Saudi Arabia's oil weapon

Bad News For U.S. Drillers As Saudis Signal No Cuts To Oil Output

Saudi King Abdullah to U.S. drillers: you’ve had your fun.

Forbes,

13 October, 2014

Despite a nearly 25% slide in oil prices in recent months, Saudi Arabia has no intention of cutting oil production. On the contrary, according to a Reuters report Sunday, the kingdom “is quietly telling oil market participants that Riyadh is comfortable with markedly lower oil prices for an extended period.” How much lower? Perhaps down to $80 per barrel, for a year or two.

This prediction runs counter to some expectations that the Saudis — as the world’s central banker of oil — the would cut production and push oil prices back above $100 in order to protect the budgets of weaker OPEC members, especially all-but-bankrupt Venezuela.

But the Saudis and the rest of OPEC might well consider Venezuela and its economically demented leaders to be an acceptable casualty of their greater mission: to wrest back market share from the United States and its legion of independent oil companies.

America’s oil production nadir came in 2008, when oil hit $147 amid U.S. output of 5 million bpd. Since then, breakthroughs in horizontal drilling and hydraulic fracturing has sent volumes surging to a current 8.5 million bpd.

OPEC could tolerate that 3.5 mm bpd of added American oil because supply disruptions in Libya and Nigeria and sanctions on Iran have kept the market tight amid steady demand. But with no end in sight to U.S. oil growth, there’s no surprise that a cartel will act like a cartel and clobber pretenders.

So, would sustained oil prices below $80 be enough to crush the smaller independent tight oil drillers that have made The Great American Oil Boom a reality?

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Saudi King Abdullah to U.S. drillers: you’ve had your fun.

Investors have already started to get freaked. In the past three months shares of fast-growing but highly leveraged oil producers have plunged. Concho Resources is down 28%, Sanchez Energy is off 39%, while Goodrich Petroleum has lost 52% and Halcon Resources 55%. The days when the market rewarded volume growth, lots of debt and capital expenditures far outstripping free cash flow could be over. At a low enough price marginal players will simply stop drilling their marginal wells.

Game over? Not so fast. There’s reason to believe that lower oil wouldn’t bring an end to America’s oil boom. After all, there’s plenty of sweet spots in the Permian, Eagle Ford and Bakken that still make sense to drill at $80. And many producers have hedges in place that will cushion their downside exposure. But they won’t be able to roll those hedges forever.

Oil company analysts at Credit Suisse ran a scenario last month looking at the effect of sustained $70 oil on American drillers. They found that “upstream growth momentum would quickly deflate,” with 11% fewer wells completed. But surprisingly, the scenario doesn’t show any end to supply growth. The U.S. has added more than 1 million bpd per year for more than two years now. The analysts figured that $70 oil would trim that by a third — resulting in growth of “only” 740,000 bpd next year.

Other analysts paint a more dire scenario. Each year, the oil analysts at Bernstein Research derive a marginal cost curve. This year they found that the oil price needed in order to incentivize producers to supply 95% of U.S. oil production is $111 per barrel.

Importantly, this marginal cost calculation includes not just the expected costs of exploring, drilling, fracking and transportation, but also the costs of replacing their produced reserves. Those so-called depreciation, depletion and amortization costs can be anywhere from $15 to $23 per barrel. It makes sense to include these, because over the course of a full cycle if an oil company can’t afford to replace its reserves it will simply end up slowly liquidating itself. But in the short run, DD&A isn’t as significant. Back that out, and the more immediate marginal costs are on the order of $90 per barrel.

Those high costs and fast decline rates from tight oil projects means that any price plunge should at least be short-lived. The world relies on American oil. And our oil supply will decline rapidly without continued investment. Tight oil wells may come on strong (more than 1,000 bpd in places like the Permian), but their flows fall off precipitously, usually down 50% in just the first 100 days. The more production grows, the faster and faster they need to keep drilling to keep growth going. In recent months, even before the price plunge, volumes out of the Bakken and Eagle Ford have plateaued.

So which companies are most likely to be hung out to dry by plunging prices? Bernstein finds that among the more oil-weighted companies, those with the highest marginal costs include Marathon Oil , Hess , and Murphy Oil . Better insulated are lower cost operators: EOG Resources , Continental Resources and Denbury Resources .

It’s been a while since the oil industry suffered a real cyclical wash out. When prices fell from $147 in 2008 to $35 in 2009, they didn’t stay low long enough to trigger bankruptcies and consolidation. This time around (if prices really do sit around $80 for two years) could be different. Chevron and Exxon Mobil have plenty of dry powder and are likely checking pricetags.

Takeout candidates? Chesapeake Energy is one. The shale drilling giant is down 33% in three months, trading at its lowest level since early 2013, with a market cap of just $12.5 billion. Plus, CEO Doug Lawler has led a debt reduction drive that has chopped “total adjusted net leverage” (including a bunch of off balance-sheet liabilities) 27% in two years from $21 billion to $15.5 billion.

Saudi Arabia's "Oil-Weapon" Hits Europe

Zero Hedge

13 October, 2014

We first exposed the "secret" US-Saudi deal in September which led to the inevitable bombing of Syria. We then progressed to explain the quid pro quo of the deal in lower oil prices (benefiting US consumers into an election and crushing Russian revenues). In today's Wall Street Journal we get the final piece of the puzzle as it is clear that what Saudi Arabia loses in 'price' it will make up in 'volume' as The Kingdon is taking the unusual step of asking buyers to commit to maximum shipments if they want to get its crude. Simply put, "they are threatening [European] buyers" to discontinue sales if they don't agree with the full fixed deliveries. The 'oil weapon' grows stronger...

As The Wall Street Journal explains,

Days after slashing prices in Asia, Saudi Arabia is now making an aggressive push in the European oil market, traders say.

The kingdom is taking the unusual step of asking buyers to commit to maximum shipments if they want to get its crude.

“The Saudi push is not just in Asia. It’s a global phenomenon,” one oil trader said. “They areusing very aggressive tactics” in Europe too, the trader added.

This month, state-owned Saudi Aramco stunned the rest of the Organization of the Petroleum Exporting Countries by slashing its November prices to defend its market share in Asia’s growing market. The move, setting a price war in the oil-production group, was combined with a boost in the kingdom’s output in September.

But Riyadh is also moving to protect its sales to Europe, a declining market where it is facing rivalry from returning Libyan production.

After cutting its November prices there, Saudi Aramco is also asking refiners to commit to full, fixed deliveries in talks to renew contracts for next year, the traders say. They say the Saudi oil company had previously offered a formula allowing flexibility of more or less 10% of contracted volumes, the most commonly used in the industry.

“They are threatening buyers” to discontinue sales if they don’t agree with the fixed deliveries, another trader said.

*  *  *

Of course, the more pressure ths US (prxied by Saudi Arabia) puts on Russia (and Iran) and implicitly Europe now (as they are forced to buy 'more' oil than needed, albeit at lower prices - but leaving their budgets bursting still further), the more the rest of the world is forced to consider alternatives to US hegemony and side with those that, for now, have not reached peak totalitarianism.

Looking back a bit

A Look Inside The Secret Deal With Saudi Arabia That Unleashed The Syrian Bombing

Zero Hedge,

25 September, 2014

For those to whom the recent US campaign against Syria seems a deja vu of last summer's "near-war" attempt to ouster its president Bashar al-Assad, which was stopped in the last minute due to some very forceful Russian intervention and the near breakout of war in the Mediterranean between US and Russian navies, it is because they are. And as a reminder, just like last year, the biggest wildcard in this, and that, direct intervention into sovereign Syrian territory, or as some would call it invasion or even war, was not the US but Saudi Arabia - recall from August of 2013 - "Meet Saudi Arabia's Bandar bin Sultan: The Puppetmaster Behind The Syrian War." Bin Sultan was officially let go shortly after the 2013 campaign to replace Syria's leadership with a more "amenable" regime failed if not unofficially (see below), but Saudi ambitions over Syria remained.

That much is revealed by the WSJ today in a piece exposing the backdoor dealings that the US conducted with Saudi Arabia to get the "green light" to launch its airstrikes against ISIS, or rather, parts of Iraq and Syria. And, not surprising, it is once again Assad whose fate was the bargaining chip to get the Saudis on the US' side, because in order to launch the incursion into Syrian sovereign territory "took months of behind-the-scenes work by the U.S. and Arab leaders, who agreed on the need to cooperate against Islamic State, but not how or when. The process gave the Saudis leverage to extract a fresh U.S. commitment to beef up training for rebels fighting Mr. Assad, whose demise the Saudis still see as a top priority."

In other words, John Kerry came, saw and promised everything he could, up to and including the missing piece of the puzzle - Syria itself on a silver platter - in order to prevent another diplomatic humiliation.

When Mr. Kerry touched down in Jeddah to meet with King Abdullah on Sept. 11, he didn't know for sure what else the Saudis were prepared to do. The Saudis had informed their American counterparts before the visit that they would be ready to commit air power—but only if they were convinced the Americans were serious about a sustained effort in Syria. The Saudis, for their part, weren't sure how far Mr. Obama would be willing to go, according to diplomats.

Said otherwise, the pound of flesh demanded by Saudi Arabia to "bless" US airstrikes and make them appear as an act of some coalition, is the removal of the Assad regime. Why? So that, as we also explained last year, the holdings of the great Qatar natural gas fields can finally make their way onward to Europe, which incidentally is also America's desire - what better way to punish Putin for his recent actions than by crushing the main leverage the Kremlin has over Europe?

But back to the Saudis and how the deal to bomb Syria was cobbled together:

The Americans knew a lot was riding on a Sept. 11 meeting with the king of Saudi Arabia at his summer palace on the Red Sea.

A year earlier, King Abdullah had fumed when President Barack Obama called off strikes against the regime of Syria's Bashar al-Assad. This time, the U.S. needed the king's commitment to support a different Syrian mission—against the extremist group Islamic State—knowing there was little hope of assembling an Arab front without it.

At the palace, Secretary of State John Kerry requested assistance up to and including air strikes, according to U.S. and Gulf officials. "We will provide any support you need," the king said.

But only after the Saudis got the abovementioned assurances that Assad will fall. And to do that they would have to strongarm Obama:

Wary of a repeat of Mr. Obama's earlier reversal, the Saudis and United Arab Emirates decided on a strategy aimed at making it harder for Mr. Obama to change course. "Whatever they ask for, you say 'yes,'" an adviser to the Gulf bloc said of its strategy. "The goal was not to give them any reason to slow down or back out."

Arab participation in the strikes is of more symbolic than military value. The Americans have taken the lead and have dropped far more bombs than their Arab counterparts. But the show of support from a major Sunni state for a campaign against a Sunni militant group, U.S. officials said, made Mr. Obama comfortable with authorizing a campaign he had previously resisted.

To be sure, so far Obama has refrained from directly bombing Assad, it is only a matter of time: "How the alliance fares will depend on how the two sides reconcile their fundamental differences over Syria and other issues. Saudi leaders and members of the moderate Syrian opposition are betting the U.S. could eventually be pulled in the direction of strikes supporting moderate rebel fighters against Mr. Assad in addition to Islamic State. U.S. officials say the administration has no intention of bombing Mr. Assad's forces"... for now.

But why is Saudi Arabia so adamant to remove Assad? Here is the WSJ's take:

For the Saudis, Syria had become a critical frontline in the battle for regional influence with Iran, an Assad ally. As Mr. Assad stepped up his domestic crackdown, the king decided to do whatever was needed to bring the Syrian leader down, Arab diplomats say.

In the last week of August, a U.S. military and State Department delegation flew to Riyadh to lay the ground for a military program to train the moderate Syrian opposition to fight both the Assad regime and Islamic State—something the Saudis have long requested. The U.S. team wanted permission to use Saudi facilities for the training. Top Saudi ministers, after consulting overnight with the king, agreed and offered to foot much of the bill. Mr. Jubeir went to Capitol Hill to pressed key lawmakers to approve legislation authorizing the training.

And once the US once again folded to Saudi demands to attack another sovereign, it was merely a matter of planning:

Hours before the military campaign was set to begin, U.S. officials held a conference call to discuss final preparations. On the call, military officers raised last-minute questions about whether Qatar would take part and whether the countries would make their actions public.

Mr. Kerry was staying in a suite on the 34th floor of New York's Waldorf Astoria hotel, where he was meeting leaders attending United Nations gatherings. He called his Gulf counterparts to make sure they were still onboard. They were. 

The UAE, which some defense officials refer to as "Little Sparta" because of its outsized military strength, had the most robust role. One of the UAE's pilots was a woman. Two of the F-15 pilots were members of the Saudi royal family, including Prince Khaled bin Salman, son of the crown prince. In the third wave of the initial attack, half of the attack airplanes in the sky were from Arab countries.

The best news for Obama: it is now just a matter of time to recreate the same false flag that the Saudi-US alliance pushed so hard on the world in the summer of 2013 to justify the first attempt to remove Assad, and once again get the "sympathy" public cote behind him, naturally with the support of the US media.

But how does one know it is once again nothing but a stage? The following blurb should explain everything:

Saudi players in attendance for the Sept. 11 meeting included Prince Bandar bin Sultan, who as the king's spymaster last year ran afoul of Mr. Kerry over Syria and Iraq policy. U.S. officials interpreted his presence as a sign the king wanted to make sure the court was united, U.S. officials said.

Actually, his presence is a sign that the same puppetmaster who pulled the strings, and failed, in 2013 to remove Assad, and as noted above was at least officially removed from the stage subsequently, is once again the person in charge of the Syrian campaign, only this time unofficially, and this time has Obama entirely wrapped around his finger.

And even further back – to 2013.

Saudi's Bandar tries to bribe Putin to turn away from Assad - and when he is refused blackmails him

Meet Saudi Arabia's Bandar bin Sultan: The Puppetmaster Behind The Syrian War

Zero Hedge,

27 August, 2013

Yesterday the Telegraph's Evans-Pritchard dug up a note that we had posted almost a month ago, relating to the "secret" meeting between Saudi Arabia and Russia, in which Saudi's influential intelligence chief Prince Bandar bin Sultan met with Putin and regaled him with gifts, including a multi-billion arms deal and a promise that Saudi is "ready to help Moscow play a bigger role in the Middle East at a time when the United States is disengaging from the region", if only Putin would agree to give up his alliance with Syria's al-Assad and let Syria take over, ostensibly including control of the country's all important natgas transit infrastructure. What was not emphasized by the Telegraph is that Putin laughed at the proposal and brushed aside the Saudi desperation by simply saying "nyet." 

However, what neither the Telegraph, nor we three weeks ago, picked up on, is what happened after Putin put Syria in its place. We now know, and it's a doozy.

Courtesy of As-Safir (translated here), we learn all the gritty details about what really happened at the meeting, instead of just the Syrian motives and the Russian conclusion, and most importantly what happened just as the meeting ended, unsuccessfully (at least to the Saudi). And by that we mean Saudi Arabia's threats toward Russia and Syria.

First, some less well-known observations on who it was that was supporting the Muslim Brotherhood in Egypt even as US support was fading fast:

Bandar said that the matter is not limited to the kingdom and that some countries have overstepped the roles drawn for them, such as Qatar and Turkey. He added, “We said so directly to the Qataris and to the Turks. We rejected their unlimited support to the Muslim Brotherhood in Egypt and elsewhere. The Turks’ role today has become similar to Pakistan’s role in the Afghan war. We do not favor extremist religious regimes, and we wish to establish moderate regimes in the region. It is worthwhile to pay attention to and to follow up on Egypt’s experience. We will continue to support the [Egyptian] army, and we will support Defense Minister Gen. Abdel Fattah al-Sisi because he is keen on having good relations with us and with you. And we suggest to you to be in contact with him, to support him and to give all the conditions for the success of this experiment. We are ready to hold arms deals with you in exchange for supporting these regimes, especially Egypt.”

So while Saudi was openly supporting the Egyptian coup, which is well-known, it was Turkey and most importantly Qatar, the nation that is funding and arming the Syrian rebels, that were the supporters of the now failed regime. One wonders just how much Egypt will straing Saudi-Qatari relations, in light of their joined interests in Syria.

Second, some better-known observations by Putin on Russia's relationship with Iran:

Regarding Iran, Putin said to Bandar that Iran is a neighbor, that Russia and Iran are bound by relations that go back centuries, and that there are common and tangled interests between them. Putin said, “We support the Iranian quest to obtain nuclear fuel for peaceful purposes. And we helped them develop their facilities in this direction. Of course, we will resume negotiations with them as part of the 5P+1 group. I will meet with President Hassan Rouhani on the sidelines of the Central Asia summit and we will discuss a lot of bilateral, regional and international issues. We will inform him that Russia is completely opposed to the UN Security Council imposing new sanctions on Iran. We believe that the sanctions imposed against Iran and Iranians are unfair and that we will not repeat the experience again.”

Then, Putin's position vis-a-vis Turkey, whom he implicitly warns that it is "not immune to Syria's bloodbath."

Regarding the Turkish issue, Putin spoke of his friendship with Turkish Prime Minister Recep Tayyip Erdogan; “Turkey is also a neighboring country with which we have common interests. We are keen to develop our relations in various fields. During the Russian-Turkish meeting, we scrutinized the issues on which we agree and disagree. We found out that we have more converging than diverging views. I have already informed the Turks, and I will reiterate my stance before my friend Erdogan, that what is happening in Syria necessitates a different approach on their part. Turkey will not be immune to Syria’s bloodbath. The Turks ought to be more eager to find a political settlement to the Syrian crisis. We are certain that the political settlement in Syria is inevitable, and therefore they ought to reduce the extent of damage. Our disagreement with them on the Syrian issue does not undermine other understandings between us at the level of economic and investment cooperation. We have recently informed them that we are ready to cooperate with them to build two nuclear reactors. This issue will be on the agenda of the Turkish prime minister during his visit to Moscow in September.”

Of course, there is Syria:

Regarding the Syrian issue, the Russian president responded to Bandar, saying, “Our stance on Assad will never change. We believe that the Syrian regime is the best speaker on behalf of the Syrian people, and not those liver eaters. During the Geneva I Conference, we agreed with the Americans on a package of understandings, and they agreed that the Syrian regime will be part of any settlement. Later on, they decided to renege on Geneva I. In all meetings of Russian and American experts, we reiterated our position. In his upcoming meeting with his American counterpart John Kerry, Russian Foreign Minister Sergey Lavrov will stress the importance of making every possible effort to rapidly reach a political settlement to the Syrian crisis so as to prevent further bloodshed.”

Alas, that has failed.

So what are some of the stunning disclosures by the Saudis? First this:

Bandar told Putin, “There are many common values ??and goals that bring us together, most notably the fight against terrorism and extremism all over the world. Russia, the US, the EU and the Saudis agree on promoting and consolidating international peace and security. The terrorist threat is growing in light of the phenomena spawned by the Arab Spring. We have lost some regimes. And what we got in return were terrorist experiences, as evidenced by the experience of the Muslim Brotherhood in Egypt and the extremist groups in Libya. 

... As an example, I can give you a guarantee to protect the Winter Olympics in the city of Sochi on the Black Sea next year. The Chechen groups that threaten the security of the games are controlled by us, and they will not move in the Syrian territory’s direction without coordinating with us. These groups do not scare us. We use them in the face of the Syrian regime but they will have no role or influence in Syria’s political future.”

It is good of the Saudis to admit they control a terrorist organization that "threatens the security" of the Sochi 2014 Olympic games, and that house of Saud uses "in the face of the Syrian regime." Perhaps the next time there is a bombing in Boston by some Chechen-related terrorists, someone can inquire Saudi Arabia what, if anything, they knew about that.

But the piece de resistance is what happened at the end of the dialogue between the two leaders. It was, in not so many words, a threat by Saudi Arabia aimed squarely at Russia:

As soon as Putin finished his speech, Prince Bandar warned that in light of the course of the talks, things were likely to intensify, especially in the Syrian arena, although he appreciated the Russians’ understanding of Saudi Arabia’s position on Egypt and their readiness to support the Egyptian army despite their fears for Egypt's future.

The head of the Saudi intelligence services said that the dispute over the approach to the Syrian issue leads to the conclusion that “there is no escape from the military option, because it is the only currently available choice given that the political settlement ended in stalemate. We believe that the Geneva II Conference will be very difficult in light of this raging situation.”

At the end of the meeting, the Russian and Saudi sides agreed to continue talks, provided that the current meeting remained under wraps. This was before one of the two sides leaked it via the Russian press.

Since we know all about this, it means no more talks, an implicit warning that the Chechens operating in proximity to Sochi may just become a loose cannon (with Saudi's blessing of course), and that about a month ago "there is no escape from the military option, because it is the only currently available choice given that the political settlement ended in stalemate." Four weeks later, we are on the edge of all out war, which may involve not only the US and Europe, but most certainly Saudi Arabia and Russia which automatically means China as well. Or, as some may call it, the world.

And all of it as preordained by a Saudi prince, and all in the name of perpetuating the hegemony of the petrodollar.

P.S. Russia and Saudi Arabia account for 25% of global oil production.