Thursday, August 6, 2015

Saudi Arabia Looking At Bankruptcy? -- The (London) Telegraph / Sydney Morning Herald -- August 6, 2015

This is quite fascinating. Before going to the link, recall these items regarding Saudi Arabia:
  • the country has a huge under-funded desalination (and existential problem for the Saudis) program;
  • recently cancels a $9 billion solar energy program to pay for their desalination program;
  • recently completes two new in-country refineries with total capacity approaching 1 million bopd; 
  • faces a deficit twice what it forecast, Saudi Arabia says it will go to the debt market for the first time in a decade;
  • President Obama explicitly states the US is no longer responsible for Saudi's security;
  • the tea leaves clearly suggest it is US policy to move Iran to singular super-power status in the Mideast;
  • announces this past week that it will issue $27 billion in bonds;
  • has a shooting war in Yemen; terrorists on its borders;
  • a $35 billion, 5-year program to increase crude oil production announced in 2012, has failed; and,
  • it continues to give away its oil at $60/bbl (when it needs $100 oil to balance its budget).
That $100-oil figure is based on data from at least a year ago. After giving away its oil for the past year at $60/bbl, the $100-oil figure is probably understated.

So, with all that, it doesn't take a rocket scientist to think the unthinkable, but even I couldn't go that far.

But apparently the editors over at The Sydney Morning Herald were willing to go out on that branch. The headline: Saudi Arabia may go broke before the US oil industry buckles.  (Archived)
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 $US62.05, 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 10.6 million 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 $US200 billion ($272 billion) 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 45 per cent this year - and not only by switching tactically to high-yielding wells.
Much more at the link. 

Earlier today while bike riding, I was thinking about Saudi's problems. I thought about what they would have to do. I typed it all out below but then realized that folks much smarter than I would note all the flaws. So, I deleted it.

But if you don't read anything else this week, read the article at The Sydney Morning Herald linked above. The original appeared in The (London) Telegraph, perhaps one of the two best newspapers in the world.


Later, see first comment: 
The succession status/procedures in KSA may be vastly more problematic as the current king is in the process of partially disenfranchising something like 34 out of the current 35 sub branches of the house of Saud.
Diminishing resources will greatly accelerate the tension.
and my reply:
Very, very interesting. I was unaware of that. These three sources provide some insight, in order of importance (first one listed is most important): 

No comments:

Post a Comment