Kenny Rogers is probably not well known in Saudi Arabia but if recent
speculation about the kingdom resorting to the international debt
market is correct then the words of The Gambler should be called,
loudly, from every minaret in Riyadh. If you don’t know Kenny’s signature song, it’s the one which includes
the refrain: “You’ve got to know when to hold em, know when to fold
‘em, know when to walk away, know when to run.”
In the case of Saudi Arabia, and the unconfirmed reports of it
seeking $27 billion in debt via an issue of bonds, it appears to be
adopting the gamblers strategy of seeing off its opponents in the
increasingly competitive oil world by calling “raise ‘em.”
Betting The House (Of Saud)
What the debt raising signals is that the kingdom is prepared to bet
the house of Saud on a high-risk gamble based on a belief that its vast
oilfields can outlast everyone else’s oilfields, especially the
newcomer, U.S. unconventional (or shale) oil. Until now, Saudi Arabia’s low cost oil and its cash reserves,
estimated to be around $670 billion, was believed to be sufficient to
frighten rival oil producers out of the business, clearing the way for a
much-needed increase in the price, once the oil-glut subsides. Several recent events indicate that the tactic of flooding the oil
market to drive high-cost producers out of business might not be going
to plan.
More Rigs Drilling Not Fewer
The first hint that all is not well on the Saudi side of the table
came in the form of last week’s count of active U.S. oil and gas
drilling rigs by the oilfield consulting firm Baker Hughes BHI -1.49%. Rather than decreasing, which had been the trend for months, the rig
count rose, only by five to 664 active rigs, but the increase indicated
that the tactic of oil-market flooding is not working as well as was
expected when launched last November.
The next clue that the oil flood will not abate soon comes with
estimates of U.S. unconventional oil production efficiency improving
dramatically since the oil price started to fall because of the
Saudi-led flood.
Shale Drillers Becoming More Efficient
One claim is that U.S. unconventional oil producers are 50% more
efficient than this time last year, and that more savings have been
identified which could keep oil output at near record levels for months
and possibly years. Saudi Arabia’s rumored resort to the debt market is not a sign that
the kingdom is about to “fold,” but it is a pointer to the increasing
pressure under which the big oil producer has found itself, with oil
income falling as it seeks to spend more on defense to counter the
likely reemergence of Iran as a regional power. A year ago, the Saudi government was confident that the traditional
approach to an oil glut, a cut in production, was not the correct
approach in the current situation.
The Technology Is Out Of Its Box
The concern was that a production cut would encourage even faster
expansion of U.S. unconventional production and a worldwide spread of
the technology which has made it possible to extract oil and gas from
rocks once considered too tightly packed to ever produce commercial
quantities of oil.
Increasing, rather than decreasing output was seen as a clever move
because in a war of attrition the leaders of Saudi Arabia were confident
that they would win. But, rather than U.S. unconventional oil producers being squeezed out
of business a dangerous game of bluff has developed with everyone in
the energy business being hurt in some way.
The question which no-one can answer yet is: Who will blink first
because the pain has become too great? While the Saudi debt plan might
not be a blink, it is a hint that other gamblers at the oil table might
see as a sign of weakness.
http://www.forbes.com/sites/timtreadgold/2015/08/06/saudi-arabia-might-just-have-blinked-in-the-oil-war/?ss=energy
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