American Oil and Gas Reporter - December 2016 - 91

ConventionCoverage: Oklahoma Independent Petroleum Association

More Than Crude Important To Saudis
RIDGEDALE, MO.-Focusing solely
on crude oil fails to consider important
pieces of the puzzle that can help explain
Saudi Arabia's production decisions, Anas
Alhajji indicated at the Oklahoma Independent Petroleum Association's 2016
fall conference.
Refined products, petrochemicals, and
natural gas liquids constitute major factors
in the kingdom's calculus, indicated Alhajji, former chief economist of NGP
Energy Capital Management. Other subjects he discussed included U.S. drilled
uncompleted wells, how the nature of
U.S. refining capacity meant the United
States must continue to import Middle
Eastern crude, and an underappreciated
consideration about Iranian and Iraqi production statistics.
OIPA's convention also included remarks from Stephen Moore, an economic
adviser for then-Republican presidential
candidate Donald Trump, who discoursed
on a number of economic subjects; and
from Americans for Prosperity President
Tim Phillips, who offered a breakdown
of U.S. Senate races.
Investments At Risk
Alhajji pointed out how the fourfold

Production from Iran and Iraq are far less
likely to skew market balance than is
commonly believed, suggests Anas Alhajji,
former chief economist of NGP Energy
Capital Management. During his remarks
on Oct. 24, the second day of OIPA's fall
conference, Alhajji also offered perspective
on why Saudi Arabia's production decisions considered a number of economic
factors beyond crude oil.

jump in oil prices during the 1970s left
the Saudis suddenly flush with cash. After
consulting with the World Bank and International Monetary Fund, the kingdom
invested much of that newfound wealth
into downstream infrastructure. "With all
that oil, gas, ethane and propane, why
not focus on energy intensive industries
and export the products?" he posed. "They
invested billions of dollars in petrochemicals and other energy intensive industries."
During the course of 40 years, Saudi
Arabia became the world's largest producer
and exporter of petrochemicals, he observed, enjoying the competitive advantage
of inexpensive ethane, while costlier
naphtha was the dominant feedstock in
the United States and Europe. "The Saudis
made a strategic decision to pour hundreds
of billions of dollars into those projects,"
he detailed. "Everything was fine until
the shale revolution brought in a massive
amount of cheap natural gas and ethane."
According to Alhajji, petrochemical
companies with plans to build or expand
in Saudi Arabia suddenly had second
thoughts. "They realized they could make
more secure investments in the United
States, and since the (ethane) was so
cheap, they decided to invest in the United
States," he described. "The shale revolution
hit the Saudis' strategic decision about
petrochemicals."
The Arab country took another hit
from refined products, Alhajji continued.
He called to mind the discount at which
a barrel of West Texas Intermediate sold
to North Sea Brent in recent years, which
grew to around $20 at times. "U.S. refiners
feasted and their stocks went through the
roof," he recounted. "They were getting
cheap U.S. crude oil, which could not be
exported at the time. They refined that
crude and sold the products at the international price. Exports of U.S. products
went through the roof-competing with
the Saudis. The shale revolution hit another
strategic objective (of Saudi Arabia)."
The shale revolution landed a third
blow by expanding U.S. NGL production
so much that the country's exports soared
16-fold while global demand was growing
at nowhere near that pace. "NGLs are
not subject to OPEC quotas, so OPEC
members-especially Saudi Arabia-could
make money by producing NGLs and
exporting them to Asia," Alhajji noted.

"Again, U.S. producers took market share
from Saudi Arabia.
"The Saudis made three major strategic
decisions since the 1970s and spent 40
years of the wealth they generated building
those industries, only to be hit really
hard by the shale revolution," he added.
"That is a key to understanding what the
Saudis are doing. If it is about oil alone,
their behavior probably does not make
sense, but the big picture makes it easier
to understand. It is not only about crude
oil; it is about 40-year investments that
have been hit by the shale revolution."
Embedded Oil Exports
According to Alhajji, U.S. production
has dropped 1.5 million barrels a day
since 2014, but that figure actually underestimates the bite. Contrasting 2016
output with forecasts from 2014 puts the
figure closer to 2.1 MMbbl/d. "The United
States has paid its share of a production
cut," he suggested.
He downplayed concerns that drilled
but uncompleted wells in U.S. shale plays,
of which he estimated there were 4,000,

The U.S. economy has expanded 15 percent since the end of the Great Recession, but would have grown 29 percent
had it met the country's average postrecession rates, explains Stephen Moore,
senior economic contributor for FreedomWorks and former Wall Street Journal
columnist. According to Moore, had the
economy recovered at the rate it did
during Ronald Reagan's presidency, the
United States would have enjoyed $3
trillion more gross domestic product.

DECEMBER 2016 91

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