Summary
There is nothing Saudi Arabia or OPEC can do about shale oil over the long term.
At best they can only delay the inevitable.
Millions of barrels of shale oil will be introduced into the market over the next decade.
Companies with shale exposure, over time, will take market share away from OPEC.
From some of the headlines I've read recently, you would think the U.S. shale industry has been defeated by Saudi Arabia and OPEC, and everything in the oil sector going to return to where things were before shale producers entered the market.
Not only is this a fallacy, it is the exact opposite, which is why the strategy of oversupplying the market will remain in place for now in order to keep the price of oil low, which in turn makes it more difficult to invest in new exploration and development.
The idea of market share being the battleground being fought over is a misguided one because, that would suggest shale oil can be defeated around the world. It's not going to happen. It won't even happen in the U.S., let alone the world.
more on OPEC's war on shale oil
Showing posts with label Saudi Arabia. Show all posts
Showing posts with label Saudi Arabia. Show all posts
Wednesday, December 16, 2015
OPEC's War on OPEC
Summary
OPEC's greatest competitor is now OPEC.
The real reason OPEC oil production levels will remain high.
What the market is transitioning into.
Is a real free market oil industry emerging?
When Saudi Arabia and OPEC decided to boost production in response to the serious threat of U.S. shale oil, that was the primary impetus behind pushing prices down, in order to put extreme pressure on the quickly-growing shale competitors before they were too big to be dealt with.
As time as passed though, and U.S. producers have been forced to lower production levels and reduce exploration and development spending, a scenario has emerged that has gravitated to OPEC itself.
With Iran about to be released from sanctions, it has aggressively and publicly stated it will take steps to gain back market share it has lost, and will do what's best for the country, which was a reference to ignoring anything Saudi Arabia had to say about it.
more on OPEC battling OPEC
Wednesday, November 18, 2015
Saudi Arabia's Airports to be Privatized to Lower Budget Pressures
* Privatization of Saudi Arabia airports will reduce budget requirements over the next several years
* Over the next decade it two it could make a difference because of economic diversification, but not in the near term
* Vulnerability of Saudi Arabia to low price of oil
The cost of engaging in a long-term battle for oil market share is starting to weigh more on Saudi Arabia, which has drawn down reserves and borrowed in order to maintain most of its budget requirements because of falling revenue. Consequently, it has also had its credit rating lowered
by Standard and Poor's.
That will likely continue to be detrimental to the country as it has plans to increase it debt by issuing of billions more in bonds, which will probably result in more credit rating cuts, resulting in higher costs of doing business.
Saudi Arabia, at best, has about 5 years of reserves left, standing today at about $647 billion. Its budget deficit is now at about $100 billion a year.
Among the steps taken to slow down the process is to drop proposed projects, eliminate non-essential one's, and find ways to lower dependence on government largesse, which is about 90 percent dependent on the energy sector to drive revenue. The low price of oil is of course the negative catalyst driving the challenge.
Recently it was announced Saudi Arabia is going to privatize its airports in order to allow it to be freed from having to prop them up.
Airport strategy
Most Saudi cities of any decent size of a domestic airport in them, but the bulk of the value of privatization will be at its three international airports located in Riyadh, Dammam and Jeddah. The goal is to have all airports in the country privatized by 2020.
The project is scheduled to be launched in the first quarter of 2016, starting with the key international airport located at Riyadh. Once that is completed, all remaining airports will go private.
All the privatized airports and associated services will be managed by the Saudi Civil Aviation Company Holding, according to Business Times.
Some believe this is aimed at economic diversification. I don't. I see it as budgetary diversification, meaning it's cutting budgetary costs to reduce pressure on its reserves over time.
Value of the action
Saudi Arabia without a doubt knows the days of oil above $100 per barrel are over. It may even be making decisions on it struggling to reach $80 per barrel over the next five years. There is no way it can continue to afford the types of perks and subsidies its people have gotten used to, so it must take steps to reduce costs.
This is important to understand because it could be viewed as a growth mechanism if it is believe it's a move to diversify the economy, rather than to lower the budget.
That doesn't mean there won't be added value once the privatization takes place. In doing research over the years concerning the difference in performance of state-owned companies versus privately-owned companies, the private companies have always outperformed the state-owned companies. A good example of that is the Mexican oil industry.
What this should do is reduce the budgetary requirements over the next several years, as the airports start to compete on their own. This very well could be a benefit for the economy, as the increased efficiencies and customer satisfaction could boost revenue and earnings, and result in more hiring.
In my opinion that's not the reason for the move though. It's driven by the numerous risks associated with declining oil revenue.
Saudi vulnerability to oil and oil prices
With about 90 percent of revenue coming from oil, the risk to Saudi Arabia is obvious. The current price war shows how quickly even this energy giant, which has the largest oil reserves in the world, can be taken down.
It's not taken down yet, but we now know it only has at most about a five-year time period to solve its problems under a low-cost oil environment.
That five-year period is subject to understanding it must take action long before that. Five years is how long it has before running out of reserves. It can't wait that long to deal with it, and it isn't.
Saudi Arabia basically makes the decisions on behalf of OPEC, and controls the economic fate of the Middle East members. There is risk there because it refused to give up market share, which has been putting enormous pressure on about half of the OPEC members, several of which are located in the region.
Even though Saudi Arabia has some time to respond to the issues, the other countries in the Middle East don't. If the result is unrest, the Middle East could go up in flames; far worse than we're seeing now with the ongoing wars there.
This has historically turned in to a contagion spreading across the region, which could easily appear in Saudi Arabia. On top of this Saudi Arabia is underwriting some of the wars against ISIS in different countries.
There are more risks, but you get point, which is the low price of oil, which will remain subdued, will only magnify these challenges until a decision is made or agreed upon to slow down production in order to support the price of oil.
Conclusion
I don't believe investors should consider this an attempt at economic diversification. After all, a publicly run airport still sends a passenger out on a plane in the same way a privately run airport would.
There will be some savings and possible an increase in revenue and earnings from the private airports, but that will be only a small part of the revenue the country takes in, and will have little effect on the reserves.
This is a cost-cutting move to remove some of the pressures on the budget of Saudi Arabia, to work in conjunction with the stoppage of projects it had in its pipeline, and the removal of those services that aren't considered of major importance to its people.
A lot further down the road this could be very important and productive, but over the next several years the value will primarily in reducing costs so its revenue can target those services considered essential to maintaining order in the country.
* Over the next decade it two it could make a difference because of economic diversification, but not in the near term
* Vulnerability of Saudi Arabia to low price of oil
The cost of engaging in a long-term battle for oil market share is starting to weigh more on Saudi Arabia, which has drawn down reserves and borrowed in order to maintain most of its budget requirements because of falling revenue. Consequently, it has also had its credit rating lowered
by Standard and Poor's.
That will likely continue to be detrimental to the country as it has plans to increase it debt by issuing of billions more in bonds, which will probably result in more credit rating cuts, resulting in higher costs of doing business.
Saudi Arabia, at best, has about 5 years of reserves left, standing today at about $647 billion. Its budget deficit is now at about $100 billion a year.
Among the steps taken to slow down the process is to drop proposed projects, eliminate non-essential one's, and find ways to lower dependence on government largesse, which is about 90 percent dependent on the energy sector to drive revenue. The low price of oil is of course the negative catalyst driving the challenge.
Recently it was announced Saudi Arabia is going to privatize its airports in order to allow it to be freed from having to prop them up.
Airport strategy
Most Saudi cities of any decent size of a domestic airport in them, but the bulk of the value of privatization will be at its three international airports located in Riyadh, Dammam and Jeddah. The goal is to have all airports in the country privatized by 2020.
The project is scheduled to be launched in the first quarter of 2016, starting with the key international airport located at Riyadh. Once that is completed, all remaining airports will go private.
All the privatized airports and associated services will be managed by the Saudi Civil Aviation Company Holding, according to Business Times.
Some believe this is aimed at economic diversification. I don't. I see it as budgetary diversification, meaning it's cutting budgetary costs to reduce pressure on its reserves over time.
Value of the action
Saudi Arabia without a doubt knows the days of oil above $100 per barrel are over. It may even be making decisions on it struggling to reach $80 per barrel over the next five years. There is no way it can continue to afford the types of perks and subsidies its people have gotten used to, so it must take steps to reduce costs.
This is important to understand because it could be viewed as a growth mechanism if it is believe it's a move to diversify the economy, rather than to lower the budget.
That doesn't mean there won't be added value once the privatization takes place. In doing research over the years concerning the difference in performance of state-owned companies versus privately-owned companies, the private companies have always outperformed the state-owned companies. A good example of that is the Mexican oil industry.
What this should do is reduce the budgetary requirements over the next several years, as the airports start to compete on their own. This very well could be a benefit for the economy, as the increased efficiencies and customer satisfaction could boost revenue and earnings, and result in more hiring.
In my opinion that's not the reason for the move though. It's driven by the numerous risks associated with declining oil revenue.
Saudi vulnerability to oil and oil prices
With about 90 percent of revenue coming from oil, the risk to Saudi Arabia is obvious. The current price war shows how quickly even this energy giant, which has the largest oil reserves in the world, can be taken down.
It's not taken down yet, but we now know it only has at most about a five-year time period to solve its problems under a low-cost oil environment.
That five-year period is subject to understanding it must take action long before that. Five years is how long it has before running out of reserves. It can't wait that long to deal with it, and it isn't.
Saudi Arabia basically makes the decisions on behalf of OPEC, and controls the economic fate of the Middle East members. There is risk there because it refused to give up market share, which has been putting enormous pressure on about half of the OPEC members, several of which are located in the region.
Even though Saudi Arabia has some time to respond to the issues, the other countries in the Middle East don't. If the result is unrest, the Middle East could go up in flames; far worse than we're seeing now with the ongoing wars there.
This has historically turned in to a contagion spreading across the region, which could easily appear in Saudi Arabia. On top of this Saudi Arabia is underwriting some of the wars against ISIS in different countries.
There are more risks, but you get point, which is the low price of oil, which will remain subdued, will only magnify these challenges until a decision is made or agreed upon to slow down production in order to support the price of oil.
Conclusion
I don't believe investors should consider this an attempt at economic diversification. After all, a publicly run airport still sends a passenger out on a plane in the same way a privately run airport would.
There will be some savings and possible an increase in revenue and earnings from the private airports, but that will be only a small part of the revenue the country takes in, and will have little effect on the reserves.
This is a cost-cutting move to remove some of the pressures on the budget of Saudi Arabia, to work in conjunction with the stoppage of projects it had in its pipeline, and the removal of those services that aren't considered of major importance to its people.
A lot further down the road this could be very important and productive, but over the next several years the value will primarily in reducing costs so its revenue can target those services considered essential to maintaining order in the country.
Monday, April 5, 2010
Alcoa (NYSE: AA) Slashes Saudi Aluminum Stake
Alcoa, Saudi Aluminum Deal
In a blow to the plans to erect an aluminum complex in Saudi Arabia, in an effort to diversify its economy and cut its reliance on oil, Alcoa (NYSE:AA) announced they're slashing their stake in the project from 40 percent to 25.1 percent, leaving the Saudi government scrambling to find financing for it.
The aluminum plant is estimated to cost $10.8 billion, and the lowering of their stake in the company by Alcoa will result in a loss of over 33 percent in the financing for the project.
So the original investment by Alcoa of $4.32 billion will now be cut to $2.71 billion.
Although this won't stop the project, as the Saudi government, which is the major stakeholder, will step in and increase the financing to what is needed. But it does generate questions as to the viability of the project, as this is obviously a defensive move by Alcoa.
In a blow to the plans to erect an aluminum complex in Saudi Arabia, in an effort to diversify its economy and cut its reliance on oil, Alcoa (NYSE:AA) announced they're slashing their stake in the project from 40 percent to 25.1 percent, leaving the Saudi government scrambling to find financing for it.
The aluminum plant is estimated to cost $10.8 billion, and the lowering of their stake in the company by Alcoa will result in a loss of over 33 percent in the financing for the project.
So the original investment by Alcoa of $4.32 billion will now be cut to $2.71 billion.
Although this won't stop the project, as the Saudi government, which is the major stakeholder, will step in and increase the financing to what is needed. But it does generate questions as to the viability of the project, as this is obviously a defensive move by Alcoa.
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