Friday's Energy News And Tweets -- January 8, 2016

Locator: 10010SAUDIMISTAKE.

 

Updates

December 2, 2023: some suggest Saudi might try it again.

July 3, 2016: Kuwait to raise $15 billion in cash to cover deficits.

January 12, 2016: Harold Hamm says the same thing -- Saudi Arabia made a trillion-dollar mistake. 

There's growing evidence that Saudi Arabia's attempt to flood the crude market at a time of oversupply and concerns about weakening demand is not working, American oil billionaire Harold Hamm said Tuesday.

"We're in a predatory pricing environment. That's what's happened. The Saudis turned 1.8 million barrels on, and basically their intent was to drown us. But they've not got that done. It's been a monumental mistake for them, I might add, a trillion- dollar mistake."

Hamm cited speculation that Saudi Aramco, the state-owned oil giant, may sell at least part of its operations in an initial public offering.

"They're having to sell part of their business to keep doing what they are doing," he said, referring to the refusal by the Saudis to cut production. "They're having to sustain a country. We're sustaining companies here. We cut capex and quit spending money. And ride it out."

Pressure may be mounting on Saudi Arabia from fellow OPEC members, as crude prices continued to trade around 12-year lows Tuesday morning. Nigeria's oil minister said a couple members of OPEC have requested an emergency meeting. But other members said the group won't be gathering to talk about oil prices before their next scheduled meeting in June.

Also this January 8, 2016, article at Forbes.

Original Post

 

OPEC's trillion-dollar miscalculation, reported in Forbes. After reviewing the past year's events, and looking at an alternate strategy, the writer concludes:

Would that strategy have cost them market share? Sure, a small amount. But assume they then pumped 34.5 million bpd at $80/bbl. That’s just over a trillion dollars in annual revenue. If instead they pump 36.5 million bpd at $35/bbl — which is actually more than they are getting as I write this — that’s $466 billion in annual revenues.

The annual difference in those scenarios is $541 billion. OPEC already lost out on that much in 2015 from the sharp drop in prices. If prices remain at these levels for most of this year, the foregone revenue for OPEC in 2015 and 2016 will easily top $1 trillion since that November 2014 meeting.

Was this a miscalculation on the Saudis’ part, or is there a deeper strategy at play? I firmly believe they failed to anticipate how sharply oil prices would drop. I think they believed that oil prices could fall somewhat below $75/bbl for a short period of time, and that would be enough to bankrupt a lot of the shale oil companies and allow OPEC to recapture market share.

Instead, the shale oil producers slashed costs, and while some producers have gone bankrupt — and other bankruptcies are undoubtedly on the way — shale oil production has proven to be much more resilient than the Saudis and OPEC expected.

At that time, the Saudis argued that it didn’t make sense for them to cut production. The highest-cost producers, they argued, should be the ones to cut. It is true that defending oil prices by cutting production — the strategy favored by Iran, Nigeria, and Venezuela — would have propped up these high-cost producers. But the shale oil boom was going to run its course and probably peak in a few years. OPEC still controls 1.2 trillion barrels of proved oil reserves — 72% of the world’s total. Thus, unless they expected shale oil production to continue to expand by millions of barrels per day every year, the group could have tightened up production as needed to maintain much higher margins on a shrinking market share. They would have higher revenues today, knowing they would capture back market share as the world’s non-OPEC reserves depleted.

Their strategy may yet pay off though. If they can keep enough marginal production sidelined over time, this period of financial difficulty could enable them to recapture higher margins in the future. If they are able to realize $10/bbl more for their remaining reserves as a result of the current strategy, then their pain will be worth it (for them) in the long run.

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Saudi Crude Oil Surge! Not So Fast!

Remember all that talk about increased crude oil imports in December (John Kemp tweets -- I'll look for the posts later), we now have October EIA data.

After a couple of reports that Saudi Arabian imports surged near the end of the year, John Kemp is tweeting now that Saudi Arabia imports in late November/early December "moderated."

Saudi Arabia crude oil imports into US, October, 2015, data updated. Imports from Saudi Arabia remain near historic lows (remember, Saudi has a huge refinery along the US gulf coast they must supply (I believe that refinery has a daily capacity of 800,000 bopd); columns below are monthly, January through December; most recent data, October, 2015:

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The drop in 2008 - 2009 coincides with a deep recession and the beginning of the Bakken boom. Current Saudi imports compare with the lows in 2008 - 2009.

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Winners And Losers

Crude oil imports into the US from various sources, May, 2015 vs October, 2015 (numbers rounded monthly):

• All countries: a decrease from 294 million bbls to 273 million (delta, 22 million bbls) 
• OPEC: a decrease from 97 million bbls to 90 million bbls (delta, 7 million bbls)
• Saudi Arabia, a loser: from 38 million bbls to 30 million bbls (delta, 8 million bbls)
• Iraq, a winner: from 9 million bbls to 12 million bbls, a 30% increase from May to October
• Venezuela, fairly stable, from 28 million bbls to 25 million bbls, but fairly wide monthly variation
• Canada: monthly variability; but 110 million bbls in May; 105 million bbls in October
• Colombia, a huge loser: from 17 million bbls in May, down to 7 million bbls in October
• Mexico: monthly variability, but 21 million bbls in May, up a bit to 23 million bbls in October

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For The Archives

Forbes.

With the extension of the tax benefits, wind and solar projects started before year’s end will qualify for a 2.3 cents per kilowatt hour production tax credit. It will gradually diminish through 2019. Wind and solar projects could opt instead to take a 30 percent investment tax credit that reduces their federal taxes dollar-for-dollar by what they put into the project. The main difference is that the solar production tax credit will phase out at the end of 2022.

Intermittent:

While green energy has a lot of public appeal, it is still intermittent in nature. And that has put the grid’s traffic cops in an untenable position. They are the ones whose job it is to schedule the flow of electricity on the lines. Their task is to maintain that reliability with the lowest-priced fuels.

Because neither the wind nor sun blows or shines on demand, they need to be firmed up with other easily “dispatchable” forms of generation. That creates two distinct issues:

The first is that the back-up power is not free and the second is that if coal plants are “cycled” up and down, they release more pollutants per unit of output than if they ran full steam ahead.