Saudis winning oil market share wars despite fiscal pain

Saudi Arabia appears to be winning the oil exporters tussle for market share, even if it is denting the country’s coffers. Anecdotal and empirical evidence doing the industry rounds was backed up by US Energy Information Administration’s recent research pointing to the OPEC heavyweight maintaining its crude oil market share among Asian customers, where much of the recent growth in liquid fuels demand has occurred.

In the first half of 2015, the Saudis exported on average 4.4 million barrels per day (bpd) of crude oil to seven major trading partners in Asia – China, Japan, India, South Korea, Taiwan, Thailand, and Singapore. Of these, the country’s market share only declined in Singapore but regional powerhouses China, Japan and India continued to import at broadly similar levels.

From January to June 2015, total crude oil imports reported for seven Asian countries averaged 19.1 million bpd, about 700,000 bpd higher than during the same period in 2014. The share of these crude oil imports from Saudi Arabia averaged 23.2% from January to June, compared to 23.9% in the same period in 2014.

Putting things into context, exports to Asia make up more than half of Saudi Arabia’s total overseas oil dispatches, and for much of 2014 and 2015, it has focused on maintaining market share rather than lending support to the oil price by lowering production. Additionally, US imports of Saudi medium and medium light crude oil rose 275,000 bpd over the second quarter of 2015, even though US importation from OPEC as a whole was down on lower takings of Iraqi oil (see below).

US imports medium and medium light Saudi crude. (Graph Courtesy: Barclays. Data Source: EIA)

While the Saudi stance has dented prospects of high cost exploration and production, it too is taking a hit. The country’s Finance Minister Ibrahim al-Assaf recently told CNBC Arabia the government would “cut spending and delay some state projects” after the recent oil price decline.

Al-Assaf did not give details of where the cuts would happen but said the country may issue Islamic bonds or sukuks to finance some of its capital expenditure. He also noted the Saudi oil industry was in a good position to manage low prices. With over $660 billion in reserves it can call upon in the event government expenditure exceeds income from oil exports, few in Riyadh are worried for the moment even if the reserve position is some $100 billion lighter than it was 11 months ago.

The situation in the rest of the industry is the polar opposite. The International Energy Agency says non-OPEC production is heading for its worst decline since 1992. Arctic and ultradeepwater exploration remains in trouble, while mature prospects such as the UK sector of the North Sea continue to see job and capex cuts.

According to Oil and Gas UK, the country’s offshore oil sector has seen 65,000 job losses since first quarter of 2014. The number of jobs supported by direct, supply chain and indirect employment had fallen from 440,000 to 375,000; a 14.8% drop in headcount. Projects in the region face a further £1.3bn in cost cuts for 2016. The figure could have been worse, were it not down to rising operating costs on new fields coming onstream, work on which had begun prior to the current oil price slump.

Concurrently, Fitch Ratings recently noted that depressed oil prices may stretch the liquidity of smaller E&P oil firms operating in Europe, Middle East and Africa, but much would depend on individual circumstances.

“Companies with strong 2015 hedging positions, low lifting costs and leverage, and committed credit lines are better positioned to survive the downturn compared with companies with volatile production, a high proportion of short-term debt or reliance on reserve-based lending,” the ratings agency said.

It also said the near 55% drop in US Lower 48 rig counts during the first half of 2015 is forecast to contribute to a second half 2015 production decline of roughly 7% in tight oil and shale gas regions at June operating and activity levels. This exit production rate would be around 3% lower than year-end 2014 levels.

Last month, Moody’s said its US Liquidity Stress Index (LSI) had jumped to a five-year high of 4.8% from 4.3% in July on renewed “oil and gas stress and pricing pressures in the energy sector.” The increase coincided with a spike in the Moody’s Oil & Gas LSI, which includes oilfield services companies, to 12.2% in mid-August from 10.5% in July, with the sector index also at a five-year high.

Moody’s LSI falls when corporate liquidity appears to improve and rises when it appears to weaken. “Lower energy prices and a growing number of energy companies with low ratings and weak liquidity are pressuring the LSI and the US speculative-grade default rate,” said John Puchalla, Analyst and Senior Vice President at Moody’s.

All the while, US shale plays, especially in Texas’ Eagle Ford, continue to tick along confounding competitors along the way. Russian players have been cushioned internally by a favorable taxation regime and the ruble halving against the dollar since mid-2014, in near tandem with the price of Brent.

“Companies with strong 2015 hedging positions, low lifting costs and leverage, and committed credit lines are better positioned to survive the downturn compared with companies with volatile production, a high proportion of short-term debt or reliance on reserve-based lending,” the ratings agency said.

It also said the near 55% drop in US Lower 48 rig counts during the first half of 2015 is forecast to contribute to a second half 2015 production decline of roughly 7% in tight oil and shale gas regions at June operating and activity levels. This exit production rate would be around 3% lower than year-end 2014 levels.

Last month, Moody’s said its US Liquidity Stress Index (LSI) had jumped to a five-year high of 4.8% from 4.3% in July on renewed “oil and gas stress and pricing pressures in the energy sector.” The increase coincided with a spike in the Moody’s Oil & Gas LSI, which includes oilfield services companies, to 12.2% in mid-August from 10.5% in July, with the sector index also at a five-year high.

Moody’s LSI falls when corporate liquidity appears to improve and rises when it appears to weaken. “Lower energy prices and a growing number of energy companies with low ratings and weak liquidity are pressuring the LSI and the US speculative-grade default rate,” said John Puchalla, Analyst and Senior Vice President at Moody’s.

All the while, US shale plays, especially in Texas’ Eagle Ford, continue to tick along confounding competitors along the way. Russian players have been cushioned internally by a favorable taxation regime and the ruble halving against the dollar since mid-2014, in near tandem with the price of Brent.

http://www.forbes.com/sites/robertwood/2015/09/18/second-422-hike-in-fee-to-exit-u-s-in-12-months/