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In Oil Face-Off, Saudis, Shale Both Claim Victory

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Benoit Faucon, Alison Sider and Georgi Katchev, Wall Street Journal

Both sides look to take advantage of higher prices

A two-year battle for global oil supremacy that pit Saudi Arabia, head of the powerful oil cartel, against upstart U.S. shale producers left them both badly wounded but with each side claiming victory.

The Organization of the Petroleum Exporting Countries deal last month to cut oil production has sparked a powerful rally after crude prices had fallen in half over the past two years. That slide followed OPEC’s decision in late 2014 to maintain production levels, despite a global glut.

For U.S. shale companies, it was two years of shrinking profits and mass layoffs as dozens of producers scaled back output or sought bankruptcy protection. But the survivors became much more efficient and are now eager to grab market share at their foreign competitors’ expense.

“Definitely, the U.S. is going to win the next two years because OPEC is cutting and U.S. shale is taking off,” said Scott Sheffield, chief executive of Pioneer Natural Resources Co., a U.S. producer that is already ramping up drilling in the Permian Basin.

In Saudi Arabia, two years of lower oil prices have greatly slowed economic growth, widened a budget gap and led the government to slash fuel and other popular subsidies in moves that risked stirring public discontent.

Yet the collapse in crude prices didn’t stop OPEC from gaining global market share as shale retreated. It also helped jump-start the kingdom’s plans to move away from a decadeslong dependency on oil. Saudi Arabia raised a record $17.5 billion with its first global bond deal in October.

Now, Riyadh is betting that a period of rising prices following the production cut could boost a massive initial public offering of the state-owned Saudi Arabian Oil Co. An IPO of just 5%, as planned in 2018, could fetch over $100 billion in capital and help fund an expansion of the Saudi economy into other sectors such as technology and mining, Saudi officials say.

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Shale producers may also have a small window to take advantage of higher prices. OPEC and other major producers have pledged to cut output only for six months, and the group has a history of exceeding production quotas.

Saudi Arabia two years ago elected to counter a rise in U.S. output with a flood of its own. Ali Al-Naimi, Saudi oil minister at the time, denied he was targeting shale but often said he wanted to force out of the market the “high-cost producers”—a phrase often interpreted to mean U.S. shale. Back then, many shale producers couldn’t break even unless crude prices were around $80 a barrel.

Two years of low prices pounded the U.S. oil industry. More than 100,000 energy workers have lost their jobs. The services companies that help drill and pump oil have jettisoned people and equipment. While activity in West Texas’ Permian Basin is booming, other once-bustling shale formations in south Texas and North Dakota haven’t recovered.

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