What Unites OPEC, U.S. Shale, and Power Generation

Speaking at IHS CERAWeek on the first day of the energy event in Houston, Libya’s HE Abdalla Salem El-Badri, secretary general of OPEC, expressed strong views about the current state of the oil market.

Though there have been other down cycles, “This one is a supply problem,” he said repeatedly. “This cycle is very nasty.”

Though consumers may like low gasoline prices, El-Badri and other speakers at the event argued that low prices suppress investment, which leads to future high prices. El-Badri said he sees investment being cut by about 35% in all countries. In the meantime, there is clear concern about low oil prices among producers.

OPEC Secretary General HE Abdalla Salem El-Badri, speaking at the 2016 IHS CERAWeek conference in Houston. Courtesy: POWEROPEC Secretary General HE Abdalla Salem El-Badri, speaking at the 2016 IHS CERAWeek conference in Houston. Courtesy: POWER

Asked by Daniel Yergin, event chairman and vice chairman of IHS, whether OPEC was surprised by U.S. shale gas development, El-Badri asserted, “No, shale was not a surprise.” Yet, later, with respect to shale oil, he commented, “I don’t know how we’re going to live together.”

In the short term, OPEC’s answer to that question appears to be a production freeze, something that is being discussed but for which there is no specific date.

Looking to the longer term, El-Badri said he tells OPEC members that they need to “diversify their income.” Though he didn’t elaborate on how to do that, a speaker on the second day, who represents another OPEC member, did suggest one way, and it involves power generation.

Oil Cycles and Shale

HE Ali Al-Naimi, the minister of petroleum and mineral resources for the Kingdom of Saudi Arabia, an OPEC member, kicked off the second day of IHS CERAWeek on February 23.

HE Ali Al-Naimi, the minister of petroleum and mineral resources for the Kingdom of Saudi Arabia, spoke on February 23 at the 2016 IHS CERAWeek. Though the kingdom is known for its fossil fuel exports, he anticipates a day when it will export solar power. Courtesy: POWERHE Ali Al-Naimi, the minister of petroleum and mineral resources for the Kingdom of Saudi Arabia, spoke on February 23 at the 2016 IHS CERAWeek. Though the kingdom is known for its fossil fuel exports, he anticipates a day when it will export solar power. Courtesy: POWER

At 81, Al-Naimi has seen just how cyclical the oil industry is, from prices below $2 a barrel to over $141 a barrel. He’s even survived “peak oil,” he joked.

Al-Naimi argued that the market is the best way to balance supply and demand. He has no concerns about supply overcapacity in the long term, because there will be new demand, especially from developing countries.

To be clear, he said, the Saudis and OPEC have not declared war on shale—which has put pressure on global oil prices. “We’re responding to challenging market conditions” in a “highly competitive environment,” he said.

The key element of OPEC’s response is calling for a production “freeze.” When exactly that might happen was left an open question for a second day, but El-Badri had implied on day one that it could be in March.

When asked by Yergin about shale resources in Saudi Arabia, Al-Naimi said that the kingdom will produce its own shale oil “sometime” and is working on it. However, it has more easily accessed conventional sources, so it doesn’t make sense to exploit harder-to-access shale at this point.

As for natural gas, he noted that Saudi Arabia is producing more each year, but it is for domestic consumption only.

Fossil Fuels and Climate Change

Al-Naimi, who attended the Paris climate talks in December, said the issue of climate change “should unite us all.”

“For the record,” he said, “we recognize the threat posed by climate change,” which is why the kingdom is investing in carbon capture and storage as well as renewables. However, the notion—widely shared in reporting from the Paris conference—that fossil fuels should stay in the ground, is unrealistic. Fossil fuels, he said, “are needed, abundant, … and will continue to play a vital role.”

However, at the same time, he is a strong supporter of renewables, especially wind and solar. A mix of resources is the best way forward, in his view.

As for the continuing use of fossil fuels, he said he has “faith in the power of technology” to come up with ways to control emissions from fossil fuels. Saudi Arabia, he said, is currently injecting about 800,000 tons per day of CO2 and also converting the gas to products. (According to the Global CCS Institute, the Saudi Aramco project is tied to enhanced oil recovery and is designed to capture “around 0.8 million tonnes of CO2 per annum from the Hayiwah NGL [natural gas liquids] Recovery Plant.”)

Though Saudi Arabia is universally famous for exporting oil, Al-Naimi said, “I think solar is going to be the answer in the future.” He looks forward to a day when Saudi Arabia exports solar power rather than oil.

Gail Reitenbach, PhD, editor (@GailReit, @POWERmagazine)