It's not the shale boom that's endangering the Saudi oil industry- it's something worse
Rising Saudi energy demand is a bigger threat to Saudi Arabia than surging US shale output, Jadwa Investment bank says in a study published on Wednesday.But Jadwa sees a bigger impact from the US shale industry on Saudi petrochemicals companies that use gas as a feedstock. It indicated that an abundance of cheap natural gas liquids (NGLs), produced by the US shale gas boom, could make Saudi petrochemicals industries less competitive than they have been to date. But Jadwa Investment expects steep decline rates of tight oil wells and their limited productivity to soften the blow of the US shale revolution on the Kingdom.Over the last few years, the rapid increase of tight oil and shale gas production in the US has brought about a significant change to the global energy landscape.
Jadwa said: “Our review of specialized public domain industry information suggests that production from US tight oil and shale gas formations may not grow as fast and as much as most commentators suggest, mainly because wells in such formations have low productivity and short lives. Further, we believe that the prospects for exploiting shale formations in other countries may be hampered by local economic, political and environmental factors.”
The report pointed out that tight oil production should not significantly affect Saudi Arabia’s situation and that shale gas production may merely induce Saudi petrochemical firms to expand production in the US.The Jadwa researchers also said: “We view the growth of tight oil and shale gas mainly occurring in the US, not only because of technical reasons (attractive and well understood ‘tight’ geological formations), but also because of uniquely favorable above ground factors such as efficient and low cost industrial services, infrastructure, legal and financial systems, and an accepting society.”
The report said: “We further doubt that, even in the US, production of tight oil and shale gas will increase as fast and as much in the medium and long term as most observers suggest. For tight oil, this is because, since the tight formations have by definition low permeability, each well has a restricted reach and its production is limited and declines rapidly. Many wells are thus needed to sustain production, let alone expand it. Of the two major tight oil plays, which account for 85 percent of US tight oil production, we view only one as promising long term growth. We suspect that US overall tight oil production may decline after 2018.”
The report added: “For shale gas, this is because, in addition to the rapid decline in production from each well and a constant need to drill more wells, gas prices are now at a level which render shale gas production unprofitable, except when it is accompanied by a significant production of Natural Gas Liquids, and when it can economically access an adequate pipeline infrastructure.”
Jadwa said: “In all thus, we doubt that tight oil production will significantly impact the world’s oil industry over the long term. In particular, we do not see it affecting Saudi Arabia’s situation.”
The report said: “As for tight oil, we doubt that the production of shale gas in the US and elsewhere will increase as much as most observers surmise.“Yet, we believe that the large production of cheap (by-product) NGLs from tight oil and shale gas formations will have a significant impact on the world’s petrochemical industry.
Saudi Arabia is not a large producer of natural gas (methane). Also, its production of cheap by-product NGLs, including ethane, for petrochemical production will remain somewhat limited.
“We thus see the main impact of the US shale gas and cheap NGL production on Saudi Arabia as (i) reducing the comparative profitability of Saudi’s existing petrochemical complexes, and (ii) inducing Saudi petrochemical firms to consider expanding their capacity in the US to profit from abundant, cheap yet valuable, feedstock,” said the Jadwa report.