Saudi domestic demand is 'larger threat than US shale'

18 December 2013

Jadwa Investment report says soaring domestic demand in Saudi Arabia poses greater risk to oil exports

The potential impact of US shale gas production to Saudi Arabia’s oil exports is less of a threat than the kingdom’s insatiable demand for hydrocarbons.

This claim has been made by the Riyadh-based Jadwa Investment in a report released in mid-December.

US Energy Information Administration figures state that US oil production has climbed to more than 8 million barrels of oil equivalent a day (boe/d) in November 2013, the highest figure for 25 years. Shale gas is responsible for 40 per cent of the US’ total production

This production is having a knock-on effect for the US, as increased domestic production is not leading to a significant increase in consumption. It is lessening imports from other producers which, in turn, should have a knock-on effect for the Middle East.

The Jadwa report states that oil producers group Opec has estimated demand for its members’ oil in 2014 will decline by 300,000 barrels a day (b/d) compared with 2013. This equates to average Opec daily production in 2014 of 29.57 million barrels.

In Saudi Arabia, petrochemicals producers are worried about the threat of cheap US gas initiating a huge petrochemicals boom in North America fuelled by low-price ethane and natural gas liquids. The one upside of this is that the major Saudi producers could decide to enter the US market, as there will be opportunities for expansion in the next decade.  

However, the long-term prospects of US shale gas production are not clear and the lifecycle of many of the fields is less than 25 years. This suggests that while production is surging now, there is a chance it may level off and eventually go into decline by 2040.

Saudi Arabia still exports some crude oil to the US, which is used to feed the joint venture refinery of Saudi Aramco and UK/Dutch Shell Group located in Texas. However, most of the kingdom’s oil is sold to Asian markets and 100 per cent of gas production is utilised domestically.

Jadwa believes that the key long-term challenge facing Riyadh is the growing domestic demand for hydrocarbons. This is a genuine concern, but the real focus should be on energy efficiency rather than consumption.

Saudi Arabia’s heavy industry sectors are still relatively underdeveloped and tens of billions of dollars are being spent on increasing capacity in the petrochemicals, metals and mining sectors. This type of energy usage is positive and will benefit the kingdom in terms of diversification away from hydrocarbon exports, as well as job creation.  

The real problem lies with cheap utilities and gasoline prices that lead to profligate consumption across the country, especially in the hot summer months when power plants are put under enormous pressure due to continuous air conditioning use.

There is no question Riyadh fully understands the need to curb consumption, but whether this will lead to price increases for gasoline and utilities is doubtful.

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