Saudi Arabia sits on some of the most significant oil reserves in the world. Despite being the world’s largest exporter of crude oil for decades, flourishing energy production in the U.S. in recent years, such as the 2016 discovery of the most prominent oil/gas field in Texas, has resulted in continuously falling prices and has driven the Saudi Arabia and the other Gulf States to reevaluate their heavy dependence on a singular commodity. In the outline below, we list multiple reasons that illustrate how the Gulf States could attempt to turn this ‘over reliance threat’ into a strategic and potentially lucrative opportunity as many GCC investors, now, clamor to invest in the oil/gas fields in North America.
Profit Potential: Since the U.S. holds extremely rich recoverable reserves of hydrocarbons, many investors firmly believe they can generate high profits from it. A report from the United States Geological Survey (USGS) states that approximately 20 billion barrels of oil reserves and 1.6 billion barrels of liquefied natural gas reserves were detected last year in Texas. According to the latest crude oil prices, the market value of the shale layer in Texas has risen to $900 billion. If those investors can seize the opportunity and make good use of the resources in Texas, they can generate vast sums of money – akin to the famous 1849 California gold rush.
Abundance in Reserves: The largest hydrocarbon reserves in the U.S. reside in the Permian Basin which spans between 400 and 480 km and is located in Western Texas and New Mexico. The Permian Basin has already produced almost 30 billion barrels of oil and 75 trillion cubic feet of gas. Additionally, the Permian Basin is currently producing over two million barrels of oil a day. More than 80% of reserves in the basin are in the form of light tight oil. As opposed to the Eagle Ford and Bakken, the Permian Basin is the only basin which has steadily increased production through the past two years despite inconsistent oil prices (Drilling Info and Labyrinth Consulting Services).
Capital Availability: Since 2016, the international oil price has doubled, and Brent crude oil prices are now approaching $70/barrel. As a result, Gulf States have experienced increasing profits over the past two years, and, with these significant cash reserves, GCC investors have expanded their investment plans to include the U.S. to develop a controlling share of the hydrocarbon industry further internationally.
Shale Technology: Since the preponderance of shale oil is left in the grounds, management surrounding fracking continues to be challenged for alternative solutions. IAA’s strategic alignments with formidable shale experts, and companies with disruptive technological solutions in enhanced oil recovery, mitigates many of these challenges.
Benefits of Alternative Fuel for Power Generation: In addition to increased capital reserves, the desire of Gulf States, like Saudi Arabia, to increase the proportion of natural gas used in power generation relative to the amount of oil used also suggests an investment in the U.S. By doing so, they can extract more oil for export, resulting in higher export revenues. Take Kuwait for example; the consumption of oil for generating power is about 219 million barrels per year. If they use natural gas instead, they can save approximate $55.80 per barrel. On top of that, they can then export the oil to receive an extra $58.47 per barrel, meaning they can increase income by approximately $25 billion per year!
Strategic Importance: Why don’t Gulf countries use their own natural gas? Because the sulfur content in GCC natural gas is particularly high, and the cost to process it into pipeline quality dry natural gas makes using it for power generation economically unsustainable. Therefore, GCC investors need to understand the shale business dynamics, and an investment in the U.S. would provide an opportunity for getting a closer look at how America approaches both the fossil fuel business and technology.
Sociopolitical Significance: From a political perspective, investment in American shale oil and natural gas fits firmly into the development plans of the GCC. Most of the Gulf States are striving for economical structural reform. And the most well-known example of this is Saudi Arabia’s Vision 2030 Plan and IKTVA. This major reform aims to minimize the country’s dependence on the oil industry to under 50% before 2030. Decentralized energy investment is the best way to achieve this goal, and natural gas is one of the best alternative energy sources available. Moreover, a prosperous economy will for sure ameliorate cities and societies.
Growth through Diversification: The oil companies that want to be listed in the international market also contribute to the investment in the hydrocarbons in the U.S. For instance, Saudi Aramco is preparing for its IPO in the near future, which is poised to be one of the most significant in economic history. By investing in American gas, this would allow for diversification in the holdings of Saudi Aramco, and as a result, more attractive towards investors looking to back Aramco during their IPO.
Lower Transportation costs: The transportation costs of developing oil/gas infrastructure in the U.S. would be comparatively minimal. For both natural gas and crude oil, the U.S. is by far and away the largest consumer. For natural gas, in particular, the U.S. consumes twice as much as the next ‘country’, the entire European Union! Shipping costs are a significant part of the price of oil, and if produced in the U.S., then the profit would be significantly higher due to competitive advantage.
Environmental Friendly: The investment into natural gas fields in the U.S. would be regarded as an environmentally friendly move. Natural gas is much cleaner than crude oil as it produces approximately 30% less carbon dioxide than crude oil; which means less heat-trapping gases emitted, and it is safer to use in larger quantities. Investment in natural gas resources would be useful international PR, helping reach goals previously outlined (regional hegemony, Saudi Aramco IPO, etc.). Additionally, the diversification into an environmental fuel source may become increasingly useful in the upcoming years and become a vital asset in the Gulf economies.
There are many upside cases available in the U.S. and the energy industry; the reasons stated above capture much on why investors from the Gulf States are clamoring to seize the potential wealth of opportunities within the U.S. and its ever-growing energy landscape. A report by A T Kearney on Shale Gas, advises GCC countries to rethink their international strategies by securing market access and building a balanced portfolio. As the shale renaissance in Texas surges ahead and the U.S. proclaimed victory as the world leading producer, strategic partnerships between Gulf States cognoscenti and their American counterparts are emerging as the winning formula.
Opportunity is staggering to learn the shale business and ultimately to transfer the technology and skills required. The process of overseas investment, however, is rife with risks and bottlenecks and needs deep-water navigational assistance to mitigate cost and boost capacity. The barriers to entry are incredibly challenging. These include cultural dissonance, fear attached to owning, and the reluctance of sharing proprietary intelligence. It is only through long-term trusted relationships with American professionals, an extensive network of operators, seismic specialists, and energy sector attorneys that one can expect to learn the U.S. shale gas industry.
Hagerty Le May is the Founder and Chairperson of Internatioal Alliance Associates LLC. IAA’s 28 year forte with GCC-US business transactions facilitates the process of accessing international investments and achieving ‘fast track’ results. IAA provides local intelligence, arranges opportunities to obtain lucrative government incentives and subsidies, structures joint ventures, drives market entry navigation, facilitates capital access and investor/partner vetting.
Mustafa Al Mutawa was educated at Harvard University, where he studied sustainability and Psychology. With the help of the Harvard faculty, he has developed and contributed research articles on reassessing the Innovation Ecosystem of the Eastern Province, in Saudi Arabia. In addition, he has taken courses in strategic innovation leadership. Moreover, Mustafa is significantly involved in his family’s holding company in the Eastern Province, Abdulla H. Al Mutawa Sons, Co.