Special Report contents:

• Saudi Arabia: Balancing austerity with growth
• Tough decisions ahead for Saudi spending plans
• Saudi projects market faces slow 2016
• Riyadh surrounded by problems
• Cautious optimism for Saudi Arabia’s mining prospects
• No gain without pain for Saudi projects sector
• Databank: Saudi Arabia key economic indicators

It has been almost a year since the fateful Opec meeting when the organisation announced it would make no decisive move to shore up falling crude prices.

Prices plummeted after the decision was made on 28 November 2014 and remain low, with Brent crude likely to average less than $55 a barrel in 2015.

Saudi Arabia, Opec’s most influential member and the only one capable of significant production cuts, has since pursued the strategy of increasing production to maintain its market share.

Riyadh’s strategy seeks to wait out the period of lower prices until it affects competitors with higher price-per-barrel operations – notably the North American shale oil sector.

US oil production has risen significantly over recent years but the lower prices are finally beginning to take their toll. Washington expects domestic oil production to drop to an average of 8.9 million barrels a day (b/d) from 9.3 million b/d this year.

“Going forward, sustained drops in production are expected as oil hedges expire, financing from secured lending is tightened and the high-yield debt market becomes too expensive,” said Fahal Alturki, chief economist at Saudi Arabia-based Jadwa Investment in a forecast.

“There will not be a collapse in shale oil production as a period of sector consolidation, via global integrated oil companies and private equity, ensures that shale oil remains a key player in the global oil market,” he added.

The drop in oil prices has also had a significant effect on conventional oil projects elsewhere.

Capital expenditure cuts by large international oil companies (IOCs) will lead to lower production down the line, which could create a tighter market from 2017.

“Although the fight for market share will lead to lower short-term oil revenue, Saudi Arabia is likely to be the main beneficiary when global oil markets become tighter and prices rebound by 2020,” said Alturki.

Saudi Arabia reportedly produced a record monthly average of 10.5 million b/d in June. This compares with an average of 9.7 million b/d in 2014.

Riyadh’s will hope that its strategy to maximise crude production will pay off before 2020 as the lower oil revenues have weakened the government’s fiscal position.

Steven Hess, a Moody’s senior vice-president, expects that “low oil prices will continue to drive fiscal deficits for several years”.

The ratings agency says that further cuts in expenditures are necessary for the kingdom to maintain its creditworthiness, on top of the drawdown on reserves and increased sovereign debt issuance.

Oil Minister Ali al-Naimi also hinted recently that the government was studying reforming fuel subsidies, which would generate more government revenues but would be unpopular with Saudi citizens.

The International Energy Agency (IEA) says the move by Saudi Arabia to impact output from rival crude producers “appears to be having the intended effect”.

The Paris-based industry body expects non-Opec production to drop 500,000 b/d next year, with the majority of this accounted for by US shale companies.

Although lower oil prices have affected the Saudi economy, the kingdom’s policy of maximising oil production has had an even more pronounced effect on its fellow Opec members that do not enjoy the fiscal strength of Saudi Arabia.

The kingdom’s unwillingness to cut production to support an acceptable price has led analysts to call into question whether the 12-member group is still relevant in today’s market.

Reports have suggested there is a widening rift within the organisation, with Iran, Iraq and Algeria critical of Saudi Arabia’s strategy.

According to UK news agency Reuters, a draft report of Opec’s long-term strategy carries annotations that include suggestions from Iran and Algeria for measures to support prices, such as a price target or floor and a return to the quota system.

“Opec should be prepared to establish and defend a price floor, in particular, and to accept a temporary trade-off between lower market share and higher revenues,” Algeria reportedly commented in the document.

The comments from the three countries contain several references to “maximising revenues”, suggesting a call for production to be cut across the organisation.

Opec has an overall production quota of 30 million b/d, but there has been no mechanism to keep member countries within quotas, such as Iraq, where large production increases have not been offset by cuts elsewhere. According to Opec, the 12 members produced an average of 31.6 million b/d in September 2015.

The apparent split within Opec comes ahead of the next meeting of the organisation on 4 December at the Vienna headquarters. Those feeling the pinch of $50-a-barrel crude will be hoping for a change of strategy by Riyadh, but analysts are not holding their breath.