Saudi oil future ‘unlikely’ to be hit by US shale revolution

The shale gas boom in the United States is unlikely to affect Saudi Arabia’s “long-term positioning”, says a Riyadh-based investment bank.

“We do not believe that the growth in oil production from tight rock formations in the US, or from shale formations elsewhere, will materially affect Saudi Arabia’s long-term position in the oil industry,” said Saudi Arabia’s Jadwa Investment bank in a report on its outlook for unconventional oil and gas.

“We see the production of US light tight oil impacting the European refiners and African light crude producers. Not the Saudi refining complexes,” the report added.

According to the US energy information administration, US domestic oil production last month climbed above an average of 8 million barrels per day for the first time in almost 25 years.

Predictions by Opec said the oil group could lose nearly 8 per cent of its market share in the next five years to shale oil and other new production.

In its annual outlook released last month, Opec said demand for its crude would dip to between 28 million and 29.2 million barrels per day (bpd) by 2018, from 30.3 million bpd today. The decline in demand for Opec’s production is attributed to the increase in production by non-Opec countries, mainly by the US and Canada.

The Saudi assistant oil minister Prince Abdulaziz bin Salman bin Abdulaziz said last month that the arrival of a direct competition from the US should “serve as a wake-up call” for the need for economic diversification. One option was for GCC nations to hedge their positions by investing in shale oil processing plants in North America.

That view was echoed by Jadwa in its report, which stated some Saudi petrochemical firms should expand their capacity in the US to benefit from the abundance of cheap feedstock gas.

“As a result of increased production in the US from tight oil and shale gas formations, we see the main impact on Saudi Arabia through the reduction of price differentials between light and heavy crudes on one hand, which could change how oil is refined in places like Europe, and a more significant impact on the petrochemicals industry on the other hand, due to the large output of cheap yet valuable natural gas liquids, which are used as feedstock in this industry,” said Fahad Al Turki, the head of research at Jadwa Investment.

The report also warned the main long-term challenge for Saudi Arabia’s oil and gas industry was the growing domestic demand for hydrocarbons, which was exacerbated by low prices. Local demand tended to erode the income from Saudi’s oil exports.

selgazzar@thenational.ae