit a paywall, google renewable energy financing hits a snag).

Only a few months ago, it seemed that the renewable energy sector could do little wrong: Stock prices were soaring and money was pouring in as investors flocked to get in on the action.

That is no longer the case. Low oil and gas prices have roiled the energy markets, and the specter of rising interest rates has rattled investors’ confidence in the industry’s returns. Although energy and financial experts say that the basics of the business remain sound, the lofty stock prices have tumbled, leading renewable energy companies to scramble for new approaches to their businesses.

Nowhere has the retrenchment been more acute than in a newfangled financing mechanism called a yieldco. Yieldcos, public companies conceived by renewable energy companies as a way to raise cheaper capital for project development, have attracted billions in new investments.

The yieldcos buy and operate power plants, mainly those that their parent companies develop. The yieldcos then collect the contracted electricity fees and pay the bulk of them out as dividends. With investors hungry for stable returns, energy yieldcos were greeted with enthusiasm through initial public offerings of their stocks over the last year and a half.

Last week, though, one of the most aggressive companies in the sector called a timeout.

SunEdison, which has bought several companies in recent months in a bid to become the world’s largest renewable energy developer, told investors it would not sell any more projects to its yieldcos, TerraForm Power and TerraForm Global, until conditions change.

The company said it would trim expenses and streamline operations, including reducing project development by 20 percent, withdrawing from Britain and cutting roughly 15 percent of its work force.

I've always thought that Saudi Arabia was more concerned about the intermittent energy surge than US shale. If so, perhaps the US "tight" oil industry was a victim of collateral damage. But I won't argue with those who say maybe the Kingdom was concerned about both equally.