Syed Rashid Husain The Iran nuclear deal, finally on the horizon, is adding to the somber mood in the sector. Oil markets came under fresh pressure after the deal, as it raised the prospect of additional Iranian crude exports. Traders had been watching closely the talks and a positive outcome was sure to impact the markets adversely for various reasons. Iran has reportedly a backlog of unsold oil ready to hit global markets and is thought to have about 30 million barrels held in a fleet of super tankers anchored off its coast, a Guardian report said. Markets thus reacted to the deal news, with prices losing additional floor. And not only the US just released job data also did not point to a vibrant scenario, the ongoing shale revolution in the US also continues to unfold - impacting the markets. This ongoing revolution has altered global energy landscape. Stocks are brimming. Demand outlook too remains weak. This is now forcing many to assert that the global crude markets would remain soft over the long term. Some are even talking of the current bearish outlook to persist for years, even decades. Just back from Houston after delivering a talk at an industry conference last Wednesday, one could see the anxiety within the fraternity, over the Saudi crude strategy. Questions continued to revolve around the Saudi strategy and its dynamics. The curiosity factor was palpably present. In the context of the shifting sands, Saudi Arabia's role in global energy markets is changing, a paper from Rice University's Baker Institute for Public Policy is now asserting. “A Refined Approach: Saudi Arabia Moves Beyond Crude” examines the growth of Saudi refining, the country's increased domestic demand for crude oil and the geopolitical effects of this development. The paper was published in Energy Policy by Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at the Baker Institute. “This is the type of change we expect to see as a state moves to a more advanced stage of development,” Krane says. “There are plenty of upsides from investing in refining, including reducing the kingdom's reliance on fuel imports and capturing margins now lost to the competition. Refining also allows the Saudis to export their heavy crude oil to a wider array of customers, beyond the select few importers who have invested in configurations that can handle heavy crudes.” However, there are also downsides, starting with an erosion of Saudi Arabia's traditional role as the global “swing supplier” of crude oil, the paper asserts. With more oil production diverted into refining, the kingdom will have reduced flexibility to “swing” oil production alongside fluctuations in global price and demand. It will be less able to influence prices and balance global oil markets, which has provided some protection against volatility. And perhaps it was in this perspective that, a study by the US National Petroleum Council, formed at the request of Energy Secretary Ernest Moniz, is now projecting that since the current shale boom cannot last long, the energy sector should begin looking for the next frontiers. The US should immediately begin a push to exploit its enormous trove of oil in the Arctic waters off Alaska, or risk a renewed reliance on imported oil in the future, the study added. In order for the US to keep domestic production high and imports low, companies should start probing the Arctic now, the study said, underlining it takes decades of preparation and drilling to bring oil to market. The Arctic is among the biggest such sources in the world and in the US. It holds about a quarter of the world's undiscovered conventional oil and gas deposits, geologists estimate. While the Russian Arctic has the biggest share of oil and gas together, the US and Russia are thought to have about the same amount of crude oil — 35 billion barrels. That's about 5 years' worth of US consumption and 15 years of US imports. “There will come a time when all the resources that are supplying the world's economies today are going to go in decline,” said Rex Tillerson, CEO of Exxon Mobil and chairman of the study's committee, in an interview with the Associated Press. “This is will be what's needed next. If we start today it'll take 20, 30, 40 years for those to come on.” The push to make the Arctic waters off of Alaska more accessible to drillers comes just as Royal Dutch Shell is poised to restart its troubled drilling program there. The company has little to show after spending years and more than $5 billion preparing for work, waiting for regulatory approval, and early-stage drilling. The council's study acknowledges a host of special challenges to drilling in the Arctic, including the sensitive environment, the need to respect the customs and traditions of indigenous peoples living there, harsh weather and sea ice. The council, which is made up of energy company executives, government officials, analysis firms and non-profit organizations, also pointed out that technology and techniques required to operate in the region are available now, and that the industry can safely operate there. Improved equipment and procedures to prevent a spill and clean up quickly, if one occur, are now available. The council also made a number of suggestions designed to make US Arctic development more feasible to companies such as Exxon, which is working in the Russian Arctic but has shied away from the US Arctic so far because of cost. Tillerson said because of regulations and other factors, it is more attractive to drill in other Arctic nations, despite the enormous potential in the US. “The US is not moving at a pace that others are moving at,” he said. “Today we find it very difficult to work in the US Arctic.” The study suggests holding regular sales of drilling rights, extending the amount of time drillers are allowed to work each year, and doing more scientific studies of the wildlife in the region to ensure it is disturbed as little as possible. There is no dearth of resources. Oil from the Arctic, Mexico, Canada, Iran, Iraq, Saudi Arabia - just to name a few - would continue to add to the global asset base in the years and decades to come. Oil will still be available - and in plenty - when the shale boon is finally over! With shale now rivaling OPEC almost as the new swing producer and the global energy kaleidoscope undergoing major structural changes, why shouldn't the role of the world's major and long-term market player too undergo some real transition?
