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Page added on November 10, 2015
Saudi Arabia Preparing To Fuel Its $100 Billion Oil War With Debt
Saudi Arabia has probably spent around $100 billion of its foreign reserves by now to prosecute its war against American shale and other low-cost oil producers. The oil kingdom’s decision one year ago not to cut production to support oil prices has driven the price of both Brent crude and West Texas Intermediate down below $50 a barrel, but Saudi Arabia will have to spend a lot more to win the battle.
Now, there are signs that Saudi Arabia is preparing to double down on its strategy with debt. The Financial Times reports that Saudi Arabia is getting ready to borrow funds in the international bond market to further finance its big effort to protect its market share in the oil world and make life impossible for U.S. shale. Saudi Arabia needs the money to keep its expensive social contract going in the face of rising budget deficits that are the result of its fast diminishing oil revenues. The oil kingdom is under further financial stress because of its costly military intervention in Yemen.
In a way, Saudi Arabia is taking a page out of the playbook of the U.S. shale producers, which have become the most powerful force in the global oil market—the swing producer—financing their huge expansion with cheap debt. Russia’s Igor Sechin, president of oil giant Rosneft, recently said that U.S. shale oil has steam rolled into control of the world oil market backed by $150 billion of debt.
So far Saudi Arabia only has some small victories to show for its big oil war against U.S. shale. Rigs in operation in the U.S. have fallen to 771 from peak levels of 1,925, according to data from Baker Hughes. There have been maybe 20 corporate oil bankruptcies, but most of them have been tiny. The biggest bankruptcy involved oil driller Samson Resources, which was the subject of a huge $7.2 billion leveraged buyout led by KKR in 2011. Shares of some big publicly-traded shale oil companies like Continental Resources are down 35% in the last year, but others like Pioneer Natural Resources have only seen a 15% drop in the 12 months since Saudi Arabia announced its new policy.
U.S. oil production has fallen by about 500,000 barrels a day from its peak, but America is still producing an enormous 9.1 million barrels a day. To put that in perspective, the U.S. was producing 6.8 million barrels a day three years ago.
The U.S. shale oil machine has proven to be pretty resilient. U.S. shale oil producers have cut costs and learned to be more efficient. Companies like Anadarko Petroleum have reduced drilling times and costs—and created a so-called fracklog by not fully completing wells and essentially storing oil in the ground until prices rebound. The break-even point for U.S. shale oil seems to have come down substantially.
On the surface, it seems like it’s going to be lower for longer when it comes to oil. Saudi Arabia is pumping more oil per day than ever and is taking its battle to non-OPEC producers like Russia, exporting ever lower-priced product to refineries in countries like Poland. Russia’s economy has been hit but it’s still pumping 10.78 million barrels per day, more oil than at any time since the days of the Soviet Union. And Iran is set to dump even more oil on international markets in the coming year.
Saudi oil minister Ali al-Naimi and new King Salman are indicating they are not backing down. The Financial Times reports Saudi Arabia could increase debt levels as high as 50% of gross domestic product within five years, up from extremely low levels today. The stakes are always higher when debt is involved. For U.S. shale, the corporate debt markets have remained robust and U.S. corporate bankruptcy law means that even those companies that fail might only be scooped up by distressed investors waiting on the sidelines with boatloads of cash and ready to turn things on again if oil prices rise. Saudi Arabia will have to prove that it can be equally nimble carrying a large debt load on its back.
9 Comments on "Saudi Arabia Preparing To Fuel Its $100 Billion Oil War With Debt"
makati1 on Tue, 10th Nov 2015 8:34 pm
The US is fueling its wars with debt, or should I say, the printing press. I guess the Saudis can also. If they lose, it is wiped out anyway. If they win, they can plunder the new territory and repay the loans … maybe.
BobInget on Tue, 10th Nov 2015 9:22 pm
Said, without cracking a smile:
Saudi Arabia says will diversify oil economy to slow climate change
By Reuters, Oslo Tuesday, 10 November 2015
Saudi Arabia, the world’s largest crude oil exporter, plans to diversify its economy to help combat climate change in a move that could reduce expected output of up to 130 million tonnes of carbon emissions a year by 2030, the government said on Tuesday.
OPEC member Saudi Arabia is the last of the Group of 20 major economies to submit a plan to the United Nations before a summit in Paris from Nov. 30-Dec. 11 about ways to slow global warming.
It said it was aiming “to achieve mitigation co-benefits ambitions of up to 130 million tons of carbon dioxide equivalent avoided by 2030 annually through contributions to economic diversification and adaptation,” it said.
Saudi Arabia did not give details of its current emissions. The World Resources Institute think-tank estimates that Saudi Arabia emits 527 million tonnes of carbon dioxide a year, or 1.22 percent of the world total.
The mere submission of a plan by Saudi Arabia is a positive sign for a deal in Paris. About 160 nations have issued national plans, meant to combat heatwaves, floods, droughts, and rising sea levels.
Saudi Arabia said its plan was based on a scenario in which it would diversify the economy with a “robust contribution” from export earnings from oil and derivatives.
Earnings would be channelled into lower emission sectors “such as financial services, medical services, tourism, education, renewable energy and energy efficiency technology to enhance growth,” it said.
An alternative scenario would involve using more oil at home to fuel carbon-intensive industries such as petrochemicals, cement, mining and metal production, it said, thereby increasing domestic rather than overseas emissions.
Saudi Arabia said it reserves the right to update its plan.
It said it plans to use energy more efficiently and invest in solar, wind, geothermal and waste generation.
Saudi Arabia said it was planning to build a plant capturing and using 1,500 tonnes of carbon dioxide a day for use in other petrochemical plants. It would operate a pilot plant at the Othmaniya oil reservoir.
The government would also encourage investments in exploring and producing natural gas. It would seek to adapt to climate change, with measures ranging from reducing the pace of desertificaition to improving public transport.
Last Update: Tuesday, 10 November 2015 KSA 14:30 – GMT 11:30
BobInget on Tue, 10th Nov 2015 9:37 pm
As it happens, KSA is waging two actual hot wars. One in Syria where KSA has pumped billions to unseat the current government.
The second in Yemen. For six months one of the wealthiest nations on earth has been relentlessly bombing anything that moves.
When those sly old dogs announce off the charts production numbers, they play down
‘domestic use’, oil that never gets exported.
One by one every Arab state has withdrawn from fighting the so called Islamic State.
Apparently KSA and other Arab Kingdoms
are happy to let Americans or Russians do the fighting while they supply oil to all sides.
shortonoil on Wed, 11th Nov 2015 7:40 am
“Saudi Arabia has probably spent around $100 billion of its foreign reserves by now to prosecute its war against American shale and other low-cost oil producers.”
The same garbage about Saudi Arabia forcing down prices to destroy Shale turns up over and over again in the MSM. It is hardly a coincidence that these are the same Shale cheerleaders that promoted American Energy Independence, and Saudi America. The ones that convinced the American public to pour its money into a Ponzi scheme; one that will transfer over $1 trillion dollars from the pockets of investors into the coffers of the oil industry. Now that the Shale scheme is leaving town, the MSM is caught red handed swimming in the buff as the tide goes out. Forbes long bony finger is now pointing East.
rockman on Wed, 11th Nov 2015 10:37 am
shorty – So true. Even this article highlighting how much this supposed “war” is costing the KSA. They make no effort to lay out what the big financial win such an effort will eventually bring to the KSA. And the obvious answer is that it doesn’t make them one extra $ in the future. When/if oil prices reach a high level any and all oil resources outside of the KSA will be developed and will compete for market share with the KSA.
The KSA gains nothing monetarily in long run and loses hundreds of $BILLIONS in the short term.
marmico on Wed, 11th Nov 2015 11:28 am
one that will transfer over $1 trillion dollars from the pockets of investors into the coffers of the oil industry
You fucktards don’t know the difference between depletion and depreciation, do you?
Wow, another oil/gas well. Wow, another residential improvement.
https://research.stlouisfed.org/fred2/graph/?id=A946RC1A027NBEA,E318RC1Q027SBEA,
U.S. consumers have spent more money maintaining and improving their homes than the oil/gas biz does drilling for hydrocarbons, ever since rockman fell off the gabbage delivery truck. 🙂
Boat on Wed, 11th Nov 2015 12:28 pm
If the Saudi pump their oil for $10-$20 per barrel how can more production be bad? In any commodity the lowest cost producer wins. It seems that along with the Saudi, Kuwait and the UAE have kept up with the necessary investment to grow their production, not shrink it.
What the country spends on war or domestic programs is a separate issue. will they invest 100 billion in solar like they claim? Or charge more than 5 cents per kw up to 2,000. Their defense budget now rivals Russia. If money gets tight they can afford to make a few adjustments.
shortonoil on Wed, 11th Nov 2015 1:49 pm
“shorty – So true. Even this article highlighting how much this supposed “war” is costing the KSA. They make no effort to lay out what the big financial win such an effort will eventually bring to the KSA.”
This is a no win situation for the industry, KSA, and the world economy. In stead they hype shale for cutting cost, Of course they don’t mention that they are doing it by bankrupting their support services, and suppliers. Neither do they mention that they are diluting their share holders stock. These guys have the integrity of a weasel!
BobInget on Wed, 11th Nov 2015 8:51 pm
http://www.telegraph.co.uk/finance/economics/11989469/Saudi-Arabia-risks-destroying-Opec-and-feeding-the-Isis-monster.html
‘Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff,’ says RBC
The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry.
Algeria’s former energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country’s Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. “Why remain in an organisation that no longer serves any purpose?” he asked.