Saudi oil minister: Production cuts are not going to happen

HOUSTON — Saudi Arabia’s oil minister Ali Al-Naimi says the world’s biggest oil-producing nations won’t cut their output to support prices, and that it’s more efficient to let the market price out high-cost, inefficient oil producers.

“The producers of these high-cost barrels must find a way to lower their costs, borrow cash or liquidate,” Al-Naimi told a conference hall filled with U.S. energy executives during the second day of IHS Energy CERAWeek.

“It sounds hard, and unfortunately it is, but it is a more efficient way to rebalance markets,” he said. “Cutting low-cost production to subsidize higher-cost supplies only delays an inevitable reckoning.”

Al-Naimi’s appearance at the conference came amid market speculation that an oil-production freeze recently planned by Saudi Arabia, Russia and other major producers could eventually lead to an agreement to cut output and raise prices. While the oil minister said the planned cap on production is the first step in a process, but downplayed the possibility of a production cut.

“If we can get all the major producers not to add additional barrels, then this high inventory that we have now will probably decline in due time,” he said. “It’s going to take time. It’s not like cutting production. That is not going to happen.”

In part, that’s because many countries will not deliver production cuts even if they promise to do so, he added.

“There is no sense in wasting our time seeking production cuts; they will not happen,” Al-Naimi said. “What will happen is we will all as major producers find it easy to freeze production, let demand rise and let some inefficent supplies decline, and eventually the market will balance.”

For the U.S. oil industry, Al-Naimi’s comments likely mean there will be no quick relief for shale drillers who break even around when crude prices are $50 a barrel. It implies they will have to give up production before the oil market can recover.

The International Energy Agency said Monday U.S. crude production will decline by 800,000 barrels a day over the next two years, and that will be the biggest factor allowing the oil market to correct the global oil oversupply in early 2017.

“Inefficient, uneconomic producers will have to get out,” he said. “This is tough to say, but it’s a fact.”

Al-Naimi said sometime in March oil exporters will have another meeting regarding the production cap, “and probably (will) gather more agreements on freezing.”

“We are not banking on cuts … because there is less trust than normal,” he said.

The oil minister also emphasized Saudi Arabia has not declared war on shale producers, despite speculation in the press. “Our purpose is to satisfy customer demand,” he said.

Climate Change

But Al-Naimi said he believes the looming danger of climate change is “a much greater existential threat” to the oil industry than cyclical oil-price movement.

Al-Naimi said he attended the international climate change conference in Paris late last year, and that he considered it a success. And while Saudi Arabia is investing in renewable resources but he said it’s impractical to expect developing nation that rely on oil revenue to keep fossil fuels “in the ground.”

“It is simply not fair for advanced nations to dictate what developing nationscan or cannot do to meet their energy needs,” he said. Fossil fuels, he said, will be a big part of the world’s energy mix “whether we like it or not.”

“There are many things being done to tackle emissions,” he said. “That is what we need to fight.”

Al-Naimi reiterated his view that solar power will likely become a major source of energy in the future.

“Oil has a future, but solar is the answer,” he said.

Saudi Shale

When asked if he was surprised by the advent of shale oil and gas resources, Al-Naimi said he wasn’t in part because Saudi Arabia has been exploring its own shale reserves.

“We are finding shale oil, we are finding shale gas,” Al-Naimi said. “But we have much more economic sources of oil and gas to produce first. But we are doing our homework for the future.”