Three years ago, former Saudi Minister for Petroleum Ali al-Naimi joined the OPEC summit deliberations in his usual calm manner, refusing to cut production unless all other member countries also agreed to do so.
He believed the Saudi Arabia should maintain its share of the oil markets. Since that time, oil prices have been in a state of decline.
Resilience of shale oil companies
The perception of observers at that time was that OPEC countries with the least cost of production could bear lower prices as opposed to non-OPEC producers, particularly producers of shale oil in the United States. As a consequence, the world continued to witness gradual decline in oil prices and a rise in oil reserves until oil prices reached $26 per barrel.
Thereafter, the Kingdom and Russia agreed with Qatar to set a roof production in February 2016. In response, prices shot up by 60 per cent although spending collapsed after three months, despite losses sustained by major oil companies in 2016 and a decline in a number of platforms (especially in the first quarter), leading to the emergence of new companies. However, the most important shale oil companies resisted and increased their investments.
As oil prices continue to fall, traditional producers have been hurt, profits of major oil companies in the world have declined, and there is speculation about their rankingMazen al-Sudairi
A year ago, OPEC countries lowered their production costs. Experts believe this is due to two reasons. The first is that most OPEC countries have low production costs. In contrast, OPEC countries rely heavily on oil as the main source of revenue for their economies and the decline in oil prices has entailed a conservative financial policy since the beginning of 2014 to avoid a large deficit that erodes financial reserves. There are countries that are heavily indebted such as Nigeria, while others have a pastoral economy such as Venezuela.
The Kingdom began to regulate its financial policy in 2016, a year after the start of its new petroleum policy. There was a shortage in interbank liquidity that year. The second reason is that some OPEC countries looked at shale oil from the view of their cost of production, and did not consider it as an industry working in a flexible economic environment.
There are also closed investment funds with investments up to $ 60 billion in financing, in addition to available and mobile work force, pipe and drilling companies that accept financial facilities and, more importantly, an investment community that exchanges advice and invents many smart applications to rationalize costs.
As prices continue to fall, traditional producers have been hurt, profits of major oil companies in the world have declined, and there is speculation about their ranking (ExxonMobil fell in rank) as some have started cutting dividends to their shareholders. This decline is also reflected in oil investments, estimated to have fallen from $ 1 trillion to about three hundred billion.
This decline continued, which could cause problems due to lack of maintenance and erosion of the oil wells. These changes have made OPEC countries reconsider their plan of creating a global balance in production, and also pushed Russia into this rethink, especially when Putin met with His Highness the Crown Prince at the G20 last year.
Last Thursday, the agreement was renewed amid questions as to when the surplus reserves will decline and when will the full production of the pre-agreement levels be restored. Questions about the future production of shale oil, the production of the Permian basin is expected to increase, which accounts for about 40 percent of shale oil production with 0.9 million barrels by 2020 at the price of $ 45, and at the price of $ 65 it is expected to increase to $ 1.5 million.
In contrast, the MIT Institute questions the accuracy of the International Energy Agency's calculations regarding the future growth of shale oil. The answer lies in the future and who can win the bet. A year from now, at the OPEC summit by mid-winter in the capital Vienna, the media will race to broadcast news and whoever wins the bet will get to taste the Austrian Sachertortecake.
This article is also available in Arabic.
Mazen al-Sudairi is a Saudi writer on geopolitical issues. He is also the Head of Research at Al Rajhi Capital. He tweets @MazenAlSudairi.