But shale gas will reduce the profitability of Saudi petrochemical output

By Staff

Oil productions from rocks and shale formations in the United States and other Western countries will not affect Saudi Arabia’s position as the world’s dominant crude supplier, according to a Saudi investment company.

The Riyadh-based Jadwa said Saudi Arabia, home to nearly a fifth of the world’s proven conventional oil resources, would only be affected by the steady growth in domestic energy demand since the increase would reduce the Gulf Kingdom’s crude exports.

“Since we doubt that tight oil production will grow as much as most commentators surmise, and since we believe that tight oil production will keep representing only about 3% of total liquids supply, we do not believe that the growth in oil production from tight rock formations in the US, or from shale formations elsewhere, will materially affect Saudi Arabia’s long-term position in the oil industry,” Jadwa said in a study.

“We view the production of tight oil in the US as mainly impacting Saudi Arabia through the narrowing of the price differential between heavy and light crudes. That narrowing may force a restructuring of downstream global refining activities, in particular in Europe, but should not affect Saudi Arabia’s refining complexes.”

The study said it believes that the key factor that will impact Saudi Arabia’s long-term position in the world’s energy industry is the high, and growing, internal demand.

“As we have previously opined, we believe that high internal demand, spurred by low internal energy prices, will not only distort internal economic decisions, but will also, in the long-term, crowd out and reduce the income from Saudi Arabia’s oil exports.”

Turning to gas, the study said it doubted that the production of shale gas in the US and elsewhere will increase as much as most observers believe.

“Yet, we believe that the large production of cheap by-product NGLs from tight oil and shale gas formations will have a significant impact on the world’s petrochemical industry….Saudi Arabia is not a large producer of natural gas (methane). Also, its production of cheap by-product NGLs, including ethane, for petrochemical production will remain somewhat limited,” the study said.

“We thus see the main impact of the US shale gas and cheap NGL production on Saudi Arabia as reducing the comparative profitability of Saudi’s existing petrochemical complexes, and inducing Saudi petrochemical firms to consider expanding their capacity in the US to profit from abundant, cheap yet valuable, feedstock.”

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