Saudi enjoys lowest cost of oil extraction in the world

The shale gas revolution in U.S. has brought about some major changes. In the late 1970s the United States decided to encourage development of technology that would enable extraction of shale gas and oil. Since then the country has had access to oil and gas deposits that were previously unreachable. With time the fracking process of hydraulic fracturing has improved giving way to reduced drilling time and expenditure.

The world has nearly 345 billion barrels of available shale oil which for a long time could not be accessed. These deposits are larger than the existing reserves of Saudi Arabia. Saudi has about 300 million barrels of shale oil. And if the additional reserves can be tapped successfully, there would be substantial changes in the global oil market. In such a situation the role of Saudi Arabia, Kuwait, the UAE and Qatar becomes uncertain. The rising competition from shale oil will likely reduce the capacity of this region.

However, the key aspect is often forgotten- latest technologies have made extraction of shale gas and oil cost-effective, but the extraction cost remains the highest among different types of oil.

Saudi Arabia enjoys lowest cost of extracting oil in the world, which is just above $20 per barrel. Other Gulf nations like Iraq and Iran extract oil with only a minimum premium over Saudi Arabia.

Markets in China, Mexico and Libya are also sources of relatively cheap oil but these nations play a small role in international markets, primarily due to their low exporting capacity. Libya hasn’t been able to recover from the Arab Spring events and exports only 100,000 barrels per day. China produces 4 million bpd which is consumed by the domestic market. Mexico has also reduced exports due to reduced production and increasing domestic consumption.

Extracting non-conventional oil leads to much higher production costs. Oil from deep water extraction is extremely expensive when compared to the conventional GCC oil.

Extracting shale oil in U.S. and oil from sands in Canada amounts to $70-$100, five times Saudi Arabia’s cost. Despite a significant rise in production, oil prices have not come down. This is because the marginal cost of oil production is rising due to technical issues- drilling in locations like the Arctic Ocean or deep waters involves higher material costs and reduced productivity.

High oil prices are necessary for Gulf nations to meet their increasing monetary needs. However, in case of an extended period of low oil prices, a major share of the global oil production would have to be shut down as a result of high extraction costs. But the Gulf countries would continue making money by selling oil at $40 per barrel.

Thus, Saudi Arabia and its neighbouring countries will have a major role to play in the global energy markets.

Follows us:

Facebook, Twitter, Linkedin

For More info: chemical industry