Column: Saudi Arabia and New

Mexico: oil price threat

By Dr. Daniel Fine
For the complete article use this link http://www.daily-times.com/farmingtonopinion/ci_26938726/column-saudi-arabia-and-new-mexico-oil-price

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
Saudiled oil price decline.