CERA panel on Middle East touches on challenges for Saudi Arabia and Iran

Growing domestic energy demand could put Saudi Arabia in a bind by 2030, caused largely by oil subsidies, an expert told an audience during IHS CERA Week in Houston on Tuesday.

“A lot of this is being driven in the region by the sharp growth in domestic consumption of oil,” Brad Bourland, chief economist for the Jadwa Investment Company, of Saudi Arabia, said during a panel discussion on the Middle East.

While Saudi Arabia produces about 10 million barrels of oil per day, it consumes about 2 million barrels a day domestically, with demand increasing, Bourland said.

The problem is that the country heavily subsidizes the oil, at an effective cost of about $10 per barrel domestically, he said. Much of those subsidies come from what amount to energy giveaways to the nation’s electric company and airline, he said.

“They’re paying $100 per barrel in opportunity cost by selling it domestically rather than internationally,” Bourland said, adding: “That’s $200 million per day of opportunity cost that that Saudi Arabia is paying by largely giving away oil domestically rather than sending it out into the global markets.”

While Saudi Arabia is in a strong fiscal position, “that starts to erode” if current trends continue, with the country eventually running in budget deficits, he said.

“By 2030, Saudi Arabia would require a break-even price for oil of about $320 per barrel to balance its budget,” Bourland said. “Much of the Saudi investment in energy across the board is trying to grapple with these trends that they recognize fully that they need to change to change the outlook of their energy future.”

In an effort to meet its growing domestic energy demand, the country is planning to invest in nuclear power, he said.

“Saudi Arabia has plans to build 16 nuclear power plants between now and 2050, that’s at a cost of $7 billion each,” he said.

The goal is to displace the domestic use of crude oil so that it can instead be exported, Bourland said.

The panel also touched on oil sanctions against Iran, a potential split of Libya and the effects of the Syrian uprising.

Iran has recently expressed an interest in resuming discussions over its nuclear program, largely because of domestic pressures, said Bijan Khajehpour, managing partner for Atieh International GmbH.

Parliamentary elections drew a turnout of around 50 percent, far less than the more than 70 percent projected by Iran’s supreme leader, Ayatollah Ali Khamenei, who has not commented to celebrate the results, as is his custom, Khajehpour said.

“The regime realizes that it is losing legitmacy,” he said.

These changes could mean progress toward removal of European sanctions on oil imports that would otherwise take effect July 1, he said.

If sanctions go into effect, however, tensions could rise between Saudi Arabia and Iran, Khajehpour said. Saudi Arabia has said it would be able to replace oil supplies lost because of sanctions, he said. That could generate further divisions between the two Persian Gulf nations.

“There is already a very intense competition between the two,” Khajehpour said. “One understands itself as the main Shiite (Mulsim) country in the region the other one as the main Sunni (Muslim) country in the region and you see this kind of fault line in many of the regional tensions.”

On Iraq, there were mixed views.

Mark Finley, general manager of global energy markets for BP America, said that Iraq has the potential to produce “in excess of 10 million barrels per day, and potentially challenge Russian and Saudi Arabia for the position of the biggest producer in the world.”

The minister of natural resources for Iraq’s Kurdistan Regional Government, however, disagreed with that assessment.

“It’s unworkable, in my view,” said the minister, Ashti Hawrami. He said the Kurdistan region will be able to produce 2 million barrels of oil per day by 2019 and that he thought 5 million barrels per day was a realistic output for Iraq.

Security, however, remains a major concern, Finley said.