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Fri 22 May 2015 09:22 AM

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The fracking of US-Saudi relations

The often-misunderstood industry of fracking may ironically become Saudi Arabia’s last resort as it seeks to desperately draw out every last drop of oil in its reserves, the founder of Texan oil giant Breitling Energy Corporation, Chris Faulkner, claims

The fracking of US-Saudi relations

Chris Faulkner is lamenting public ignorance on fracking a few minutes into our conversation. “Ask the majority of people on the street what ‘fracking’ is and they’ll say they don’t really know, but that it’s something negative,” the founder, chief executive and president of Texan oil company Breitling Energy Corporation says. “It’s amazing how many years [the industry] has been doing it and people still don’t have a good grasp of what it is.”

Fracking, or ‘hydraulic fracturing’ as it is officially termed, involves drilling into shale rocks in the ground and then injecting water, sand and chemicals at high pressure, to release natural oil and gas. The controversial method, which has come under relentless attack by environmental lobbyists, is said to make otherwise prohibitively expensive oil extraction commercially viable.

It is still pricey, says Faulkner, in an interview with Arabian Business. An oil well typically costs $3m to drill and $5m to frack, “but in the US that’s all we have left”. Natural wells have all but dried up in the US, making fracking the last resort for the shale gas explorer.

The pressure also is building up in this part of the world, particularly in Saudi Arabia, Faulkner warns during his visit to the Middle East this month.

The kingdom’s state-run oil company Saudi Aramco recently announced plans to invest $7bn on top of $3bn earmarked last year to start its own fracking revolution. Speaking at a conference in Riyadh in January, Aramco chief executive Khalid Al Falih declared Saudi Arabia was the “next frontier” in shale gas exploration — the kingdom is estimated to have the fifth largest shale gas reserves in the world, and shale production is considered crucial in helping the country maintain its powerful position within the global oil market.

But Faulkner says he is not convinced Saudi Arabia can fulfil its ambitions if oil prices remain low — a situation the kingdom is helping to sustain by maintaining bullishly high production levels. “Shale gas is expensive oil,” he says. “The average break-even price in the US is about $55 a barrel versus $10 or $15 [for] conventional [oil production], so a factor of around four times — and we have access to all the equipment and water, which Saudi Arabia does not.

“Can it [Saudi Arabia] even begin to frack when oil [sale] prices are so low? Is it really positioned to get oil out of the ground for $60 a barrel when it has historically insisted upon $100? I don’t know if it’ll be accustomed to this.

“Then there’s the question of water — one resource in which the kingdom is not rich. This could be the Achilles heel of any fracking operation in Saudi.”

Faulkner evidently has an agenda to position the US as a latent rival to Saudi Arabia’s long-established oil reign, but he knows what he is talking about. His Dallas-based company is just ten years old but during that time the entrepreneur, who began his career with numerous dotcom ventures in the early 1990s, has carved out a role for himself as an outspoken member of the pro-fracking lobby. The self-proclaimed ‘Frack Master’ makes regular public appearances to quash what he calls “negative mis-messaging” by Greenpeace and others that have fuelled anti-fracking sentiment in the West. Last November, he spoke during a public hearing involving the Texas Oil and Gas Association and campaigners that fought to ban fracking in the north Texan town of Denton. The oil company was defeated and Denton became the first town in the state to ban fracking — the very technique that had put Texas at the epicentre of a national energy boom.

But last week, the Texas governor Greg Abbott signed a bill into law that prohibits cities and towns from banning hydraulic fracking, giving the state sole authority over oil and gas regulation. The ruling is a triumph for Faulkner, with many of Breitling’s 607 oil wells located within the Permian Basin in West Texas [the others are in the states of Kansas, North Dakota, Louisiana and Oklahoma]. The company plans to drill 54 additional wells across 4,000 acres of land in Sterling County, Texas, over the next six years, so the governor's support is crucial.

But Faulkner says the case has highlighted how dismally the global oil and gas industry has responded to the powerful anti-fracking campaigns.

“Anti-frackers are fighting from the grassroots — the small-scale, community level. They’re thinking, ‘ok, we can’t beat the whole country but we can go to the communities and convince them fracking is bad’ and hope that will spread into the state-wide effort," he said.

“The oil and gas industry has not done a great job at responding to this. It hasn’t understood that the campaigns are about social media and acting at a local level; that this has a far more emotive impact than national TV and newspaper advertising. The Denton case made it clear we still have a long way to go in matching our response to theirs.”

The challenge he and his compatriots face is that most people don’t believe industry claims. “They think Greenpeace is run by scientists when most of them are just activists. They think scientists know what they’re talking about and business people are liars. So the activists have done a spectacularly good job at putting out the wrong message.”

Faulkner is lobbying US President Barack Obama for greater support for the oil and gas industry — though Obama is not a huge fan of fracking and Faulkner is not a huge fan of Obama. His ultimate wish is for the 1970s-era ban on US oil exports to be repealed — a move that, while unlikely to happen in this presidential term, would profoundly strengthen the US’s position on the global oil and gas stage and signify a threat to countries such as Saudi Arabia and Russia that have long held a substantial chunk of the market.

At the time of writing, a bill introduced in February by Texas Republican Representative Joe Barton had 26 co-sponsors in the 435-member chamber, including four Democrats, and it could see increased support if more Representatives from non-energy-producing US states sign up, according to reports.

Faulkner’s message is clear: the US means (oil) business and the Middle East had better watch out. Despite crude oil falling below $54 a barrel for the first time in more than five years earlier this month, Saudi Arabia continues to produce almost 10 million barrels a day and has signalled it has no intention of changing its policy while it has $700bn of foreign currency reserves in the bank.

However, Faulkner points out that Saudi Arabia is racing through its cash faster than anticipated. The country announced in December it was increasing spending for 2015 by 4.3 percent to $358bn — equivalent to $15bn per month — and holdings in its central bank have dropped by 5 percent from $755bn to $708bn in just two months, according to the International Monetary Fund (IMF). Although the kingdom is still rich, the figures are alarming for a country where domestic spending is used to help maintain peace among its citizens.

“Saudi Arabia’s social programmes cannot be sustained at these oil prices,” Faulkner says. “The kingdom needs upwards of $90 per barrel just to break even. How long will Saudi Arabians allow them to burn through all this money?

“Is the country going to carry on depleting assets that took decades to amass, just to teach the world they will not give up their market share? If so, what will Saudis be told they have to give up, and how will they react?”

Saudi Arabia’s determined policy to maintain production also has begun to rub up its Middle East neighbours the wrong way. In the week we meet Faulkner, reports emerge that an ongoing row between Saudi Arabia and Kuwait has forced production to stop for at least two weeks at their shared Wafra and Khafji oil fields, a Saudi comfort blanket that produce about 500,000 barrels a day. 

Meanwhile, Oman’s Oil and Natural Gas Minister Mohammed Bin Hamad Al Rumhi told a press conference this month that Saudi Arabia “does not have a God-given right” to control oil prices. “You cannot just dump barrels in the market. Where will it go?” he said.

Al Rumhi added that the current situation was not sustainable for oil-export dependent countries.

“I think that, one of these days, we are going to see OPEC countries like Angola, Nigeria, Gabon, Venezuela, Iran and maybe Iraq, going unilaterally without the Saudis [and cutting production to trim oversupply in the market].”

Faulkner agrees: “There are a lot of dominoes falling the wrong way for Saudi Arabia at the moment. Why are they drilling more?  Do they think they can force prices down further, to their own detriment? They have p****d off a lot of people and there’s a lot of infighting.

“What they’re doing isn’t sustainable and eventually shale production from the US and Mexico and tar sands production from Canada will catch up with them. We’ve never seen Saudi standing alone like this before in modern history.”

Faulkner believes Saudi Arabia’s refusal to curb oil production despite low prices masks deep anxiety about what the future holds for a nation that generates up to 90 percent of its earnings from hydrocarbons. “They need a big [oil] discovery. The reason they’re talking about fracking is because many of their wells are in their last phase of life.

“They are pumping saltwater, nitrogen, CO2 into these wells because the pressure’s so low and they can’t get the gas out of the ground without pushing all this liquid down there.

“They are trying desperately to suck out every last drop but it’s a tell-tale sign they have this level of concern. The oil won’t last forever.”

Lower oil prices should act as an incentive for oil-dependent Middle Eastern countries to diversify their economies, and GCC countries such as the UAE and Qatar have for many years adopted this policy. But Saudi Arabia so far has had limited diversification.

“If I were them I’d be increasing my refocusing efforts,” Faulkner says. “[Low oil prices] are a double-edged sword, speeding up the demise of the revenue stream that is needed to speed up attempts to diversify. It’s a catch-22.”

Meanwhile, the US is showing Saudi Arabia it can operate at lower prices than anticipated: “We’re not down and out, we’re bigger and better, and we have further to go,” Faulkner says. Ninety percent of wells drilled in the US have not been turned on, he claims, arguing that with new discoveries in Canada and Mexico prompting ambitious policies to boost extraction, the Americas could easily produce over 21 million barrels a day to rival OPEC’s 30 million. A so-called “NOPEC” federation between the US, Canada and Mexico could orchestrate production to help stabilise world oil prices, he adds.

The day after our meeting, Saudi Aramco published its annual report claiming eight new oil and gas fields were discovered in the east of the country during 2014. The company did not disclose figures on estimated reserves or production rates for the new fields but said they represented the biggest number of discoveries in the company’s history and brought the total number to 129.

Faulkner is sceptical. “The numbers are always conveniently manipulated. They always seem to show that for all the oil they’ve used up in the past year, they’ve found more — the balance is always at zero,” he says.

“Look, if Saudi Arabia puts its hands up and says the oil’s running out, wars could happen. If people think they’ve hit their peak and come down again, they could have ISIL walking across their back yard! They will become vulnerable.

“But at some point they will have to admit there’s a wall at the end of the tunnel that they will hit if they don’t do something else.”

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