Bloomberg
Saudis Bet ‘Drill, Baby, Drill’ Over in search of a more expensive oil
(Bloomberg) – Saudi Arabia has just made a risky bet that the glory days of the U.S. shale, which has transformed the global energy map in the past decade, will never return. Alliance of oil producers OPEC +, Saudi energy minister Prince Abdulaziz bin Salman, has shown that he is focused on raising prices – and confident that this time he will not encourage American producers to come back and steal market share. forever, ”said Prince Abdulaziz, who orchestrated the revival of the oil market after last year’s catastrophic collapse. months to increase production, fearing that rising oil prices may awaken rival shale producers. The Saudis are certain that American industry has reformed. If the prince is right, OPEC + will be able to raise prices now and regain market share later, without worrying rivals in Texas, Oklahoma and North Dakota that will flood the market. But if Riyadh has made a miscalculation – and it has erred in shale before – the danger will be the reduction of prices and production. The Saudis have so far convinced their allies that the strategy will work. After a brief virtual meeting on Thursday, OPEC + agreed to prolong its production cuts, defying expectations of an increase in production. Russia, however, has secured an exemption for itself and Kazakhstan, and will increase production marginally in April. Crude oil jumped 5% to a year-on-year high of nearly $ 68 a barrel after the decision. First month futures widened gains on Friday and several banks updated their price forecasts, including Goldman Sachs Group Inc., which increased its estimates by $ 5 – to $ 75 in the next quarter and $ 80 in following three months. “Bold move by OPEC + to extend the rise in oil prices,” said Regina Mayor, leader of the global energy sector at KPMG. If history is a guide, however, problems may be brewing. The OPEC + coalition, which brings together Saudi Arabia, Russia and almost two dozen other oil producers, has in the past underestimated its American rivals, which year after year have produced more than most expected. From a low point of less than 7 million barrels per day in 2007, total U.S. oil production more than doubled, reaching an all-time high of almost 18 million barrels per day in early 2020, forcing the cartel to give in. market share. It is a risky gamble, ”said Amrita Sen, chief oil analyst at consultancy Energy Aspects Ltd.“ Shale may not be able to respond immediately this year, but 2022 will be different. The higher prices are a lifeline. ”For now, total U.S. oil production remains restricted, hovering at 16 million barrels due to the impact of last year’s drop, which saw reference prices briefly negotiate below zero. Under pressure from shareholders, shale producers pledged restraint, putting profits ahead of growth that they relentlessly pursued during the boom years. Although drilling has risen since the 2020 lows, it is well below previous levels. In addition, President Joe Biden is trying to moderate the industry’s worst excesses, including the indiscriminate burning of natural gas that is a by-product of shale’s success. Under another oil minister, Saudi Arabia attacked shale producers in 2014 and 2015, flooding the market and forcing lower prices – a strategy that ended up failing. Prince Abdulaziz is doing the opposite, because higher oil prices will ultimately benefit shale producers. Even so, he is convinced that the industry will not repeat the excesses of the past. “Shale companies are now more focused on dividends,” Prince Abdulaziz told Bloomberg News in an interview after the OPEC + meeting, saying the kingdom wished the best for American industry. “We have never had any problems with shale oil. It is the shale companies themselves that are changing. They had their fair share of adventure and are now hearing the call of their shareholders. “Shale executives agree with him – at least for now.” A few years ago it was’ drill, baby, drill ‘,’ John Hess, the head of Hess Corp., said in Houston earlier this week. “Now, it’s ‘show me the money’.” Ryan Lance, the CEO of ConocoPhillips, echoed the sentiment: “I hope there is discipline in the system. The worst thing that can happen now is for US producers to start growing rapidly again. ”As the industry cuts spending to pay shareholders fatter dividends, there’s not much left to finance increased production. Even Big Oil is expanding its ambitions in shale. Exxon Mobil Corp. operated 55 oil rigs in the Permian basin, which extends across western Texas and southeastern New Mexico, as part of an effort to increase production to 1 million barrels a day by 2025. After tightening its belt, the giant US oil is operating only ten rigs and has cut its production target for 2025 by almost a third to 700,000 barrels a day. However, there are also signs that higher oil prices may ultimately reactivate the U.S. shale industry. With the West Texas Intermediate benchmark now changing hands above $ 60 a barrel, some companies believe they can grow and keep shareholders happy. EOG Resources Inc., Permian’s largest producer, announced a huge increase in spending for next year. And others are following suit. But the stock market reaction justified the case of Prince Abdulaziz: investors punished EOG for spending more on drilling, reducing its shares compared to more disciplined rivals. (Updates with Goldman’s predictions in the seventh paragraph.) For more articles like this, visit us at bloomberg.comSubscribe now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP