Oil price : Saudi Arabia vs Shale oil IAEE CONFERENCE SINGAPORE– June 19, 2017 Oil price : Saudi Arabia vs Shale oil Jean-Pierre Favennec jpfavennec@yahoo.fr

AGENDA The demand for energy The role of oil Oil prices evolution The collapse of prices in 2014 The strategy of « market share » Facing deficits OPEC vs US Shale oil

World primary commercial energy consumption (2/2) (Mtoe) 29% 32% 24% 4% 7% 3% Hydro Nu. Sources : Schilling & Al. (1977), BP Statistical 2016

Crude oil price (Brent 2000-2016) Source: IMF

Brent crude oil price (spot) 2014-2015 oil price drop Brent crude oil price (spot)

Recent Evolution 28th September 2016 27 Nov 2014 170th OPEC Meeting Production limited at 32,5– 33 Mbd 27 Nov 2014 166th OPEC Meeting Discussed COP21 & CMP10 Stable price : Decent income for producer. OPEC Supply at 30 Mbd. 11 June 2014 165th OPEC meeting Market adequately supplied. OPEC supply unchanged(30mbd). Steps to ensure market balance(around $100/bbl). 05th Dec 2015 168th OPEC Meeting OPEC Supply at 30mbd 05th June 2015 167th Meeting Concern over market volatility. Market oversupplied. OPEC Supply at 30mbd. 02nd June 2016 169th OPEC Meeting Called Non-OPEC countries for balancing market

Factors a) Potential Oversupply + Geo political Factors:- Arab Spring: Syria, Libya, Yemen, Egypt, Kuwait, Iraq, Saudi Arabia (2011). Strikes by oil workers in Libya : oil production reduced by 88% (2013). Violence in Libya blocked oil exports(2014). Iraq & ISIS: fears of supply outages(2014). Nigeria’s political instability: on going theft of up to 350,000 bd. Climate change: Limiting carbon emission from fossil. Iranian Sanction lifted: more 0.5 mbd into already glutted market (2016).

Factors b) Demand of Oil: 2016 saw slower increase in oil demand because of slower growth of GDP Japan & Europe’s Oil demand also decreased A stable US oil demand. c) Climate Change & other factors:  Paris Agreement(COP-21) showcased a strong and growing civil society, including clear demands to stop funding Fossils and keep Fossil Fuels in the Ground. The age of stone did not finish because of the lack of stones, the age of oil will not finish because of the lack of oil (Sheikh Zaki Yamani – Oil Minister in Saudi Arabia in 1986).  Advances in technology are beginning to offer a way for economies to diversify their supplies of energy and reduce their demand for petroleum, thus loosening the grip of oil and the countries that produce. Oil which is not produced today will, perhaps, not be produced in the future.

The Fiscal Deficit With income falling, the 13/15 members of OPEC posted a combined current account deficit of $99.60 billion in 2015, compared with a surplus of $238.10 billion in 2014. Venezuela : suffering from scarcity of food and medicine and has logged a budget deficit of around 20% of GDP. Kuwait: recorded a budget shortfall of $15.3 billion in the fiscal year which ended on March 31. The IMF expects Iraq’s budget deficit will grow to 17.4 per cent this year, up from 5 per cent in 2014.  Saudi Arabia: expected deficit for 2016 $87 billion. IMF:The International Monetary Fund

Need for an increased price Country Oil revenues (in % of GDP) Kuwait 53 Congo Republic, Africa 45.2 Iraq 41.4 Saudi Arabia 38.7 Libya 33.3 Oman 28 Azerbaijan 27.2 Venezuela 23.8 Iran 23.6 UAE 19 - High inflation rates. - Struggling economies like Venezuela & Nigeria. - Important Development projects are on halt. - CAPEX is also reduced.. - Deficits are widening. Source: World Bank

The Doha, Algiers and Vienna Agreements. - A summit in Doha among the world's largest oil producing countries ended without an agreement on 17th April 2016: leaders failed to strike a deal to freeze output. - OPEC on Sept. 28, in Algiers, agreed to reduce output to a range of 32.50 million barrels per day from 33.0 million bpd: its first output cut since 2008. - November 30, Vienna : the OPEC countries confirm the Algiers agreement - December 2017 : 11 non- OPEC countries agree to reduce their production by 600 000 b/d (Russia taking half of the reduction) - May 25, 2017 : the OPEC and non-OPEC agreements are prolonged for 9 months For Algeria agreement no plans on: By how each member should cut the production?

Can the market be « re balanced » ? The objective of the agreements (reductions of production) is to reduce inventories and increase the price The end of 2016 agreements provoked an increase in the price up to $55/b But the decision of May 2017 to continue the cuts did not satisfy the market and the price fell under $50/b What can we expect ?

Why it takes time to rebalance the market ? Important : the implementation of the cuts is well followed by OPEC ans non OPEC countries But : Inventories were very large A number of projects were launched in 2011 – 2014 when oil prices were very high and are now producing The production of LTO (Light Tight Oil – Shale Oil) in the US increased again

Potential Non-OPEC Production 1. Kashagan Field:- - An offshore oil filed in Kazakhstan’s zone of Caspian Sea. - Recoverable reserves= 13 billion bbl. - Commercial production could begin in 2017 and expected to last till 2040. 2. Brazil Fields:- 13 billion bbl of proved reserves. - Rancador Field - Lula(Tupi) Oil Field 7,500 Mbbl recoverable oil. 100,000 bbl/day. - Badejo Field - Franco Oil Field Production peak not yet reached! Production has been shut due to leakage problems, expected to start again in 2017.

Potential Non-OPEC Production 4. US Gulf of Mexico Field:- - Accounts to 17% of total US Oil Production. Fields: Louisiana, Texas, Alabama, Florida 3. Mexican Field:- - 10.3 billion bbl proved reserves as of 2013 - From 1979 to 2007, Mexico produced most of its oil from the supergiant Cantarell Field, which used to be the second-biggest oil field in the world by production. - Oil production peaked in 2004. - Other field- Chicontepec Field.

Potential OPEC Production 1. Iraq Iraq has 5 super giant fields. 143.1 billion bbl of proved reserves. Oil production of 2015 nearly around 4.1mbd. 2. Iran 157.8 billion barrel of proved reserves. Total production peaked at 6.6mbd in 1976. 2015 oil production= 3.92 mbd

Investment International oil companies (IOCs) have been forced to scale back investments as weak prices squeeze profit margins=> Decrease in standard production by IOC. More than $300 billion upstream investments slashed in 2015/16. NOCs have raised their share of upstream investments to a 40-year high of 44 percent. With NOCs gaining a larger share of investments in the sector, the oil market could enter a new dynamic in which production decisions are less driven by market fundamentals.

US Oil & Gas production today Sources : US EIA Annual Energy 2016

US Oil & Gas production today and tomorrow U.S. petroleum and other liquid fuels supply by source, 1970-2040 (million barrels per day) Natural gas production by source, 1990-2040 (trillion cubic feet) Sources : US EIA Annual Energy outlook 2016.

Future Supply Demand Balance - The balancing will depend on the clearance of the stock at sea and also on the way OPEC adjusts its production in the short term. Focus will also be on the participation of non OPEC producers with OPEC. All data before of Algeria Agreement

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