Saudi Shrugs Off Shale Impact Outside North America

DUBAI - Production of oil from shale deposits outside North America will be too limited and too costly to significantly harm the interests of established oil exporters, the adviser to Saudi Arabia's oil minister said Wednesday, in the most comprehensive response yet from the OPEC heavyweight to an energy boom that is reshaping global markets.

However, Ibrahim al-Muhanna, a close adviser of Saudi Oil Minister Ali al-Naimi, acknowledged for the first time the psychological impact the U.S. shale boom is having on members of the Organization of the Petroleum Exporting Countries, most of whom have so far played down the significance of the phenomenon.

"There appears to be fear on the side of some oil producing countries, particularly OPEC and Arab countries, of the negative impact shale oil may have on the petroleum market with regard to the huge increase in supply which may lead to collapse of prices," he said in a speech in Kuwait, a draft of which was provided to The Wall Street Journal. "This fear is misplaced," he said.

"Increases in the production of shale oil during the remaining part of this decade will be restricted to the United States and Canada within the limits of 1.5 million barrels per day, which is a small quantity in a market where demand exceeds 90 million barrels per day," he said. "Production of shale oil in the remaining parts of the world is not expected before the start of the next decade at best."

The extra supply is not a competitive threat because it costs much more to produce than oil in most of OPEC's member countries, he said. "There are many difficulties that face the production activities of shale oil...most importantly, the high production cost which amounts to about $70 to $80 per barrel," he said.

Mr. Muhanna's comments come as many industry experts are questioning whether major OPEC oil producers in the Gulf can maintain their historic dominance of the oil market amid the sharp rise in production in North America.

U.S. crude production in November and December topped 7 million barrels a day for the first time in 20 years. At the same time, Saudi Arabia reduced its oil production to 9.025 million barrels in December, 5% less than in November. It was the kingdom's deepest cut in almost three years, reflecting weaker demand, chiefly from Asian nations.

The International Energy Agency, which represents key oil consumers, has predicted the U.S. will overtake Saudi Arabia as the world's No. 1 oil producer by 2020.

Saudi Arabia and other Gulf producers say they are sanguine about these changes, arguing that their exports to the U.S. remain buoyant and their sales to China and other Asian markets continue to grow.

Nevertheless, change is already afoot in the oil market. According to OPEC itself, oil supply from the U.S. is expected to increase by about 570,000 barrels a day this year, while demand for its own oil will likely fall by 400,000 barrels a day this year.

The hardest hit OPEC member has been Nigeria, which has seen its exports to the U.S. fall sharply in recent years.Benoit Faucon in London contributed to this article.

Copyright (c) 2012 Dow Jones & Company, Inc.


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