Analysis by the father of American Geopolitics Dr. Daniel Fine, MIT.

Archive for November, 2014

Column: Saudi Arabia and New Mexico: oil price threat By Dr. Daniel Fine

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The shale oil boom which returns 25 percent of the New Mexico State revenue is under “bust” threat from Saudi Arabia.

The current price decline in both midland Texas light sweet crude and brent (world price) will begin to defer future projects if prices fall to $72 a barrel and below. An estimated 80 percent of production and projected production in the next five years requires price stability higher than $ 75 per barrel. Saudi Arabia is combining market share strategy with a world oversupply of crude oil.

Oil producers in New Mexico are partially protected through cash flow hedges, which are crude barrels sold forward with prices established in futures (must be higher than present prices). However, no more than 50 percent of production is estimated to be hedged or protected in 2015. The other half must be sold at whatever the market (West Texas crude) price will be. An oil company can hedge 2016 production at $79.00 per barrel compared to the current hedge protection of $95.

Decline ratios (rate of recovery after initial production) are high. Massive drilling of new wells for replacement is the economic challenge. At least half of the new shale or light sweet crude oil production from the Southwest to North Dakota through the Rocky Mountain energy corridor is at risk.

This effectively limits the 10-year-old shale oil technology play and consequent “energy revolution.”

The shale oil or light sweet unconventional oil boom is the target of Saudi Arabian oil strategy which is market share. This rejects production cuts in response to weak demand and prices. Defense of market share coupled with falling world oil demand accounts for a global price fall of 25 percent since July.

The timing of the Saudi action has hit the Southwest U.S. unconventional oil producers when they are already vulnerable to a massive infrastructure bottleneck. Producers have confronted a discount price of as much as $15 per barrel because there is not sufficient pipeline take-away capacity from the Permian and San Juan basins to refineries on the Gulf of Mexico coast or anywhere. This is the result of unanticipated high oil production without investment in transport to get it to markets or process it here in New Mexico. Stand-by rail transport is costly and trucking is competitive with rail. New pipeline and refinery capacity is required in New Mexico and Texas.

Strategic market share is the Saudi Arabian counter-attack upon the American shale-oil and gas-supply revolution which threatens Saudi exports. Saudi ARAMCO is reacting to the rise of American oil production as a threat because of the demand to lift the 1975 prohibitions against American crude oil exports.

The argument for America to become a world crude oil exporter not only displaces Saudi crude exports to the U.S. market but also promotes geopolitical leverage against OPEC and Russia. With the lowest world cost of producing oil, Saudi Arabia is acting in its national interest against American competition or influence against its national interest.

While the Saudi market share strategy threatens unconventional or shale oil production of the United States, Washington, D.C., has been given, indirectly, another sanction against the Russian oil and gas industry. Lower crude oil prices have cut Russian export revenue by $300 million per day since the onset of the Ukraine hostilities which parallel the

Saudi–led oil price decline.

Saudi Arabia is credited in 1985, in part, for the disintegration of the Soviet Union when it adopted an aggressive market share high-production, low-price strategy, which reduced prices from $28 to $8 per barrel. Soviet Union dependence on oil export revenue was exposed and its credit line collapse contributed to the end of the cold war. The Reagan administration was neither remote nor indifferent toward Saudi oil production oversupply.

Price crash could end New Mexico’s oil boom by By Kevin Robinson-Avila / Journal Staff Writer

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Copyright © 2014 Albuquerque Journal

The huge drop in crude oil prices since September is a double-edged sword for New Mexico that provides welcome relief at the pumps for consumers but puts the state’s seven-year production boom in jeopardy.

And any slowdown in New Mexico output will affect everybody, since nearly one-third of state revenue comes from the state’s oil and gas production.

For now, industry experts aren’t projecting a new bust cycle in the Permian Basin in southeastern New Mexico, but rather a marked reduction in growth. But if prices remain depressed, or decline further, it could begin to reverse one of the longest-running booms in the New Mexico Oil Patch since the 1970s.

“We’ve crossed the break-even point on prices for most New Mexico producers,” said Daniel Fine, associate director at the New Mexico Institute for Mining and Technology’s Center for Energy Policy. “Much of New Mexico’s small-cap and independent producers are at risk.”

Even if current production levels remain steady, dropping oil prices and slower growth will have a significant impact on New Mexico’s finances. In August, state officials projected $285 million in “new” money for the fiscal year that begins next July, mostly from oil and gas revenue.

“The state budget will take a big hit, because those projections were based on oil at $95 per barrel,” Fine said.

There is, of course, a thick silver lining for consumers. Average prices for unleaded gasoline fell on Thursday to $2.92 per gallon nationally and to $2.77 in New Mexico, according to AAA. If those prices hold, it would save U.S. consumers about $61 billion at the pumps next year.

map templateTipping point

Fine, who was recently appointed project leader for state energy policy, said the tipping point between profit and loss for newly drilled wells is $70 per barrel. Benchmark West Texas Intermediate is trading at about $77 per barrel, down from about $100 this summer.

But New Mexico producers receive up to $12 per barrel less for the Midland Sweet Sour that comes from the Oil Patch, largely because of higher costs from bottlenecks in transporting the crude to refineries.

“For small, undercapitalized – or low-cap – oil and gas producers in southeastern New Mexico, the price has crossed the tipping point,” Fine said.

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