Energy minister says oil price slump will drive out high-cost production

The price slide is unlikely to end soon and will drive out high-cost production such as shale oil, UAE Energy Minister Suhail Al Mazrouei said.

UAE Energy Minister Suhail Al Mazrouei talks during the 6th Gulf Intelligence UAE Energy Forum in Abu Dhabi on Tuesday, January 13, 2015. Kamran Jebreili / AP Photo

The UAE Energy Minister Suhail Al Mazrouei said yesterday shale oil producers could not sustain output as crude dipped below $45.

Oil futures fell again in London and New York despite record Chinese oil imports, as the supply glut and bearish trader sentiment sent prices near six-year lows.

Brent slid 48 per cent last year to end at about $57 a barrel, the steepest decline since the 2008 financial crisis, because of an oil supply glut spurred by the shale oil boom in the United States, weaker demand in Asia and Europe and a strong dollar. Brent this year has fallen 22 per cent and it is down 60 per cent since last year’s peak of $115 a barrel reached in June.

Brent was trading at about $46.12 yesterday afternoon, while West Texas Intermediate fell to $44.75.

The price slide is unlikely to end soon and will drive out high-cost production such as shale oil, Mr Al Mazrouei said yesterday at a forum organised by Dubai-based consultancy Gulf Intelligence.

"It's unlikely that we'll see a sudden rise [in oil prices], it will take some time. Is it going to be a year or a couple? I think that will depend on what we see in the next two quarters," said the minister. "The current prices are not sustainable – not for us, but for the other producers.

“Everyone needs to take measures, but those who are producing the most expensive oil – the rationale and the rules of the market say that they should be the first to pull or reduce their production. If the price is right for them to produce, then fine, let them produce. If the price is not right, then they will reduce.”

He said shale oil production cannot be sustained at the current prices.

The US, the world’s No 1 oil consumer, is pumping oil at a near three-decade high exceeding 9 million barrels of oil per day primarily thanks to an increase in shale production.

“Shale producers are hurting already, depending on where they produce. The producers with the best acreage can break even at $30 [a barrel] but many don’t do so at even $100. On average, they need $76 to continue producing and investing,” said Amrita Sen, the chief analyst at London-based consultancy Energy Aspects.

Goldman Sachs said this week that $40 a barrel oil for a six-month period is needed to slow down US oil production.

The oil rout continued yesterday even as China, the world’s second biggest oil consumer, reported record crude imports of 7 million bpd in December.

“In the near term, prices can continue falling as bearish sentiment is coinciding with a seasonal drop in crude demand,” said Ms Sen. “We don’t think current prices are fundamentally justified, and think they will rise towards $60.”

The oil price slide accelerated last year after Opec, the 12-member organisation that pumps more than a third of the world’s oil, decided to roll over production at 30 million bpd despite overproduction and weaker demand in major oil importers.

Mr Al Mazrouei defended Opec's decision, saying it was the right one to take.

Meanwhile, the UAE is carrying on with projects to boost oil production capacity to 3.5 million bpd by 2017 from about 3 million bpd now. The UAE currently produces about 2.7 million bpd.

“The contracts are already completed. We cannot as a responsible oil producer and reliable supplier in the market adjust our plans every time there’s volatility in the market,” the minister said. “For us, we aspire to keep our role as a reliable supplier and will continue investing. We’ve passed through more difficult times.”

The oil price slump is unlikely to affect the UAE's plans to award concessions to international oil companies to run its onshore oil fields operated by Abu Dhabi Company for Onshore Oil Operations (Adco). Abu Dhabi National Oil Company (Adnoc), Adco's parent company, took 100 per cent ownership of the onshore fields when the concessions expired in January last year after 75 years. Currently Adnoc and the Supreme Petroleum Council are evaluating bids from international companies. These companies are unlikely to lose interest in the concessions because of the low oil prices, the minister said.

“All of those bidding are on a long-term relationship that will last 30 years or more. They’re not going to change their mind every time we have a glut in the market,” the minister said. “I don’t think it’s going to impact it in any shape or form.”

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