Saudi Missteps Continue -- May 31, 2016

This is one of those huge stories that anyone following the oil and gas industry already knows ... but I was late. I didn't figure it out until just a few minutes ago. Graphs are worth a thousand words, and some 140-characters tweets are worth a picture.

Quick, what did Prince Salman call his "strategic plan" for his country?

Vision 2030.

Quick, what does Prince Salman want to do?

Diversify his country's economy.

Quick, what is Saudi Arabia really good at?

Almost anything that has to do with oil and can be run by contractors (US, Indian, predominantly).

Quick, what has Prince Salman recommended for diversifying his economy?

Build refineries.

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Everyone pretty much agrees that Saudi Arabia, at some point in the future, will become a net importer of oil.

Quick: "on the street," when is it being said that Saudi Arabia will become a net importer of oil?

2030. There are many, many links for this issue; here is one: http://www.bloomberg.com/news/articles/2012-09-04/saudi-arabia-may-become-oil-importer-by-2030-citigroup-says-1-.

Again, quick, what did Prince Salman call his "strategic plan" for his country?

Yup: Vision 2030.

I don't think that Citigroup suggesting that Saudi will be a net importer of oil by 2030 and Prince Salman calling his strategic plan Vision 2030 were coincidental.

Saudi Arabia may be in more trouble than we realize.

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This is where I got it wrong. I had assumed Prince Salman was going to build refineries in his home country to export refined products. He will build refineries in other countries, notably the US and Vietnam, he has said. I don't recall if he has also said India. Hold that thought.

Prince Salman is not going to build refineries in his home country to export refined products. Those refined products will be needed for his own population. And that does not bring revenue into state coffers. In fact, if he follows the Venezuelan example, his kingdom will step into even deeper doo-doo.

As far as building refineries in other countries:

• Vietnam: okay; perhaps not a bad choice; not great, but not bad
• India: not going to happen (see Apple's experience)
• US: Saudi Aramco can expand their one refinery in the US; buy others (subject to regulatory approval); but build more? In this politically correct / green environment? LOL.

So, we now have another misstep by Saudi Arabia: Vision 2030's emphasis on building more refineries around the world. It won't be that easy. With US refineries operating at less than 100% capacity, I just don't see the need for more refineries.

But, hey, what about all that diesel and gasoline that China and India will need? Helloooo? I don't know about India, but China is now exporting (as is Japan) refined products (see earlier posts this morning). It turns out that Saudi Arabia does not have a monopoly on knowing how to refine oil.

Now the third Saudi misstep and this is a doozy. This misstep is bigger than Vision 2030 that calls for diversifying into refineries.

In October, 2014, Saudi agreed to open the crude oil taps. The price of oil plummeted. What did China do? It appears that China doubled down, tripled down, quadrupled down on refining.

I remember all those posts about Saudi "giving away their oil," and China buying it; folks wondered what China was doing with all that oil. I guess we now know.  They were refining it and exporting it.

Know what is so amazing about that graph? Two things. One you can see on the graph. One, you can't.

The "thing" you can see on the graph is how fast this happened. In less than a year! Only a couple of years ago, China was a net importer of diesel. The more one looks at that graph, the more incredible it looks. The first question one asks: who bought that Chinese diesel and at whose expense?

China's domestic consumption didn't decrease this past year; if anything it went up. So, China had to have increased utilization of existing refineries or completed new ones.

The thing one does not see in this graph: China's domestic demand for refined products.

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Saudi's Missteps

 
By letting oil go to $100 or more per bbl, Saudi opened the door for US shale revolution. US shale operators needed that kind of incentive to "crack the code." Now that US frackers have cracked the code, $60 oil is just fine. Not great, but fine.

Then, in an attempt to bankrupt US frackers, they said they would flood the market; oil price plummeted; and Saudi has a "trillion-dollar mistake" to remedy.

This incredibly cheap oil AND the global glut of oil gave Chinese entrepreneurs (like US frackers) the incentive to expand refining operations. In one year, China has made strides that simply amaze me. I would assume if oil stays this cheap AND this plentiful, China will continue to increase its refining capacity.

Saudi Arabia won't even have it's Vision 2030 finalized and presented to the Supreme Council until 2017? 2018? Later?  How much diesel and gasoline will China be exporting in 2020, ten years before 2030?

When China becomes a net exporter of diesel it speaks volumes.

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In An Attempt To Crush The US Shale Oil Revolution, Saudi Crushed OPEC

A couple things to get out of the way.

First, as I've often said, there never was any OPEC. It was always Saudi Arabia.

Second, I don't recall if I've blogged about this before, but over the past year or so, I've thought about the huge turmoil Saudi's action would cause in Africa because of its decision to open the spigots. And now we're seeing it. CNBC is reporting that Saudi's attempts to crush the US shale revolution backfired:

Saudi Arabia engineered OPEC's policy to kill off U.S. shale oil production. The plan was straightforward: Keep pumping oil, maintain market share and outlast the Americans.

But the plan is also producing casualties within the cartel itself: Angola, Nigeria and a Venezuela that's on the verge of implosion.

Six months after OPEC left its high-production policy in place, some of the cartel members who called loudest for output cuts are feeling the most pain. Inflation is soaring and currencies have plummeted in lesser petro states, as top exporter Saudi Arabia continues to dictate policy.