Surging Saudi Fuel Use A Bigger Threat Than US Shale Oil

Rising Saudi energy demand is a bigger threat to the world’s biggest oil exporter than surging US shale output, Saudi Jadwa Investment bank says in a study published on Wednesday.

“The key long-term challenge facing Saudi Arabia’s oil and gas industry remains the high and growing domestic demand for hydrocarbons,” Fahad Al Turki, head of Research at the Riyadh-based investment bank, said of the next 25 years.

“This is exacerbated by low prices locally, which will distort internal economic decisions and reduce the available income from the Kingdom’s oil exports,” he said.

Global demand for crude oil produced by OPEC members like Saudi Arabia is expected to fall, along with oil prices, over the next few years due partly to higher supply from North America.

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 oil export dependent Kingdom.

Turki said the main impact on Saudi crude exports of US shale would likely be the reduction of price differentials between light and heavy crudes grades, which it said may change how oil is refined in Europe.

But Jadwa sees a bigger impact from the US shale industry on Saudi petrochemicals companies that use gas as a feedstock.

Low priced and plentiful natural gas available to US petrochemical producers could make it difficult for Saudi industry to compete and may see some open plants in the United States, Jadwa says.

Although US gas costs have fallen from over $13 per million British thermal units (mmbtu) in mid-2008 to around $4.29 now, Saudi gas prices that have been fixed at around $0.75/mmbtu for many years are still much lower.

But the relative lack of investment in new gas production that such low prices have contributed to sees Saudi Arabia struggle to meet demand in summer – forcing it to burn millions of barrels a week of oil in power plants.

A surge in US shale gas production over the last five years has also brought with it a sharp increase in liquefied petroleum gas (LPG) supplies which could hit Saudi exports.

US production of LPG – mainly butane and propane used for cooking and increasingly transport – has risen to the point where analysts expect US competition to force Saudi Arabia to cut its sales prices in Asia and Europe in years to come.