Shale Threatens Saudi Economy, Warns Prince Alwaleed

By
• SUMMER SAID and
• BENOÎT FAUCON

Saudi billionaire Prince Alwaleed bin Talal has warned that the kingdom’s oil-dependent economy is increasingly vulnerable to rising U.S. energy production, breaking ranks with oil officials in Riyadh who have played down its impact.

In an open letter dated May 13 addressed to Saudi Oil Minister Ali al-Naimi and several other ministers, a link to which was published Sunday on Prince Alwaleed’s Twitter account, he warned that the boom in U.S. shale oil and gas will reduce demand for crude from members of the Organization of the Petroleum Exporting Countries.

A Saudi official confirmed that ministers received the letter in May.
Not long after the prince issued his warning, a report from OPEC published Monday showed the group’s oil export revenue hit a record high of $1.26 trillion in 2012. However, forecasts from the group raise questions over whether that level of earnings can be sustained amid the competition from shale oil.

Saudi Arabia, the world’s biggest oil exporter, is now pumping at less than its production capacity because consumers are limiting their oil imports, Prince Alwaleed said in the letter. This means the kingdom is “facing a threat with the continuation of its near-complete reliance on oil, especially as 92% of the budget for this year depends on oil,” said the prince.

Prince Alwaleed, a nephew of Saudi King Abdullah, is a major international investor, with stakes in Apple Inc., AAPL +1.54%Citigroup Inc., C -1.09%Time Warner Inc., TWX -0.83%Twitter and News Corp, NWSA -2.39%which owns Dow Jones & Co., publisher of The Wall Street Journal.

In contrast to Prince Alwaleed, Mr. Naimi, the Saudi oil minister, has so far played down the significance of rising shale-oil production, despite the fact that some OPEC members, such as Nigeria and Algeria, have seen a sharp drop in their exports to the U.S. At an OPEC meeting in late May, he said it wasn’t the first time OPEC has had to compete with a surge in output from countries outside the group.

“We disagree with your Excellency on what you said, and we see that rising North American shale gas production is an inevitable threat,” Prince Alwaleed’s letter said, in comments directed at Mr. Naimi.

Neither Mr. Naimi nor a spokesman for the ministry could be reached to comment.

Despite posting record revenues from oil exports in 2012, OPEC data showed some members’ earnings were already under pressure.

Algeria’s oil-export revenue fell last year by 6% and the selling price of its flagship Saharan Blend crude was down by 1.3%, compared with the previous year. Algeria has seen its oil exports to the U.S. fall sharply and earlier this year its finance minister, Karim Djoudi, said lower oil export revenue tied to mounting shale production could force the government to cut domestic spending.

Oil revenues in Iran, whose oil exports have been sharply curtailed by Western sanctions, fell 8% to $133 billion, according to OPEC data.

OPEC data suggests other members could soon face an earnings squeeze.

The group expects demand for its crude to fall to 29.6 million barrels a day next year, 600,000 barrels a day lower than in 2012, because of rising production outside the group. The average price of the group’s main crude export grades so far this year has been 4% lower than last year, OPEC data show.

The International Energy Agency expects demand for OPEC crude to decline again in 2015 to 29.2 million barrels a day, before starting to rise gradually in the following years.

Prince Alwaleed also warned in his letter that competition from shale oil means Saudi Arabia won’t be able to increase its crude production capacity to 15 million barrels, adding to a rare public disagreement over whether Saudi Arabia should expand its current production capacity of 12.5 million barrels a day.

In April, Prince Turki al-Faisal, a former Saudi intelligence chief and ambassador, said the kingdom needs to increase its crude production capacity to 15 million barrels a day by 2020 in order to meet rising domestic consumption and maintain its export capacity. Mr. Naimi has ruled out increasing Saudi Arabia’s capacity until at least 2030 or 2040.

Write to Summer Said at summer.said@dowjones.com and Benoit Faucon at benoit.faucon@dowjones.com