A Saudi Predator?

How market manipulation helped the kingdom become a major investor in western oil companies

By Peter McKenzie-Brown

The last twelve months have been rough for companies invested in Alberta’s oil sands. Things began rough, with Norway’s US$1 trillion sovereign wealth fund, which has its origins in the country’s offshore oilfields, announced that it would unload the US$81 billion it had invested in bitumen companies. The reason? Such an investment was out of alignment with the 2^oC global warming target set by the 2016 Paris Agreement on greenhouse-gas-emissions. “By going…oil sands free,” the Norwegian news release said, “we are sending a strong message on the urgency of shifting from fossil to renewable energy.”

A strong message it may be, but also haughty. There is a direct correlation between a nation’s oil consumption, its GDP and the quality of life its citizens enjoy. By what right could the world’s rich nations – for practical purposes, the 37 members of the Organization for Cooperation and Development, with a population of about 1.3 billion – justify denying affordable energy to other countries in the world? Well, there is the matter of the global warming emergency.  The case for developing alternative energy resources is dire. After all, the population of our planet is rapidly approaching eight billion.

Norway’s wealth fund soon sold its US$81 billion interests in Calgary-based Cenovus Energy Inc., Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc. From that point on, the statement said, the fund would exclude companies involved in the oil sands from consideration as appropriate investments.

The shares in those companies responded immediately by falling. Even though there is widespread concern about global warming in Alberta, many of us with backgrounds in the oil patch felt affronted. “What else could go wrong?” we wondered. We did not know it at the time, of course, but there would soon be the matter of COVID-19.

As the dangers of travel across a pandemic-stricken planet became obvious, governments imposed lockdowns around the world and global oil consumption plummeted. As international travel crumbled, oil prices dropped for an industry which cannot too quickly shut in production. The poster-child for this event came on April 20^th, when the headline price for a barrel of West Texas Intermediate oil fell into negative territory for the first time ever. For the only time in history, sellers had to pay buyers to take their oil. (See chart.)

                Why did it happen? Essentially, because of the way oil markets function in Texas. The Texas Railroad Commission is the steward of the oil-rich state’s natural resources and the environment, and its regulations led to the reality of oil prices crashing from US$18 a barrel to -US$38 in a matter of hours. Rising stockpiles of crude threatened to overwhelm storage facilities and forced producers to pay buyers to take the barrels they could not store. Was this the doing of big oil – such vast publicly-traded oil companies as ExxonMobil, British Petroleum and Royal Dutch Shell, which are so often characterized as villains when pump prices rise at your local gas station.

In fact, the world’s 13 largest energy companies, measured by the reserves they control, are government-owned and operated – by name, Saudi Aramco, Gazprom (Russia), China National Petroleum Corp., National Iranian Oil Co., Petróleos de Venezuela, Petrobras (Brazil) and Petronas (Malaysia). These state-owned companies and their smaller siblings control more than 75 percent of global production. By contrast, the multinationals produce only ten percent.

Markets, manipulated

In early March, OPEC officials presented an ultimatum to Russia to cut production by 1.5 percent of world supply. For her part, the Eurasian giant foresaw continuing cuts in her market share: after all, America’s shale oil production, which uses fairly new technology, was making the country both the world’s largest consumer of oil and the largest producer. Anxious about this concern, Putin’s government rejected the demand – in effect ending a three-year partnership between OPEC and major non-OPEC producers, widely known as the OPEC Plus cartel. Another factor was weakening global demand resulting from the COVID-19 pandemic. This also resulted in OPEC Plus failing to extend the agreement cutting 2.1 million barrels per day that was set to expire at the end of March. Saudi Arabia, which has absorbed a disproportionate amount of the cuts to convince Russia to stay in the agreement, notified its buyers on March 7^th that they would raise output and discount their oil in April. This prompted a Brent crude price crash of more than 30 percent before a slight recovery and widespread turmoil in financial markets.

Perhaps this Saudi-Russian price war was a game of chicken to see who would blink first. But neither of the major players had much reason to blink. In March 2000, the Saudis had US$500 billion in foreign exchange reserves; Russia had US$580 billion. More to the point, the Saudi cost of production, depending on the grade produced, is three dollars per barrel, compared to US$$30 per barrel in Russia.

Thus, the OPEC plus price war was designed to take advantage of a weak global economy, infected by COVID-19. It Saudi Arabia's case, it assaulted the Western petroleum sector – especially America’s. To ward off from the oil exporters price war which can make shale oil production uneconomical, US may protect its crude oil market share by passing the NOPEC bill.

In April 2020, OPEC and a group of other oil producers, including Russia, agreed to extend production cuts until the end of July. The cartel and its allies agreed to cut oil production in May and June by 9.7 million barrels a day, equal to around 10 percent of global output, to prop up prices, which had previously fallen to record lows.

The Russia/Saudi Arabia oil price war, which had begun the previous month, had a huge impact – probably by design – on the ownership of large oil companies in Europe and North America. Saudi Arabia’s sovereign wealth fund saw nothing but opportunity in the global oil price plunge. During the battle, the kingdom scooped up billions of dollars’ worth of shares in downtrodden energy companies, including Canadian firms.

Filings with U.S. Securities and Exchange Commission indicate the kingdom’s Public Investment Fund (PIF), which has an estimated US$320 billion in assets under management, bought stakes worth US$481 million and US$408 million in Suncor and Canadian Natural Resources, respectively, during the first quarter of 2020. That month, the values of the Canadian producers and three other energy stocks PIF bought — Royal Dutch Shell plc, Total SA and BP plc — had all more than halved from their 52-week highs at the time the kingdom made its acquisitions. The illustration shows the prototypical Royal Dutch share price after the crash. It also shows the quick return the kingdom made from the package of acquisition of these five stocks as markets rebounded: more than US$182.6 million since the end of March.

LNG Trumped

Image via Wikipedia

The burst of enthusiasm for shale gas could put LNG on the sidelines of global gas trade

This article appears in the October 2010 issue of Oilweek

By Peter McKenzie-Brown

If you want to understand the performance of global natural gas markets in the next few years, think hockey. On one side the team captain is liquefied natural gas (LNG); on the other natural gas from shale reservoirs (“shale gas”).

The matches are serious, but they are also friendly. Each side is a team of rivals. The squads frequently swap players in and out, but they can play nail-biting games.

Robin Mann’s description of an annual CBM conference in Asia calls the game during two days of play. The first day of the Singapore conference, the president of AJM Petroleum Consultants says, the dominant theme was that “if there is a lot of shale gas development in India, Europe and China, there will be no need for much LNG project development.”

Shale Gas one; LNG zip.

On the second day, however, “the speakers suggested that new LNG projects will be needed no matter how much shale gas is developed in those countries. LNG development might not be as dynamic as people had thought it would be, but the projects now built or on the books to be built will remain viable.”

Game tied.

He cautions, though, that “In the end price will be the deciding factor.” Of course, everything from geopolitics to economics can influence price. This is the recurring theme in the competition between LNG and shale gas.
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Three Sources of Gas
From the perspective of North American producers, the future of three gas sources (not two) is of interest. The first is the wild success of shale gas production in the US and Canada. The shale gas revolution, as it is called, is largely the result of rapid innovation in such down-hole technologies as horizontal drilling, better bit design, coil tubing, down-hole motors, geo-steering, microseismic, measurement-while-drilling tools and more powerful fraccing systems. It has truly been a revolutionary development.

The second is the evolution of a global market for liquefied natural gas. This development has been decades in the making, and it has eliminated the need for pipelines to tie stranded gas into the world’s industrial markets. To cite the extreme example, Qatar is developing liquefaction facilities for an offshore reservoir with more than a quadrillion cubic feet of proved reserves, and it will be able to deliver that gas around the world for a century or more.
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The gas industry’s third area of interest lies in the huge conventional gas reserves in Alaska and the Northwest Territories. While companies are proposing expensive pipeline systems to deliver those resources to southern markets, Mann doubts that those proposals will go ahead in the foreseeable future. “Because of the development of shale gas formations like the Montney and Horn River and other with great potential right next to infrastructure and right next to pipelines, and with our existing conventional gas and our exports to the United States going down daily, we have more than enough (gas) for our own (use) so why is it important to build these pipelines? Why are we worrying about anything north of Alberta and BC?” asks Mann.

“Their costs keep going up and up and up, and economics will trump any national sovereignty argument for the Canadian pipeline. Maybe the best way is to develop LNG facilities in the north, but what will the economics of that kind of project be? Will the price of LNG justify building facilities up there? Certainly at the Singapore conference there was no strong feeling that there would be much in the way of LNG exports from North America, apart from a few small projects” like the proposed LNG terminal in Kitimat, BC. The only really positive argument for developing LNG facilities is that the many existing receiver terminals in the world offer a lot of flexibility. Given a Northwest Passage free of ice, you could take Arctic LNG anywhere – if the price were right.
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Arctic Gas Pipelines: benched.
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International sketches
While Robin Mann acknowledges the large potential for shale gas development in Asia, especially in China and India, he is sceptical that this will happen in the near term. “North America’s shale gas sector is advanced, it’s more of a mature industry” he says, sketching out the situation around the world. “Europe is in its infancy. In Asia it isn’t even that far – it’s in its beginning stages. People have barely gone beyond looking at resource potential. The idea of unconventional gas in Australia, China, India and Indonesia is still CBM” (coal bed methane) – a resource the North American industry is not heavily investing in anymore. “Europe is more interested in shale gas because they don’t have much CBM.”

One problem those countries face in developing a shale gas industry is “getting the hardware needed to properly develop the resource – getting the right equipment to the right spot and (having) the expertise and manpower to get things developed. That’s why CBM is still on the books in those regions. To manage in the CBM world you don’t need (heavy-duty) frac equipment or (specialized) manpower.”

Here is the kind of problem he is talking about. Huge fraccing jobs for shale gas development in north-eastern B.C. require a great deal of logistical support. Each horizontal hole can require 2,000 to 3,000 tonnes of fine-grained sand as a propping agent. To take on one such project may require a 40-member crew and 20 or more hydraulic compression systems mounted on huge fraccing trucks. This equipment isn’t widely available outside North America, and there are gas-bearing shales around the world that are remote from the kind of sand quarries needed.

Moreover, a great deal of water is required. While the water commonly comes from deep formations, a typical shale gas fraccing job requires a large water storage pit in addition to a string of high-volume steel tanks. According to Dave Russum, an AJM vice president who also attended the Singapore conference, “in India and Australia they are drilling their first holes into shale just to gather information. They aren’t even into pilot projects yet.” Given those realities, Mann concludes that shale gas will not have a large impact on LNG development – at least not initially
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Geopolitics and the local community
As a domestic source of supply, shale gas is an attractive alternative to imports. For the United States, which has huge trade deficits, it slows down the haemorrhage of US dollars. For Europe it offers a geopolitically smart alternative to Russian supply. Also, governments want this kind of development because it contributes to security of supply
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In recent years Russia has turned off the taps a couple of times because of disputes with Ukraine over payment. As collateral damage, countries in the European Union were temporarily cut off, too. It is therefore ironic that the best shale gas prospects in the European Union are in the north – especially Poland, Ukraine’s neighbour. In northern Europe, according to Mann, “you can get access to enough land to make a viable shale gas project.” In more developed and densely populated southern parts of the union, this is much harder.

As Europe develops shale gas, geopolitics is again likely to enter the fray compliments of the Russian bear. “Are the Russians just going to sit by and let Poland and northern Europe develop natural gas so they can turn off the taps from Russia?” asks Mann. “I don’t think so. They could retaliate with price, and make shale gas uneconomic.”

So could LNG producers. In fact, rather than shale gas driving LNG out of global markets, the exact opposite could take place, with LNG putting the screws to shale gas development irrespective of its geopolitical and trade balance advantages. Qatar, you will recall, has huge reserves that it can liquefy and deliver cheaply, causing international gas prices to crater and rendering some shale gas projects uneconomic.

Yemen and other exporters could do the same. According to Dave Russum, “It wouldn’t take much of a gas surplus on the oceans to really drop the price of gas in many markets. Although (shale gas) reservoirs can be prolific, gas from shale is not cheap, and whether production is sustainable over time is a real question.”

In addition to the prospect of price competition, shale gas development is likely to face environmental and population density issues in Europe and Asia. Environmental concern is likely to be most intense in Europe, and to echo concerns already being expressed in a number of places in the US. Will fraccing contaminate groundwater reservoirs? Are the chemicals used in development safe? Will shale gas production lead to unintended consequences of the undesirable kind?

The matter of population density ranges from critical in India and coastal China to highly significant in much of the southern states in the European Union, where the industry can’t get access to enough land to develop a viable shale gas project. Shale gas development requires drilling many wells. Multilateral horizontal drilling and fraccing from a single pad can take weeks and even months to complete. These drilling pads are large and operations can be dirty and noisy. Moreover, in densely populated countries good drilling prospects can be covered over with villages, small farming operations, markets and industrial operations. This inconvenient truth is hard to ignore

Game plans
Mann’s assessment of the situation involves pretty raw political analysis of the situation. “In China the communist government would just do it,” he speculates. The country has almost the same landmass as Canada, yet the population is mostly located along a relatively thin band along the east coast. There are many prospective sedimentary basins within the country, which is geologically more like the United States than Canada. “The ones that are now being looked at for shale gas are out in a desert in the western China, where there is virtually a zero population problem and access is not a problem either. None of these projects are commercial yet, they are just at the stages of looking at resource potential, doing some tests, seeing whether they are viable and then going down the road” to development.

Having said that, he recalls an argument from Singapore that “Even if China developed shale gas at the same rate and volume as North America did over the past ten years they would still require LNG because (in ten years) shale gas would meet only around 15% of their total requirements.” That’s a compelling argument against the notion that shale gas will displace global LNG
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Shale gas development is going to be difficult in most places except northern Europe, potentially China and eventually India. “In India, you do have British law covering land ownership so you do have land issues but you wouldn’t have the same environmental issues as you have in Europe. (Gas producers) could get (to viable projects) if they worked with the local population, most of whom have very low incomes. In much of Europe, where the amount people make on average is much higher and people have a much higher standard of living, it would likely be more difficult to work with local populations.”

Shale gas and LNG can coexist, but as team captains for the gas industry’s two big new hockey clubs there are many ways they can affect price and therefore development. Too much LNG on world markets could hinder development of shale gas in certain parts of the world. A great deal of shale gas development could hinder LNG development in others. But, says Mann, “Either thing could happen. It’s going to depend on geography, on what resources you have, on governments’ want to develop security of supply – a whole bunch of political things can get rolled up into that.”

“North America is a great example,” he concludes. “A few years ago we wanted to have LNG receiver terminals dotting the east coast, the southern coast and the west coast of North America. People didn’t want them. Then all of a sudden by some miracle we ended up with the shale gas revolution and we suddenly found we didn’t need them. So LNG – go away.”

For North America, at least, shale gas was the game changer. Shale Gas five; LNG one.

Pricing the Marginal Barrel of Oil

The large-scale exporting nations and regions that are increasing government take from oil – or have already nationalized their oil resources – include Russia, much of the Middle East, Venezuela and other countries. The five countries whose production is charted here are not particularly friendly to the West.

By Peter McKenzie-Brown Five of the world’s large oil exporters have two things besides big oil reserves in common. First, their economies are largely dependent on revenues from energy production – they don’t produce much else. Second, their people or their governments (or both) are hostile to the West.

The chart shows the relative positions of five of the world’s large producers – Venezuela, Russia, Iran, Nigeria and Saudi Arabia. Consider the context: the planet consumes about 85 million barrels a day. Together, these five countries produce more than one third of world supply. Except for post-Soviet Russia, which is new to the game, each of these countries long ago found ways to maximize government revenue from petroleum. Perversely, in the long run this will serve them well by making less production available. As prices rise, their economies will boom long after their production has gone into decline. As the world nears its petroleum peak, the economic reality of a seller’s market will have strange, unintended consequences.

Economic Dependency: Consider the first of the two points I raised. The countries named in the chart have little to keep their economies going except revenue from oil and gas. Here are the numbers. The info comes from many sources, but I’ve done my best to keep it consistent.
• Nigeria: Oil exports provide 20 per cent of GDP, 95 per cent of foreign exchange earnings, and about 65 per cent of budgetary revenues. No reliable export numbers available; Nigeria’s OPEC quota is 2.3 million barrels per day.
• Saudi Arabia: the petroleum sector accounts for roughly 75 per cent of budget revenues, 45 per cent of GDP, and 90 per cent of export earnings. Oil exports are 8.5 million barrels. Saudi’s official OPEC quota is 10.1 million barrels per day.
• Iran: Petroleum exports of 2.8 million barrels per day represent 80 per cent of exports. Exports: 2.8 million barrels per day; the country’s OPEC quota is 4.1 million barrels per day.
• Venezuela: Oil revenues account for roughly 90 per cent of export earnings, more than 50 per cent of federal revenue, and around 30 per cent of GDP. Oil exports are about 2.3 million barrels per day – well short of Venezuela’s OPEC quota of 3.2 million barrels per day.
• Russia: Oil, natural gas, metals, and timber account for more than 80 per cent of exports and 32 per cent of government revenues. Each day, Russia exports some 7 million barrels of oil. It is not a member of OPEC.

No matter how much they protest the importance of oil at “reasonable” levels, these countries are delighted when the price of the marginal barrel of oil – that is, the price of the last barrel sold – goes up. Higher marginal prices enable them to charge more for the barrels they load onto tankers. Nothing new here. However, at a recent energy conference in London, Sadad Al-Husseini – an oil consultant and former executive at Saudi Arabia’s national oil company - made an observation that puts the reality of this economic dependency in an interesting light. In effect, he quantified the price of the marginal barrel when he suggested that supply shortages will add $12 to the price for every million barrels a day of additional global demand.

As this chart of eight major oil-consuming nations illustrates, it isn’t hard to see where increases in world oil consumption will come from. Just watch China and India grow.

Of course, supply and demand are parts of the same equation. Let’s assume that $12 is the cost of adding another million barrels of demand. It would also be the price of subtracting a million barrels of supply. Cutting supply by one million barrels a day would jack prices up by $12 per barrel as effectively as would increasing demand by that amount. While the marginal price is increasing from a growing Asia, it could also increase because of reductions in supply.

If the five producing countries I have been discussing were to cut supply by a million barrels per day, we would likely see yet a price increase of the same magnitude. Consider the math: Today’s marginal barrel is worth about $90. If our five countries collectively reduced production by 5 per cent, their revenue per barrel would increase by 15 per cent, as oil rose to $102 per barrel. Their collective revenues would benefit quite nicely, thank you very much. How could such a reduction occur? These countries wouldn’t need an OPEC agreement to reduce production – you may have noticed that none of the OPEC members are producing their full quotas anyhow. They could effectively reduce production through failure to explore for and develop reserves, by shoddy production practices, by simple government fiat, or as a result of the natural depletion of their reservoirs. Supply could also drop as a consequence of war, insurgency or terrorism. Whatever the cause, the result would be that countries with little else to offer could increase government coffers and national wealth.


Hostility to the West: At the beginning of this post, I noted that each of these countries has a certain amount of hostility to the west, and each in its special way.
 • In the case of Nigeria, part of the issue is an insurgency in which local entrepreneurs have found that taking westerners hostage can be a good source of income. A major oil exporter, the country is also hobbled by political instability, corruption, lousy infrastructure and worse management. Oil is frequently stolen from production facilities, and whole fields shut down after rebel attacks.
 • Saudi Arabia? Officially, the princelings love the West and will do everything they can to maintain supply. Their subjects have other ideas, though. You may remember that fifteen of the September 11 hijackers were Saudi nationals. The land of the fanatical Wahhabist sect of Islam has some real issues with the decadence of the West.
 • Iran’s mullahs can’t understand why anyone would be concerned about their peaceful nuclear program, and would just love to nuke anyone who questions their nuclear rights. George Bush recently announced that if they get nuclear weapons, it will lead to World War Three.
 • Hugo Chavez is selling gasoline in Caracas for 3 cents a litre (part of his socialist reform), while running a country fuelled by crude oil exports. And he’s confiscating the assets of well-managed western oil companies in the interest of owning and operating those assets locally.
 • Then there is newly-belligerent Russia. Incredibly popular and riding the wave of high oil prices, Vladimir Putin wants Russia to become a superpower again. And his control of energy can help him achieve that goal. His country is already an energy superpower. Putin has briefly cut off the taps to both Ukraine and Georgia in recent years, using the energy weapon to settle political scores. He does much more than talk.


Greedy Government Redux: In a recent post, I discussed last week’s changes to Alberta’s royalty regime. As I pointed out, during periods of high oil prices, governments get greedy. In Canada we experienced the disastrous National Energy Program due to the greed of our federal government in the early 1980s. Now, the provincial government of Alberta is at the trough. My basic assumption is that the spectre of peak oil is imminent. As a result, and because of high prices, governments around the world are increasing their take from oil and gas. Alberta is by no means alone in this. Increased government take does not increase oil production – in practice, it decreases the incentive and ability for oil companies to bring more oil on stream. Less production, higher prices: it's a simple matter of supply and demand. In a response to my article, a correspondent told me that “The sooner we get away from the dirty polluting tar sands, the better it will be for the environment and the people of this planet.”

I think that if the 1,250,000 daily barrels of oil that now come from Canada's oil sands suddenly evaporated, you and I would both be dealing with oil well beyond $100 per barrel, right now. Most consumers in the West can pay the extra money for gasoline that such an increase in oil prices would generate, although most of us have had to tighten our belts to do so. However, rising prices are already causing a great deal of suffering around the world – especially in the poorer countries. The world is hooked on oil, which is not good. However, as long as we are hooked, we must find ways to keep those supplies of oil coming while we look for solutions. Increased government take makes it more difficult to develop supply. Increased take by countries whose governments or people are openly hostile to the West is a danger we cannot resolve, but it is also a danger we must not ignore.