Tuesday, April 22, 2008

Sauidi oil production / Ghawar Field

Saudis put off longer-term oil capacity rise

By Carola Hoyos in Rome
Financial Times April 20 2008

Saudi Arabia, the world’s biggest oil producer, has put on hold plans to increase long-term production capacity from its vast oil fields beyond existing proposals, its most powerful policymakers have said.

In a series of statements, including one by the king himself, the kingdom has warned consumers it does not reckon there is a need for further expansion beyond 12.5m barrels a day, an assumption disputed by the world’s biggest developed countries.
The realisation Saudi Arabia will not increase production to 15m barrels a day as quickly as important consumers and the markets had assumed could put further pressure on oil prices, which touched fresh records last week.

Mr Naimi has floated the figure of 15m barrels a day several times as representing the next phase of Saudi expansion although the number has never been adopted officially as a target. International organisations such as the International Energy Agency have taken the statements as signalling that Saudi Arabia will continue with its expansion plans.
New York benchmark futures reached a record of slightly less than $117 a barrel last week in response to fear that Russia, the world’s second largest producer, was unable to increase production in the next years.
Abdullah Jum’ah, chief executive of Saudi Aramco, the kingdom’s oil company, said in a closed door meeting with oil ministers and executives in Rome on Sunday that market signals were ’imperfect’ and that there were uncertainties created by the move away from oil, the world’s worsening economic outlook and the recent turbulance in the financial markets, according to one person who took notes at the discussions. This has impacted Saudi Arabia’s view on the profitability of investing billions of additional dollars into its industry at this point, Gulf sources said.

In a recent interview with Argus, an industry newsletter, Ali Naimi, Saudi Arabia’s energy minister, made clear Saudi Arabia had “no plans” to embark on its next phase of expansion. “We are idling at around 9m bpd and we will reach capacity of 12.5m bpd by 2009.”
He added: “That is substantial spare capacity. As far as I know, all the latest projections, at least up to 2020, do not require anything higher than that.”
Forecasts by the International Energy Agency, the watchdog of the main consuming countries and an important participant in the forum, reach a different conclusion.
Most recently the group calculated that, even if all the policies to increase renewable fuels and to use oil more efficiently were to be enacted on Tuesday, the world would still need Opec’s daily production to increase by 11.5m barrels by 2030, the bulk of which would have to come from its biggest members, such as Saudi Arabia.
That is a tall order. It is more than 50 per cent more than Opec has managed to increase output during 1980 to 2006.

Recent announcements will harden the view of those sceptics who argue the kingdom is unable to boost production because of the high decline rates at its fields – a view that is still in the minority among those in the industry and one Riyadh emphatically rejects.
King Abdullah, reported by the official news agency this month, said: “I keep no secret from you that when there were some new finds, I told them: ‘No, leave it in the ground, with grace from God, our children need it’.”

New aggressive Saudi stance points to $100 oil for the long term

Letter April 22 2008

Financial Times

From Mr Peter Hutton.

Sir, Your article on constraints in Saudi capacity (“Saudis put oil capacity rise on hold”, April 21) is further evidence of a structural shift in the position of Saudi Arabia.
Since 2004, Saudi Aramco has more than doubled the number of oil wells, trebled the number of well recompletions and quadrupled the number of workovers, without any real increase in production. Oil service companies such as Schlumberger and Weatherford report significant increases in enhanced oil recovery techniques, and according to a key local supplier to Aramco their fastest-growing product is for water injection, not crude transportation.
Aramco is now also suffering from project delay: Khursaniyah (500,000 barrels a day) should have been ready in the fourth quarter of last year, but is still not in production, and latest reports estimate a partial start-up next month. The bigger risk is on Khurais, a 1.2m b/d oilfield due late in 2009, where similar delay would have a significant impact on the world's oil market.


Even without delay, Aramco is signalling no new capacity between the end of 2009 and 2012 (at least). Furthermore, adding all new projects to existing capacity, the total should reach 13m b/d, yet Saudi Aramco's own targets are lower at 12.5m b/d at the end of 2009 and 12.2m b/d in 2012. The likely assumption is that decline from the 5m b/d giant Ghawar field is increasing, a trend that they have long publicly denied.

Saudi Aramco looks to be undergoing a significant shift in policy. In February, its chief executive Abdallah Jum'ah flagged to a major industry conference that the world had sufficient reserves only if one included non-conventional sources (ie, oilsands, a big admission for Saudis). Conceding to oilsands suggests an inability to produce enough to prevent investment in this competing source, and perhaps also a recognition that having this expensive alternative as the price-setting mechanism in the long-term oil market is a positive development for prices.
Saudi fears of demand destruction have not been borne out and the kingdom is becoming more reconciled to high oil prices, not least because it has more than $400bn of infrastructure projects to carry out over the next 10 years. The comments in your article look to be further signalling of the new, more aggressive stance by Saudi Arabia at the highest level. The logic and evidence looks increasingly compelling for a long-term call for oil at $100 a barrel or above, rather than $75 analyst consensus and even lower figures from the oil companies. Such a move would be further bad news for those hoping that any economic correction would be shallow and swift, and might explain the unease about confronting higher oil prices more publicly in consuming nations.

Peter Hutton,
Head of Research,NCB Stockbrokers,London EC4R 6BH

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