Column: Saudi Arabia and New Mexico: oil price threat By Dr. Daniel Fine

For the complete article use this link--> http://www.daily-times.com/farmington-opinion/ci_26938726/column-sa...

The shale oil boom which returns 25 percent of the New Mexico State revenue is under "bust" threat from Saudi Arabia.

The current price decline in both midland Texas light sweet crude and brent (world price) will begin to defer future projects if prices fall to $72 a barrel and below. An estimated 80 percent of production and projected production in the next five years requires price stability higher than $ 75 per barrel. Saudi Arabia is combining market share strategy with a world oversupply of crude oil.

Oil producers in New Mexico are partially protected through cash flow hedges, which are crude barrels sold forward with prices established in futures (must be higher than present prices). However, no more than 50 percent of production is estimated to be hedged or protected in 2015. The other half must be sold at whatever the market (West Texas crude) price will be. An oil company can hedge 2016 production at $79.00 per barrel compared to the current hedge protection of $95.

Decline ratios (rate of recovery after initial production) are high. Massive drilling of new wells for replacement is the economic challenge. At least half of the new shale or light sweet crude oil production from the Southwest to North Dakota through the Rocky Mountain energy corridor is at risk.

This effectively limits the 10-year-old shale oil technology play and consequent "energy revolution."

The shale oil or light sweet unconventional oil boom is the target of Saudi Arabian oil strategy which is market share. This rejects production cuts in response to weak demand and prices. Defense of market share coupled with falling world oil demand accounts for a global price fall of 25 percent since July.

The timing of the Saudi action has hit the Southwest U.S. unconventional oil producers when they are already vulnerable to a massive infrastructure bottleneck. Producers have confronted a discount price of as much as $15 per barrel because there is not sufficient pipeline take-away capacity from the Permian and San Juan basins to refineries on the Gulf of Mexico coast or anywhere. This is the result of unanticipated high oil production without investment in transport to get it to markets or process it here in New Mexico. Stand-by rail transport is costly and trucking is competitive with rail. New pipeline and refinery capacity is required in New Mexico and Texas.

Strategic market share is the Saudi Arabian counter-attack upon the American shale-oil and gas-supply revolution which threatens Saudi exports. Saudi ARAMCO is reacting to the rise of American oil production as a threat because of the demand to lift the 1975 prohibitions against American crude oil exports.

The argument for America to become a world crude oil exporter not only displaces Saudi crude exports to the U.S. market but also promotes geopolitical leverage against OPEC and Russia. With the lowest world cost of producing oil, Saudi Arabia is acting in its national interest against American competition or influence against its national interest.

While the Saudi market share strategy threatens unconventional or shale oil production of the United States, Washington, D.C., has been given, indirectly, another sanction against the Russian oil and gas industry. Lower crude oil prices have cut Russian export revenue by $300 million per day since the onset of the Ukraine hostilities which parallel the

Saudi–led oil price decline.

Tags: Conservative, DrDanielFIne, Fracking, GOP, Gas, Geopolitics, NewMexico, Oil, Republican, SaudiArabia, More…Teaparty, business, news, politics

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IMO, "the Saudi Arabian counter-attack upon the American shale-oil and gas-supply..." is a mis-diagnosis shared by a number of authors and reporters. First, Saudi Arabia doesn't produce enough gas to matter.  They may not export any.  That puts the author's contentions in a less than favorable light right out of the gate.  US refiners source less than 1% of their crude from Saudi Arabia (0.96%).  The chance that the prohibition on domestic US crude export will be lifted is small.  It does appear that the door is open for "processed condensate" (which is not really crude oil) exports to rise which is good for US producers because they are creating a glut that would eventually depress the price to non-economic levels.

Saudi Arabia is not concerned, at this point in time, with the "US Shale Revolution".  The drop in global crude supply is due to global production greater than global demand.  And every major oil producing country will be affected and react based on their national interests.  The Saudis are more interested in maintaining market share and that's not in the US.  Their main market is Asia in general and China in particular.  In those markets they compete with their OPEC brethren.  The contention that the Saudis are maintaining production levels to hurt US shale producers is not supported by the facts.  Neither is the conspiracy theory that the Saudis maintain production at the behest of the US to damage the Russian economy.  The Saudis are simply doing what is in their best interest to protect their share of the global crude market..

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