Saudis battle for oil market supremacy

RIYADH — By abandoning the tight rein it held for decades on the oil market, Saudi Arabia launched a battle for control that sent crude prices plummeting.

It has been a painful fight, experts say, but with its vast resources the Gulf kingdom is showing no signs of giving up.

The huge drop in oil prices since mid-2014, from more than $110 a barrel to around $30, followed a decision by the Saudi-influenced Organisation of the Petroleum Exporting Countries (OPEC) not to cut output as it had in the past to keep prices high.

The move came as traditional suppliers like Saudi Arabia were facing increasing pressure from new market players, in particular US shale producers, and aimed to squeeze them out.

It also sought to put pressure on non-OPEC member Russia, the biggest global oil producer, and to force a trimming of output by fellow OPEC member Iran, Riyadh's regional political rival.

As the freefall in prices has continued, calls have grown on Riyadh and its Gulf Arab neighbours to reconsider.

With the market awash in crude, even the chairman of state-owned oil giant Saudi Aramco has said prices have reached "irrational" levels.

But still Riyadh has given no indication of wavering.

"The Saudis are well aware that if they cut production, it will not greatly impact prices because their cut will be replaced by other producers like Iran, Iraq, Russia," said oil expert Jean-Francois Seznec at Georgetown University.

'Protecting market share' 

"The Saudis want producers to suffer enough to agree to a negotiated cut across the board," Seznec added.

Saudi Arabia, the world's second-biggest oil producer and largest exporter, spent tens of billions of dollars in the past two decades to raise its crude production capacity to 12.5 million barrels per day.

It became the only producer with spare capacity, allowing it to raise and lower production to influence the market.

The kingdom boasts the world's second-largest crude reserves, at 268 billion barrels, and sits on the fifth-largest natural gas deposits, at 8.5 trillion cubic metres. 

At less than $10 a barrel, its production cost is also the second cheapest in the world, according to Rystad Energy, a private consultancy.

"Saudi Arabia's main goal is achieving stability in the oil market and protecting its market share," Kuwaiti oil expert Kamel Al Harami said.

"The kingdom could not let high-cost producers compete in its own markets," Harami added.

Saudi Arabia and its Gulf peers in OPEC also have huge fiscal cushions to cope with low oil prices, accumulated in the years when oil prices were high.

So while Saudi Arabia's oil revenues have plunged, leading to a record $98 billion budget deficit for 2015, the kingdom can still count on more than $600 billion in reserves.

"There is no wish to cut production when you have costs lower than the others and ultimately you can resist longer than the others," Patrick Pouyanne, the chief executive officer of French oil giant Total, told AFP during the recent World Economic Forum in Davos.

Producers 'cannot bleed forever' 

"We have scale. We have technologies that have allowed us to maintain our low cost," Aramco Chairman Khalid Al Falih said at the Global Competitiveness Forum in Riyadh this week.

"That is going to be even sharper in a more low-price environment," he added, noting that the company's investments had not slowed down despite the price fall.

In a report on Monday, Jadwa Investment in Riyadh said Saudi Arabia remains the only country with spare production capacity, leaving it "well equipped to hold off any attempts of encroachment on its market share".

So far, Harami remarked, the battle is not yet won.

"Shale oil has proven to be much more resilient than they had initially expected," he said.

But a Western diplomat based in Riyadh said the Saudi oil policy reflects a more assertive attitude under King Salman, who took power a year ago, and is unlikely to be abandoned.

The kingdom will "defend its interests internally and externally" whether that pleases outsiders or not, the diplomat said, speaking on condition of anonymity.

And Seznec said he expects the strategy to start yielding results in the near future.

"I think sooner rather than later there will be an arrangement with non-OPEC producers, who cannot continue to bleed forever," the analyst added.

Separately, the president of Saudi Aramco said on Tuesday  that global crude prices should recover near the end of this year.

"Our prediction is that we will see some adjustment but it will happen toward the end of this year," Amin Al Nasser, president and chief executive officer of the state-owned company, told a business forum in the Saudi capital.

"I think with low oil prices, demand will hopefully also increase... and as such the gap between supply and demand will start closing," Nasser told the Global Competitiveness Forum organised by the Saudi Arabian General Investment Authority (SAGIA).

Nasser said prices will not return to the $100 level, but "it will definitely be better than what we are seeing today."

The price drop led oil-dependent Saudi Arabia to impose unprecedented cuts in its 2016 budget and to push economic diversification.

Authorities are even considering a share listing of Aramco.

A SAGIA official, Abdulmohsen Al Majnouni, told AFP that the kingdom had already been working towards economic diversification even before the dramatic oil price drop.

"But we could have maybe done a better job," he said.

Deputy Crown Prince Mohammed Bin Salman, who heads the main economic affairs council, "is really keen to make this happen", Majnouni said in an interview.

The kingdom is currently focused on three main sectors: transportation, including the $22.5 billion Riyadh metro system; healthcare; and industrial parts and equipment for the kingdom's major corporations including Saudi Aramco, petrochemicals giant SABIC and the Saudi Arabian Mining company, Ma'aden.

Other sectors are also being looked at, such as paints and coatings to serve the kingdom's demand for housing, electrical generation and desalination of water for the desert nation, Majnouni said.

He said SAGIA identified six major investment barriers including the length of time to start a business, and "a major challenge" with cross-border shipment of goods.

"We're working together to overcome this," he said.

An oil industry expert, who asked not to be named, told AFP on Monday that despite high-level talk of diversification, a lack of skills and training is hindering the process.

But Majnouni said the kingdom has set up more than 100 "colleges of excellence" to address specific technical training needs.

He added that over the next five years the skills of members of the workforce "will hopefully be improved".