BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Saudi Arabia Preparing To Fuel Its $100 Billion Oil War With Debt

This article is more than 8 years old.

Saudi Arabia has probably spent around $100 billion of its foreign reserves by now to prosecute its war against American shale and other low-cost oil producers. The oil kingdom’s decision one year ago not to cut production to support oil prices has driven the price of both Brent crude and West Texas Intermediate down below $50 a barrel, but Saudi Arabia will have to spend a lot more to win the battle.

Now, there are signs that Saudi Arabia is preparing to double down on its strategy with debt. The Financial Times reports that Saudi Arabia is getting ready to borrow funds in the international bond market to further finance its big effort to protect its market share in the oil world and make life impossible for U.S. shale. Saudi Arabia needs the money to keep its expensive social contract going in the face of rising budget deficits that are the result of its fast diminishing oil revenues. The oil kingdom is under further financial stress because of its costly military intervention in Yemen.

In a way, Saudi Arabia is taking a page out of the playbook of the U.S. shale producers, which have become the most powerful force in the global oil market—the swing producer—financing their huge expansion with cheap debt. Russia’s Igor Sechin, president of oil giant Rosneft, recently said that U.S. shale oil has steam rolled into control of the world oil market backed by $150 billion of debt.

So far Saudi Arabia only has some small victories to show for its big oil war against U.S. shale. Rigs in operation in the U.S. have fallen to 771 from peak levels of 1,925, according to data from Baker Hughes. There have been maybe 20 corporate oil bankruptcies, but most of them have been tiny. The biggest bankruptcy involved oil driller Samson Resources, which was the subject of a huge $7.2 billion leveraged buyout led by KKR in 2011. Shares of some big publicly-traded shale oil companies like Continental Resources are down 35% in the last year, but others like Pioneer Natural Resources have only seen a 15% drop in the 12 months since Saudi Arabia announced its new policy.

U.S. oil production has fallen by about 500,000 barrels a day from its peak, but America is still producing an enormous 9.1 million barrels a day. To put that in perspective, the U.S. was producing 6.8 million barrels a day three years ago.

The U.S. shale oil machine has proven to be pretty resilient. U.S. shale oil producers have cut costs and learned to be more efficient. Companies like Anadarko Petroleum have reduced drilling times and costs—and created a so-called fracklog by not fully completing wells and essentially storing oil in the ground until prices rebound. The break-even point for U.S. shale oil seems to have come down substantially.

On the surface, it seems like it’s going to be lower for longer when it comes to oil. Saudi Arabia is pumping more oil per day than ever and is taking its battle to non-OPEC producers like Russia, exporting ever lower-priced product to refineries in countries like Poland. Russia’s economy has been hit but it’s still pumping 10.78 million barrels per day, more oil than at any time since the days of the Soviet Union. And Iran is set to dump even more oil on international markets in the coming year.

Saudi oil minister Ali al-Naimi and new King Salman are indicating they are not backing down. The Financial Times reports Saudi Arabia could increase debt levels as high as 50% of gross domestic product within five years, up from extremely low levels today. The stakes are always higher when debt is involved. For U.S. shale, the corporate debt markets have remained robust and U.S. corporate bankruptcy law means that even those companies that fail might only be scooped up by distressed investors waiting on the sidelines with boatloads of cash and ready to turn things on again if oil prices rise. Saudi Arabia will have to prove that it can be equally nimble carrying a large debt load on its back.