Complex Made Simple

Coronavirus, Saudi Shale, OPEC, climate and the oil price playbook

Saudi is planning ahead on oil and gas matters leaving nothing, not even Coronavirus, to chance

Saudi Aramco expects the coronavirus impact on oil demand to be short-lived and consumption to rise in H2 Gas is on the agenda for Saudi: a $110 billion Jafurah shale gas field project, led by Aramco Saudi is reportedly in talks with the UAE and Kuwait on a joint cut of about 300,000 bpd

Oil prices are crashing, coronavirus is peaking and Saudi has plans to play a role in keeping all things oil and gas related under control, even if it means steering OPEC without Russia, of investing billions in Shale.

Oh and let’s not forget the Saudi G-20 which insists that climate in on everyone’s agenda this year, which greases things nicely. 

Read: Equities fall across the globe as the coronavirus outbreak spreads 

Oil prices and demand down

As reported by Yahoo Finance, Saudi Aramco expects the coronavirus impact on oil demand to be short-lived and for consumption to rise in the second half of the year, Chief Executive Amin Nasser told Reuters on Monday, and added “(a rise) especially from China”.

Oil prices have fallen this year as the rapid spread of the coronavirus in China, the world’s largest energy consumer, has dented demand. 

“I do not think it is going to have a long-term impact,” he said.

The coronavirus has infected nearly 77,000 people and killed more than 2,500 in China, most of them in Hubei.

Kuwait, Bahrain, Oman and Iraq on Monday recorded their first new coronavirus cases, all involving people who had been in Iran, which has had 61 cases and 12 deaths.

OilPrice.com reported oil prices slumped nearly 4% on Monday with WTI Crude nearly 4% at $51.40 and Brent Crude tumbling 3.75% at $55.78. 

A hit to global oil consumption on the order of 1.5 million barrels per day (mb/d) I expected for the first quarter of 2020.

Read: Oil prices set to decline further if OPEC+ doesn’t act

Shale and the climate

Saudi has for years battled for market share with rapidly expanding US shale oil producers which in just a decade have developed capacity to pump millions of barrels per day of oil from rock formations that were previously too costly to tap.

Reuters said Saudi fought a price war aimed at putting the U.S. shale industry out of business just six years ago. Now, the country has adopted the techniques developed in U.S. fields, only gas is on the agenda for Saudi: a $110 billion Jafurah shale gas field project, led by Aramco. 

If Aramco hits its targets for development of the field, with production slated for a 2024 start, Saudi Arabia would become the world’s third largest gas producer by 2030 and output would reach around 2.2 billion cubic feet per day of sales gas by 2036. The field would produce some 550,000 barrels per day of gas liquids and condensates, he said, around 50% more than current output of just over 1 million bpd.

Gas reserves in Jafurah are estimated at 200 trillion cubic feet of raw gas.

The world’s top two gas producers are the United States and Russia.

Nasser said Aramco had developed fracking using seawater, which will remove the obstacle that a lack of water supply represents to fracking in the desert.

The new shale gas development would help the country to reduce burning an average of 800,000 barrels per day of crude and fuel for electricity, Nasser said. That would free up more crude for export if needed, he said, and reduce emissions.

 Speaking of emissions, or rather climate, a statement from the Group of 20 (G-20) meeting of finance ministers in Saudi Arabia mentions climate change, despite reported resistance from the U.S. on including the language. 

“The [Financial Stability Board] is examining the financial stability implications of climate change,” said the communiqué.

Read: Markets steady; OPEC agree to deeper cuts

OPEC cuts 

Saudi Arabia, OPEC’s de-facto leader, has held talks with other OPEC members and Russia to discuss potential deeper oil supply cuts to counter the impact on crude prices. But Russia has yet to announce its final position on the proposal.

OPEC and allies are due to meet over March 5-6 to decide on production policy.

In recent weeks, cuts on the order of 500,000 or 600,000 bpd seemed to be all but a foregone conclusion.

Now, Saudi Arabia is reportedly in talks with the UAE and Kuwait on a joint cut of about 300,000 bpd. Unable to count on Russia, the Gulf States may act on their own.