In a changing world environment politically and economically, Saudi Arabia is sending a reassuring message that it is committed to its traditional role of balancing the market at a price by keeping an excess capacity while joining hands to make use of new technology that can even address some of the Kingdom’s worries in terms of boosting its gas production to meet rising domestic consumption.
In a keynote speech in Hong Kong before Credit Suisse delegates Ali Al-Naimi, minister of petroleum and mineral resources, said the new fracturing technology that has unleashed oil and gas reserves in North America is benefiting the main goal of establishing oil market stability, which has been an elusive target pursued by main players such as Saudi Arabia and consumers at large.
Generally speaking, the main line adopted is that this new development is impacting negatively on the Kingdom as well as other crude exporters as the US started to use less imported crude given the rise of its domestic production.
The point made by Al-Naimi is that this new technology is adding more to supply and thus reduce the burden on countries like Saudi Arabia, who may eventually be relieved of spending billions of dollars simply to maintain spare production capacity that ranges between one million to two million barrels a day. Moreover, this new development helps in undermining the long talked about peak oil theory and Al-Naimi was quick to capitalize on this in his address. Over decades, billions of barrels of crude oil have been consumed and available known reserves still quite abundant, though posing an investment and technological challenge. New breakthrough in the fracturing is part of the answer to some of these challenges.
For quite a long time there was a belief that any new technology will come at the expense of the central role the leading exporting countries are playing.
But more important is that the new technology like fracturing will benefit the Kingdom itself by enabling it tap some of its unconventional gas reserves, probably adding to the 9.9 billion cubic feet produced currently but falling short of meeting domestic needs.
According to Al-Naimi, there is an estimated 600 trillion cubic feet of unconventional shale gas in the Kingdom that awaits exploitation.
It may be too early to conclude what will be the outcome of such approach on the domestic Saudi scene. With the rising population and expanding domestic needs in various activities, the Kingdom’s only choice was to resort to crude supplies to meet that need.
As a result, domestic crude consumption rose to 2.5 million bpd on average.
That is a huge amount and if kept to continue along this pattern it will impact whatever volume could be available for export over long time.
The announcement that Saudi Arabia is drawing out plans to tap this unconventional gas resources shows that the same technology, which is seen as affecting exports is on the other hand providing a ray of hope to overcome one of the obstacles in the domestic scene.
However, despite the economic and financial crises engulfing the Western world on one hand, Asia is compensating to a large extent the lost demand on the other. More important, it is consuming a sizeable amount of OPEC exports.
China alone is importing around one million barrels from the Kingdom against zero imports back in the 1990s.
That provides an alternative to the traditional Western consuming markets and confirms that oil continues to play an important role in fueling world economy in general as well as maintaining its central position in the energy mix.
So, it is the same typical story of market leavers and comers. At the time the historically traditional markets are declining, new ones are emerging.
More importantly, this new development provides a chance to tap additional supplies that could help eventually in ensuring market stability and probably impact positively on prices, which continue to pose serious threat to fledging economic recovery around the world.
In an op-ed piece in the Financial Times recently, Al-Naimi did not mince his words while saying that high oil prices were bad for every one, including producers such as Saudi Arabia, and that it will deploy its resources to help lower them, though the market remains the main determining factor.
The question is how to deal with these developments for the benefit of all?
There is a rich experience over decades on managing the market from the Seven Sisters to OPEC and aborted efforts of dialogue between producers and consumers. If any lesson could be drawn out of all this, it is that no single player or group of players has the ability to make the final call. And that is where Riyadh needs to deploy its pivotal position in the industry and push the International Energy Forum it is hosting to play a more active role for that purpose.