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Oil-Drop Pain Spreads to Saudi Aramco

Oil-Drop Pain Spreads to Saudi Aramco thumbnail

Saudi Arabia’s refusal late last year to rein in oil production helped trigger the price crash that has hurt oil-producing countries and publicly listed energy companies alike. And now even the kingdom’s own oil company is feeling the pain.

As a result, state-owned Saudi Aramco is looking for ways to cut costs everywhere, from pushing contractors for better deals on oil-well services to negotiating discounts on its phone and power bills, according to people familiar with the matter.

The company—the world’s largest oil producer—is also considering slashing its future spending on production and exploration by as much as 25%, much like private oil companies, industry sources said.

“Like everyone else, we’re using the downturn as an opportunity to sharpen our fiscal discipline,” Aramco CEO Khalid Al Falih said in public remarks during the World Economic Forum in Davos in January. “We’re cutting on a few things that we could cut, but we’re as committed as ever to our long-term strategy.”

The measures demonstrate some of the risks the Organization of the Petroleum Exporting Countries took when it decided in November to forsake its traditional role of cutting production to boost prices. The Saudi-backed decision has hurt big, publicly listed companies, such as Royal Dutch Shell PLC and Chevron Corp., but is now ricocheting and hitting national oil companies.

Not only is revenue to state treasuries falling, but OPEC nation oil companies—like their private counterparts—are making cuts that may make it difficult for them to capitalize when prices begin to rise.

The measures are a departure for Aramco, which had boosted its spending on pumping oil and launched its first efforts at deep-sea production when crude was regularly trading at more than $100 a barrel from 2011 to 2014. The price of Brent crude, the world benchmark, has nearly halved since June, trading around $60 a barrel in London on Thursday.

To be sure, the retrenchment is small scale for Aramco and Gulf oil producers—whose production costs are much lower than for most international rivals—and executives say it won’t threaten output levels in big fields in Saudi Arabia, Kuwait or the United Arab Emirates. The cuts don’t appear to be as deep as those after the mid-1980s price crash, when Aramco and others laid off thousands of workers and cut back production to historically low levels.

Government companies like Aramco and others in the Gulf hold monopolies on the production of their huge crude reserves and don’t have to produce public accountings of their business, so it is difficult to know precisely what they plan to spend and cut or whether they are losing money.

But oil prices have produced a new cost-consciousness across the Persian Gulf’s state-owned companies.

In December, Aramco was advised by the Saudi government to cut costs, one Saudi official said. Aramco, which usually bases its investment on oil supply and demand, is trying to execute some projects at lower costs, while deferring others until the picture of the oil market is clearer, the official said.

Aramco executives are considering slashing production and exploration spending to $30 billion a year from $40 billion while oil prices remain low, according to industry sources.

ENLARGE

Aramco has joined oil companies, big and small, in pushing aggressively for discounts from its contractors, seeking rebates from telecommunications providers and power suppliers, for example, according to executives.

In December, the Saudi oil company summoned oil-services companies including Baker Hughes Inc., Halliburton Co. and Schlumberger Ltd. to its offices in the northeastern city of Al Khobar to ask for discounts of up to 20% on certain services, for instance, well-testing procedures, according to people familiar with the matter. The companies do about $6 billion a year in business with Aramco combined, according to people familiar with the matter.

Baker Hughes offered a small discount, but Aramco has held out for 20%, according to people familiar with the matter. The two parties are still in talks to find a common ground, but no contracts have been canceled, they said.

Halliburton, Baker Hughes and Schlumberger declined to comment.

In an earnings conference call last month, Baker Hughes Chief Executive Martin Craighead said the company was in discussions with “bigger companies with pretty sophisticated procurement groups” to reduce prices. In an earnings conference call at Schlumberger, CEO Paal Kibsgaard said he expected a reduction in spending in the Middle East.

Also in a conference call, Halliburton Chairman Dave Lesar said he anticipated “headwinds” in the Middle East, though he expected his company to be more resilient than most, notably because of recent contracts in Saudi Arabia.

Aramco has pushed back by a year plans to build a $2 billion clean-fuels plant and put on hold deep-water oil and gas exploration and drilling activities in the Red Sea because their profitability is now in question, said people familiar with the matter.

Geologists have estimated that Saudi territory in the Red Sea could hold the equivalent of more than a third of the Kingdom’s known oil-and-gas reserves, but these reservoirs are also much more expensive to develop than onshore.

Deep-water projects world-wide typically need $53 a barrel to break even, according to Norwegian energy consultancy Rystad Energy.

Aramco isn’t the only big state oil company seeking to cut costs.

Suhail bin Mohammed al-Mazroui, the oil minister of the United Arab Emirates, said in January that his country, along with other producers, would squeeze oil contractors’ costs to adapt to lower oil prices.

“We will need the service companies and contractors to understand the cycle [of the oil market],” he said at an energy event in Dubai.

Qatar Petroleum said earlier this year it has shelved a petrochemicals project in the Gulf emirate with partner Shell.

In Oman, a Gulf country with moderate oil reserves and production that isn’t an OPEC member, state company Petroleum Development of Oman postponed in December the award of a $1 billion contract to supply and manage oil-production pumps for seven years, according to people familiar with the matter. The government informed bidders they will have to wait for a year to see how oil prices are evolving before committing to major projects, one Omani official said.

While Aramco is beginning to feel some pain, OPEC doesn’t appear likely to change its strategy of maintaining production before its next meeting in June. The cartel has put a premium on maintaining its customer base, and Saudi Arabia has made tactical price cuts.

This week, PIRA Energy Group, a New York research firm, said Saudi Arabian production was pumping more crude than usual, as much as 10 million barrels a day—close to Aramco’s estimated capacity.

WSJ



36 Comments on "Oil-Drop Pain Spreads to Saudi Aramco"

  1. baptised on Sat, 21st Feb 2015 1:48 pm 

    Cut your overpriced fee’s Haliburton by 20% or we’ll use the Chinese at 50% reduction. As the worm slowly turns.

  2. shortonoil on Sat, 21st Feb 2015 4:06 pm 

    Things are a lot worse than oil produces are admitting. The Etp Model indicates that in the present price environment that only about 35% of the world’s producers are making money over their full life cycle costs. Their desperation for cash ensures that production will not decline until many of them start to fail. The energy dynamics of the situation point to falling prices until at least 2020. By then much of the world’s petroleum production capacity will be gone forever!

    http://www.thehillsgroup.org/

  3. Plantagenet on Sat, 21st Feb 2015 4:55 pm 

    @short

    Your prediction of 5 more years of oil glut is really interesting. You’re right that 5 years of these low prices will wipe out many oil companies and service companies.

  4. Davy on Sat, 21st Feb 2015 5:44 pm 

    Short said – “The Etp Model indicates that in the present price environment that only about 35% of the world’s producers are making money over their full life cycle costs.”

    Short, I find it interesting how the ETP values you express translate and relate to the digital economy rehypothocation of physical represented by the digital. My point is in today’s digital economy the values expressed for the notional digital wealth are many times greater than the actual physical world the digital inhabits. All these billionaires today are in fact nothing more than millionaires. This phenomenon must somehow be linked to the exploding population, exploding debt, peak oil, and peak everything. It is almost as if BAU is an inflating balloon approaching its maximum volume.

  5. Makati1 on Sat, 21st Feb 2015 6:19 pm 

    Beep!Beep! As Wyle Coyote looks down…

  6. GregT on Sat, 21st Feb 2015 7:26 pm 

    Short,

    You predicted a five year long oil glut? Have you lost your mind? And all of this time I though that you were smarter than a twig.

  7. Northwest Resident on Sat, 21st Feb 2015 8:27 pm 

    As long as they keep fracking that low quality mix of fluids they call “oil” out of the ground, there’ll be a glut of it. And the “glutster” will be here daily on every article to proclaim that glut, to tout it as the result of superior technology outpacing robust demand, much to the annoyance of all intelligent and informed visitors to this forum.

  8. TemplarMyst on Sat, 21st Feb 2015 10:34 pm 

    NWR, Short and Various and Sundry Folk,

    I don’t normally have much comment on the oil side of the peak. Though I do like reading y’all. I guess I just figure the stuff is gonna run low at some point, so better find something else in the mean time.

    However, on this occasion, I have a question. I looked a little bit into the stuff that’s actually coming out of these fracked wells. The oil stuff, I mean (as opposed to the natgas).

    It does seem like a rather strange brew. So my question is, who actually buys this stuff? Can it be refined like the stuff that comes out of Ghawar? It looks nasty. How do distillers deal with it?

    And if it’s not all that great, how is producing it putting price pressure on OPEC and the others who have easier to handle stuff?

  9. Northwest Resident on Sat, 21st Feb 2015 11:03 pm 

    TemplarMyst — shortonoil posted a link a few days ago that gave a very detailed breakdown of just what is in the average barrel of fracked oil. I didn’t save that link, but I’m sure shortonoil or somebody can repost it for you if they see your comment.

    The more you look into and learn about fracked oil and the whole fracking process including the financing and promotion of it to the general public, the more you’ll discover that it has been a grand scam — a central component, the flagship actually, of the entire propaganda campaign designed to maintain the illusion of “all is well”.

    I don’t believe that fracking/shale oil production is putting price pressure on OPEC. That’s just what you’re supposed to believe.

    What is putting price pressure on not just OPEC but Russia, Iraq and almost all other oil producers is declining demand. Goldman Sachs came out with a statement not long ago in which they said based on their analysis that the global economy shrank last year. The economic growth touted by the Fed and all the feel good “all is well” employment and financial numbers are just pure hype. Demand is collapsing. The many trillions in accumulated debt ($200 trillion globally) has bought us the ILLUSION of “all is well” during these last 6 – 7 years, probably longer than that. Debt paid for the “shale revolution” — it didn’t pay for itself, never could, and never will.

  10. keith on Sat, 21st Feb 2015 11:43 pm 

    It’s called price discovery. Oil companies are discovering that economies can not afford their prices. What can they do? @0 dollar barrel of oil doesn’t pay for their expenses. It’s all volume now. It’s a death spiral.

  11. keith on Sat, 21st Feb 2015 11:44 pm 

    20 dollar

  12. TemplarMyst on Sun, 22nd Feb 2015 1:34 am 

    NWR – Thanks. I’ll see if Short sees this and reposts the link. I didn’t find it in a quick search, but this site has lots of stuff by Short on it.

  13. GregT on Sun, 22nd Feb 2015 2:05 am 

    High oil prices lead to the viability of using decades old technology to bring the dregs to market. But those high oil prices are not the prices that allow the continuation of economic growth. Growth has stagnated, which has lead in turn to reduced demand, which some people wrongly perceive to be a glut in supply.

    Our economies are fuelled by oil. Not any oil, but 20 to 40 dollar a barrel oil. The price at which our economies continue to grow, and the price that our debt based, ponzi schemed monetary systems were built upon. Not only that, but all barrels of oil are not created equal. It is the energy content of that oil that matters, and the products that are refined from that oil.

    We have passed peak ‘conventional’ oil, or the stuff that matters to our ‘conventional’ economic systems. We entered an entirely new era in ’08.

    We now live in the era of ever diminishing returns.

  14. shortonoil on Sun, 22nd Feb 2015 5:30 am 

    TemplarMyst — shortonoil posted a link a few days ago that gave a very detailed breakdown of just what is in the average barrel of fracked oil. I didn’t save that link, but I’m sure shortonoil or somebody can repost it for you if they see your comment.

    Is this the post that you are referring to:

    ***************************************

    following Westexas position, the 2005 peak of API 45 oil I think has not been surpassed , if it has , not by much .

    That is why we put up this graph:

    http://www.thehillsgroup.org/depletion2_011.htm

    To be used for the production of fuels a liquid hydrocarbon must have an API less than 50. It has to have an energy content (exergy) of at least 131,300 BTU/gal.

    http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/images/eneene/sources/petpet/images/refraf1-lrgr-eng.png

    37% (1.2 mb/d) of LTO produced in 2013 had an API that was greater than 50. That portion of the production can only be used as a feedstock, and that market has become saturated. This is evident by the storage situation along the Gulf Coast. Production of crude that can produce fuels has probably not increased, and may have declined, since 2005. The declining value of the liquid hydrocarbons that have been produced has generated a price crisis as seen in this graph:

    http://www.thehillsgroup.org/depletion2_022.htm

    This situation will not be alleviated until a considerable portion of higher cost production products have been taken off line. We estimate that to be about 4mb/d.

    In the mean time damage is being inflicted on the industry that will never be repaired. CapEx is being cut everywhere in the industry, and future development is likely to never fully recover. The Etp Model indicates that only about an additional 320 Gb will now ever be extracted. In 2012 petroleum contributed $6.22 trillion to the $16.16 trillion GDP of the US. That contribution will fall by more than half during the next decade.

    http://www.thehillsgroup.org/

  15. shortonoil on Sun, 22nd Feb 2015 6:30 am 

    Short,
    You predicted a five year long oil glut? Have you lost your mind? And all of this time I though that you were smarter than a twig.

    In 2015 it will require 54% of the energy content of a unit of oil to extract, process, and distributed it. Most people have a hard time believing that could be true, but we will be putting up a page at the site that will unequivocally demonstrate the reality of the situation. We would have had it up already, but the weather here in Virginia has ground about everything to a standstill lately.

    The now lower oil prices are forcing producers to keep production at a maximum to maintain cash flow at the highest level possible. Eventually, some of them will go out of business because they are selling oil for less than the cost of production. This will not alleviate much of the demand/ supply imbalance we are seeing because the producers themselves now compromise more than half of the demand. Because oil has already hit the maximum price the economy can afford to pay for it, there is an upward ceiling on price, and that is declining:

    http://www.thehillsgroup.org/depletion2_022.htm

    In 2015 that is $77/barrel. The oil age will end not because the consumer is priced out of the market, that has already happened. The oil age will end because the producers will not be able to produce the remaining oil at a return that will be high enough to justify their continuance. It will end with a wimpier, not a bang!

  16. Davy on Sun, 22nd Feb 2015 6:43 am 

    Short, I know Greg and he was being sarcastic. I believe he is sold on the POD & ETP of oil your group has published. I know his comment may not have appeared that way. Greg, if I spoke for you wrongly sorry. I just respect both of you highly and believe you both on the same page.

  17. shortonoil on Sun, 22nd Feb 2015 6:58 am 

    Short, I know Greg and he was being sarcastic.

    Did someone misplace the “sarc” tag? Anyway back to shoveling snow, still got one vehicle stuck in a snowbank, and I moved from Vermont to nice “warm” Virgina! The climate moved with me.

  18. Davy on Sun, 22nd Feb 2015 7:05 am 

    Short, we had an ice storm here and bitter cold so I feel for you. Stay warm!

  19. marmico on Sun, 22nd Feb 2015 8:51 am 

    we will be putting up a page at the site that will unequivocally demonstrate the reality of the situation

    So how many quads of energy are used by the U.S. refining sector?

  20. Northwest Resident on Sun, 22nd Feb 2015 9:26 am 

    “Short, I know Greg and he was being sarcastic.”

    Greg was aiming his well-deserved sarcasm directly at the glutster’s comment, which would be the third comment from the top on this article.

    As long as they keep fracking that low quality mix of fluids they call “oil” out of the ground, there’ll be a glut of it.

    They aren’t producing that low quality crap to make money or to power the economy. They’re doing it to keep the wheels of BAU turning for a little while longer, and they’re doing it by piling on more debt. Long after BAU has crashed and burned and whoever makes it through the bottleneck settles into their new lives post-collapse, that “glut” will still most likely be there, sitting in storage, because it just doesn’t have enough benefit to waste good energy to process it. And the glutster, if he makes it through the bottleneck, will spend the rest of his life saying “oil glut, oil glut” to whoever will listen, which will be nobody.

  21. shortonoil on Sun, 22nd Feb 2015 10:59 am 

    So how many quads of energy are used by the U.S. refining sector?

    Are you asking about direct energy inputs, indirect energy inputs (like the gas that the refining employee must put in his car to get to work), or both. There are several sources for direct inputs, but most of them don’t agree with each other very well. It also depends on what year you are looking at? Inputs change with API, and environmental temperatures.

    You’ll have to rephrase your question to make it a little more specific. In other words you’ll have to come up with a real question. Since you are probably getting paid by the word, this is your opportunity to cash in.

  22. GregT on Sun, 22nd Feb 2015 11:02 am 

    “Short, I know Greg and he was being sarcastic.”

    Yes, I was being sarcastic, and yes I am entirely sold on Short’s hills-group publications. It took me a couple of minutes to wrap my head around decreasing prices going forward, but yah, makes perfect sense.

    BTW, 62’F at my home in the Fraser Valley yesterday. I was working in the garden in shorts and a T-Shirt. I grow Bonsai Japanese maples. Some have leafed out already in February?

    This is normally the time period when we get some really cold weather here. The local ski hills have all shut down for the season. We can usually ski until May.

  23. marmico on Sun, 22nd Feb 2015 11:37 am 

    U.S. refineries consume 3.5 quads based on EIA surveys and Argonne linear programming (LP) models. They are 90% efficient which translates to an EROI of 10:1.

    In 2015, 100 units (Btus) at the well head are reduced by 10 units of extraction and 10 units of refining leaving 80 units available for midstream transportation and processing (M) and retail distribution (R).

    According to you M + R = 26 units. I call bullshit.

    If in 1945, 1 unit was consumed in extraction (100:1 EROI) and 15 units were consumed in refining (7:1 EROI), 84 units were available for M + R. Comparatively, 80 units in 2015 and 84 units in 1945 before M + R. M + R was higher in 1945.

    EROI extraction is no big deal.

  24. shortonoil on Sun, 22nd Feb 2015 1:42 pm 

    U.S. refineries consume 3.5 quads based on EIA surveys and Argonne linear programming (LP) models. They are 90% efficient which translates to an EROI of 10:1.

    3.5 quad is purchased energy costs only. Most energy used by refineries is still gas. Neither does your statement include things like the energy needed to build the refinery, energy used in maintenance, and thousands of other inputs to the process. 90% is pure industry propaganda.

    68 to 70% of the cost of refining a gallon of gasoline is the price of the crude. That is wholesale price at the refinery gate. Where did the other 20% go? That alone puts your EROI down to 7:1. Adding in other costs puts the EROI at the refinery gate at 2.9:1.

    To figure it out all you have to know is that a refinery runs at 850º F, and the specific heat of crude is 0.51 BTU/lb* ºR. The rest is pure physics. Simple as that, and you don’t have to listen to a pile of bull crap.

  25. marmico on Sun, 22nd Feb 2015 1:58 pm 

    Listen twig, we are talking intertemporal EROI Btus (energy input, energy output), not intertemporal 1945 dollars in, 2015 dollars out.

    You are an effing moron.

  26. Northwest Resident on Sun, 22nd Feb 2015 3:52 pm 

    It is crystal clear who the effing moron is here.

  27. shortonoil on Sun, 22nd Feb 2015 3:52 pm 

    Listen twig, we are talking intertemporal EROI Btus (energy input, energy output), not intertemporal 1945 dollars in, 2015 dollars out.
    You are an effing moron.

    “intertemporal” is not a word. Seeing how you like to make stuff up you might as well also make up words.

  28. marmico on Sun, 22nd Feb 2015 3:56 pm 

    You are an effing moron.

  29. Apneaman on Sun, 22nd Feb 2015 4:15 pm 

    Your like a little girly marm, scared shitless about the near future and your complete loss of status and the total physical vulnerability that brings. Your entire life is about to be rendered meaningless. Better call your mommey, marmy or better yet make a play date with your cuddle buddy nony. You can comfort each other while waiting for the tattooed thugs to come get ya.

  30. marmico on Sun, 22nd Feb 2015 4:23 pm 

    The quart shy is true to form. A little light on alphanumerics.

  31. GregT on Sun, 22nd Feb 2015 4:43 pm 

    Sounds like somebody has finally moved on to the violent opposition, or anger stage.

    C’mon Marmico work it out, we all know you can do it. The sooner you get to acceptance, the sooner you will be able to begin the healing process.

  32. Apneaman on Sun, 22nd Feb 2015 4:54 pm 

    alphanumerics. Another thing you won’t be able to hide behind any more. Maybe the wife will be able to keep you safe.

  33. Apneaman on Sun, 22nd Feb 2015 4:57 pm 

    A white boy with a business degree? Soon to be NTE. Dead weight.

  34. marmico on Sun, 22nd Feb 2015 4:59 pm 

    Hill is a goof. He ranks right up there with POD from Podunk.

    Who’s next in the tribe to make an appearance? Calling Davy-boy. Now that’s a tribe member who is conspicuously a quart shy of numerics; nothing but alpha word salad.

  35. Davy on Sun, 22nd Feb 2015 7:40 pm 

    Marm, I like what I am hearin. You are getting frustrated. That is what happens when things don’t add up Marm. Frustration takes over when the hopium drip is interrupted. I am here for you if you need support. We want you to join the tribe and I think you want to join. You are fascinated by doom but caught in the Bautopian fantasy. The more you are here with us Marm the closer you will get to freedom. Soon you will be able to face reality like a man and feel real. It is a feeling that will set you free Marm. I am watching you and you are close to conversion.

  36. Northwest Resident on Sun, 22nd Feb 2015 7:45 pm 

    marmico — Got to hand it to you. You’re the best at slinging insults and making shit up. Truly, a rare talent, that is plain for all to see.

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