The Fuse

Saudis Hold Steady in Upstream Investment While Others Slash Spending

by Matt Piotrowski | June 17, 2016

It’s no secret that the extended period of low prices, which is almost two years running, has significantly crimped upstream spending, but the numbers are becoming more and more eye-opening. Consultancy Wood Mackenzie says that global development upstream spending has been slashed by some $1 trillion since the oil price fall began in 2014. The cut in spending, which will negatively impact investment from 2015-2020, is likely to bring about a tighter market, or possibly a severe supply crunch, sometime in the future, despite the current oversupply. Woodmac estimates that the spending decline will lead to some 7 billion barrels of oil equivalent not being produced from 2016-2020 versus what was expected before the price decline.

Middle East producers, most notably Saudi Arabia, have not cut back in investment, setting the stage for them to see sharp gains in market share when tighter fundamentals are realized.

But lost in the talk about the decrease in spending is how Middle East producers, most notably Saudi Arabia, have not cut back in investment, setting the stage for them to see sharp gains in market share when tighter fundamentals are realized. Woodmac says it expects no drop in Saudi Arabian investment throughout this year and in 2017. While Saudi Arabia has suffered economic and fiscal pain from lower revenues from oil sales, it has a distinct advantage over other producers, particularly non-OPEC countries, for the longer term since it holds some of the lowest-cost reserves in the world.

The recent upstream developments are the result of the Saudis’ oil market strategy, decided in November 2014, to keep production elevated to capture market share and undermine high-cost non-OPEC production. The data from Woodmac reflect how successful the Saudi plan has been. The U.S., where shale production grew by 4 million barrels per day from 2010-15, is seeing the sharpest cuts, with investment falling by $125 billion in 2016-17. Moreover, some 70 percent of the fall in global production this year and next will occur onshore U.S.

Upstream developments are the result of the Saudis’ oil market strategy, decided in November 2014, to keep production elevated to capture market share and undermine high-cost non-OPEC production.

Saudi Arabia is now pumping 10.25 mbd, up roughly 600,000 b/d from November 2014, when OPEC made its seminal decision not to constrain output to balance the market. Securing America’s Future Energy’s latest issue brief shows how Saudi Arabia is using low prices to structurally rebalance the oil market for their benefit by recapturing short-term market share from U.S. shale, undermining investment in capital-intensive non-OPEC oil, stimulating oil demand, and undercutting policies that reduce oil consumption.

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In contrast to the Saudis increasing output, the U.S. has seen a drop of almost 1 mbd in the past 14 months, with more declines expected. Oil prices rallying to the $50 level has certainly helped the U.S. oil industry, but the price is not high enough stimulate large volumes of shale oil. The fact that prices met resistance at $50 and have fallen back actually serves the Saudis well. The longer prices are low, the more non-OPEC investment will be choked off. This situation positions the Saudis well for the longer term.

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