Saudi Increasing Eating Their Own Oil

Jim Brown
 
Printer Friendly Version

The IEA said this week that the increase in oil consumption by Saudi Arabia would account for a whopping 11.7% of global demand growth. That puts them in second place behind China with a projected 26% of the total new demand.

The IEA said Saudi is trying to expand its industrial base in order to create high value jobs. Saudi is also ramping up their refining operations to become a petrochemical giant. Selling refined chemicals produces a lot more profit than simply selling bulk oil. Saudi is not saddled with a lot of EPA restrictions and it makes sense to beak their crude down into the component chemicals rather than relay on global refiners that could be half a world away and at the mercy of funding, politics and environmental regulations and the ability to buy oil from anybody.

I have long agreed with the Saudi plan to build several monster refineries for their various grades of home grown crude and not have to discount the heavy, sour crude on the world markets. This puts them in charge of their own fate. Gasoline and diesel is a lot easier to sell globally than sour crude.

Saudi is also increasing its use of its own crude oil for electrical generation and desalination. Recent Saudi statements show that the burning of crude is going to increase significantly with their electrical demand expected to rise by 45% over the next decade.

Saudi has a lot of crude but not as much natural gas as you would think. They recently announced new exploration efforts to find additional gas supplies to offset future electrical generation requirements. That will take years to find, develop and create infrastructure in order to use the gas. The crude infrastructure is already in place.

In past years Saudi had been forced to import large volumes of heavy fuel oil to burn in power plants. This produced more carbon emissions than burning their own light crude but that allowed them to sell the light crude at a higher price on the market.

The IEA said 75% of global demand growth would come from only six countries. Those are China, Saudi Arabia, Russia, Brazil, Iran and India. Note that four of those are also four of the largest crude producers. A perfect example that having plenty of oil encourages additional usage.

Venezuela can't consume more of its own oil because it can't produce its own oil. Contract workers on 12 drilling rigs owned by foreign companies stopped work this week over pay issues. The rigs are exploration rigs and the work stoppage did not immediately impact production but there is the potential for this strike to expand to the rest of the oil community.

The rigs are owned by China National Petroleum (CNPC), Petrex (owned by Italy ENI), Schlumberger (SLB) and Precision Drilling. The rigs are under contract with PDVSA and PDVSA owes billions in rents, leases, wages, service contracts, etc. Overall there are 140 rigs active in Venezuela. 50 are owned by PDVSA and 90 belong to contractors. Many U.S. contractors pulled out or halted drilling due to lack of payments last year. Those still active are forced to use PDVSA contractors and in many cases they are required by Venezuela to pay the contractors even though PDVSA is not paying the contractors for their work. They can't leave without losing their rigs to PDVSA and they have to pay the workers without getting paid themselves. Heck of a way to run an oil field and you can imagine how little work actually gets done. The days left in Chavez reign are ticking quickly away.

China reported GDP growth of 11.7% in Q1 and that initially boosted hopes for increased oil demand but those hopes were quickly replaced with fears that China was going to have to tighten the economic screws to prevent overheating. China is pretty quick on the economic changes so there could be additional controls announced any day.

There is never a shortage of points over which to worry in the energy sector.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

Archives:200920102011201220132014201520162017