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Royal Dutch Shell CEO Blames Saudi Arabia For Slowed US Shale Growth

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Bidness Etc takes a look at how Saudi Arabia led to slowed growth of the US shale oil industry

By: MICHEAL KAUFMANPublished: Jul 2, 2015 at 9:37 am EST

The Organization of Petroleum Exporting Countries (OPEC), led by Saud Arabia, usually monitors the crude oil supplies and prices prevailing in the market. The US energy companies have begun using hydraulic fracturing techniques, which allow US drillers to drill deeper into the surface, and extract more oil. Therefore, crude oil output has risen substantially.

On the other hand, the OPEC refused to play its role as a price regulator last year. On November 27, the cartel decided to maintain output at 30 million barrels of oil per day. Prices that once traded at $115 per barrel fell to $60 per barrel. The price decline was also due to reduced global crude oil demand.

During the pre-market trading on Thursday at 6:44 AM EDT, West Texas Intermediate (WTI), the US benchmark for crude oil, was up 0.30% at $57.13 per barrel. At the same time, Brent, the global benchmark for crude oil, was up 0.68% at $62.43 per barrel.

According to Financial Times, Royal Dutch Shell plc (NYSE:RDS.A) CEO Ben van Beurden highlighted that the OPEC has abandoned its price mediator role in the market. He added that energy companies are wrong to believe that the OPEC would adjust output to keep crude oil price higher than $100 per barrel.

Regarding the issue, Mr. van Beurden said: “I think they [the Saudis] have been quite successful, if you like, in making it very clear to shale oil companies as well as their financiers that they cannot forget the price risk.”

The US energy companies had to face a tough time. Companies such as Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) have seen a decline in their first-quarter profits, compared to the same period last year. Despite the challenges, the industry has shown resilience, and managed to survive remarkably well.

Mr. van Beurden indicates that lower oil prices mean companies should cut back on their capital expenditure budgets. He added: “Extracting “more marginal” barrels would need higher oil prices.” However, US production would remain consistent despite its issues. He believes that over time, companies would become more efficient, and manage to cut back on costs.

In April, Shell finalized its deal with BG Group plc (OTCMKTS:BRGYY) for $70 billion. Many consider that Shell overpaid the company, considering the falling crude oil prices. In order to prevent Exxon from cashing in the offer, Shell decided to pay 50% premium for BG Group. However, as reported by Financial Times, Mr. van Beurden believes that no matter what Shell paid BG Group, it would have received criticism from investors, and thus dismissed investor concerns.

He also mentioned: “If you look at where the value of the company really is, and how the market valued it, there was a big disconnect between the two.” He added: “If you add on top of that what we think we can do with the portfolio .that gives you the deal space. We ended up exactly in the sweet spot.”

The Shell-BG deal is considered to be the largest in the last ten years, and would help Shell diversify its operations by going in the liquefied natural gas (LNG) market. The combined entity would also experience economies of scale, and be able to achieve efficiency.

While investors believe that the Shell-BG merger would increase consolidation activity in the energy industry, this has not been the case. Mr. van Beurden stated: “In terms of the really large industry consolidations, there isn’t an awful lot of choice and there isn’t an awful lot of capacity, firepower on balance sheets to do something like this. I think we were one of the very few who could do it.”

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