The rapid growth of the US shale industry seems to be at the heart of the Saudi-Russia crude oil price war. Already weak from the coronavirus outbreak, oil prices crashed after talks in Vienna last week on production cuts between the Organization of Petroleum Exporting Countries (OPEC), Russia and other oil producers, the so-called OPEC+ grouping, collapsed with no deal to cut production. OPEC-kingpin Saudi Arabia and the United Arab Emirates (UAE) have announced plans to boost production while Moscow has declared that it can withstand low oil prices.
“Recent history shows that playing Russian roulette with the US shale industry through an oil ‘price war’ can backfire,” International Energy Agency (IEA) Executive Director Fatih Birol warned in a tweet on 13 March. “The major victims are likely to be people in developing countries that still rely heavily on oil and gas revenues to fund their social and economic systems,” he added.
The rapid growth of the US shale industry is a key factor in the Saudi-Russia oil war, Cyprus Natural Hydrocarbons Company CEO Charles Ellinas told New Europe on 13 March. Russian oil producers, especially state oil giant Rosneft made no secret of the fact that they are concerned about the growth of the US shale industry. “Rosneft has always been baulking at production cuts. It believes that their effect is to subsidise the US shale oil industry,” he said.
Ellinas explained that, so far, every time OPEC+ agreed to production cuts, US shale oil stepped-in to cover demand, undermining and negating OPEC+ actions to shore-up the oil price. Recent US sanctions against Rosneft and the Nord Stream-2 pipeline from Russia to Germany may also come into this, he added.
The Saudis also sensed an opportunity to regain market share at the expense of shale oil, Elllinas said, adding that the oil price was going down anyway due to the impact of coronavirus on oil demand. “The Saudis were not prepared to shoulder additional cuts without Russia joining,” he said.
Both Russia and Saudi Arabia have enough resources and can maintain this oil price war long enough to inflict pain on US shale oil producers, whose average break-even oil price is in the range $40-50 per barrel, Ellinas argued, adding that the US shale oil producers are highly indebted, with a high risk that quite a few of the smaller companies may go bankrupt because they will not be able to service their debt if the oil price remains low for a sustained period. “The industry had already experienced a sharp increase in the number of bankruptcies in 2019 due to low prices and oversupply. And that’s exactly what Russia and Saudi Arabia are aiming for, hoping to gain-back market share,” the energy expert said.
Russian oil producers met with Russian Energy Minister Alexander Novak on 12 March. But Reuters quoted Gazprom Neft CEO Alexander Dyukov as telling reporters that representatives of oil producers have not even discussed with Novak returning to a deal with OPEC+.
Asked what will happen if US President Donald J. Trump bails out the shale industry, Ellinas told New Europe that the oil price war may then last longer.
Russia’s Finance Ministry said on 9 March that the country could weather oil prices of $25-30 per barrel for 6-10 years, he said. “It is possible that Trump applies tariffs on oil imports, but that will not help US oil exports – these will have to compete against Saudi and US oil that is prepared to go quite low indeed,” Ellinas said. “It is possible that at some stage – in response to pleas from the shale industry for help – Trump applies pressure on Saudis to take action and they respond. But, at present, Trump is quite happy with petrol prices coming down, fulfilling one of his pledges, in the period leading to the US presidential elections,” he added.
If the oil price war goes into 2021, then low oil and gas prices will also impact renewables, he said. “In any case, natural gas prices are already rock-bottom as a result of the impact of coronavirus on gas demand, especially in China,” Ellinas said, adding that the oil price war is also bound to impact heavily other oil producer countries with high government fiscal break-even oil prices.
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