The Organization of Petroleum Exporting Countries took a good first step when its members agreed to limit production and exports at its recent meeting, a former Saudi Arabian petroleum minister said (OGJ Online, Nov. 30, 2016). But the cartel probably won’t exert the kind of global market influence it did in the 1970s and ’80s because unconventional production has established a strong, lasting position, Ali Ibrahim Al-Naimi and two oil industry executives agreed.
“OPEC needs to make a concerted effort now to have everyone reduce production,” Al-Naimi said during the Dec. 2 discussion at the Center for Strategic and International Studies. “It’s not certain that Russia will go along. The only tool OPEC has is constraint. Unfortunately, [its members] tend to cheat. There’s not much that can be done if producers don’t cooperate.”
The cartel had no strategy in November 2014 when Saudi Arabia announced it would reduce its production in a bid to stabilize prices after unconventional production growth in North America flooded the market, he said. “The collapse in shale oil production later validated our decision,” said Al-Naimi, who was Saudi petroleum minister from 1995 to 2016 and recently released his memoirs, “Out of the Desert.”
But Hess Corp. Chief Executive Officer John B. Hess and retired Schlumberger Ltd. Chief Executive Officer Andrew Gould each noted that oil production from tight shale formations could recover more quickly if OPEC’s reduced production in 2017 increases global prices.
“Shale is a new supply source that can move quickly in either direction, but it’s not a swing producer as Saudi Arabia was in the past,” said Hess. “It took the hardest hits when prices dropped, but will probably recover quickest when they increase.”
Gould said, “The financial system has been hesitant to invest in shale plays until there’s a better idea how production there will survive with prices below $60/bbl. Technology flourished when operations are concentrated in places like Texas and the Gulf of Mexico. Places like Offshore Tanzania look promising, but they don’t have the necessary infrastructure.”
US independent producers are proving that more efficient operations can make unconventional oil operations economic when prices are around $50/bbl, Hess said. “The long-cycle plays, such as offshore, have been shut down. They may start to recover when prices pass $60/bbl and stay there for a while,” he said.
The speakers agreed that technological breakthroughs unquestionably helped unconventional oil development and production grow. But Al-Naimi said it would be a mistake to assume that technology won’t have impacts elsewhere in energy. “It could reduce fossil fuel demand and make alternatives more economic in the future,” he said.
Saudi Arabia is in a better position than most countries because it has both conventional and unconventional oil and gas resources, Al-Naimi said. “I realized early in my career that if you look after people, that’s what it takes,” he said. “Success breeds success. There’s no better investment than in human beings.”
Asked what effect he thought the recent US elections might have on the country’s relationship with Saudi Arabia, Al-Naimi said, “As far as we’re concerned, we’ve had a great relationship. We may have different systems, but we also have great respect for each other. I think that will continue.”
Contact Nick Snow at [email protected].