Saudi Arabia says shale oil sets price floor
London, 10 April (Argus) – Saudi Arabia sees increasing shale oil production as a factor for stability in the market and believes that shale oil will establish a $70/bl floor price for crude.
Ibrahim al-Muhanna, advisor to Saudi Arabia's oil minister Ali Naimi, told Arab oil ministers in Kuwait today that a major contributor to the stability that Riyadh wants is the expected production of large amounts of shale gas and oil in the US and other parts of the world, he said.
“Production of shale oil will, undoubtedly, give the market more depth. This will mean an increase in the degree of stability, lowering of fluctuation and more reassurances in the market at the short and long terms,” said al-Muhanna.
The costs of producing shale oil will now define the price floor for crude, he added. At present “the minimum price will be for shale oil and the heavy Canadian oil with a cost of production amounting to about $60-90/bl,” he added. “With regard to prices, then, the discovery of shale oil has more positive aspects than negative ones,” said al-Muhanna.
In the past decade the focus in determining the price floor has been on ethanol deepwater crude, and Canadian oil sands or very heavy oil from Venezuela, he said.
Large-scale production of shale oil and gas will contribute to a stable market by easing “world fears concerning the future of oil supplies which will lead to more peace of mind that the fossil energy sources will continue to supply the world with its requirements of energy, at least during this century.”
Al-Muhanna labelled fears amongst Opec producers that a large increase in shale oil output as “misplaced”, adding, “The positive effects of shale oil on oil producing countries, including Opec and Arab countries, in the medium term (five to 10 years), outweigh the negative effects.”
This year, al-Muhanna expects global economic growth of 2.4pc led by China, India and Indonesia and, the crude market to be “clearly balanced as prices remain close to present levels, that is, about $100/bl.” Global demand will rise by some 1mn b/d in 2013, matched by similar growth in non-Opec output. If Opec maintains current output of around 30.5mn b/d “the market will stay balanced this year, with anticipated withdrawals from commercial stocks in the fourth quarter.”
Global demand will keep growing at around 1.2mn b/d from 2015 to 2020, when it will reach 98mn b/d, with non-Opec output growing to 62mn b/d, said al-Muhanna. Hence, Opec producers would have to increase their output to 34mn b/d by 2020, while maintaining an “appropriate” collective spare capacity of 3mn-4mn b/d, mainly in Saudi Arabia, Iraq, Kuwait and the UAE, that would be “neither high to put negative pressure on prices as it did in the latter half of the eighties, nor low to increase prices as it did in the first months of 2008”.
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