Tuesday, January 6, 2015

Saudi Arabia and Its Oil Production Capability - An Insider's Viewpoint

Updated September 2015

While the mainstream media has long forgotten WikiLeaks and its release of United States Embassy cables, there is one key cable from December 2007 that is particularly pertinent in this volatile oil pricing environment.

As most of us are aware, Saudi Arabia, the world's largest producer of oil for several decades along with having 16 percent of the worlds crude reserves, has functioned as OPEC's swing producer.  Thus far, the nation has been able to both ramp up and cut production when necessary to ensure that overall OPEC output remains close to its target levels.  This has been used in the past to either prop up prices when they fall or push prices down when they are too high to be sustainable as was the case in 2008.  That said, Saudi Arabia is particularly evasive when it comes to the actual size of its oil reserves and the state of its aging fleet of supergiant oil fields, some of which were discovered in the 1940s and 1950s like Ghawar, the world's largest oil field which accounts for more than half of Saudi Arabia'c cumulative oil production.

Here is a map from the EIA showing Saudi Arabia's oil infrastructure:

As of 2012, here is the capacity of Saudi Arabia's major oil fields:

All oil industry operations in Saudi Arabia are operated by the Saudi Arabian Oil Company better known as Saudi Aramco.  This national oil and natural gas company is based in Dhahran and has two distinctions; it has the world's largest proven oil reserves and the world's largest daily oil production.  Saudi Aramco has proven oil and condensate reserves totalling 260.2 billion barrels and the company's average daily crude production in 2013 was 9.4 million BOPD for a total of 3.4 billion barrels over the year or one in every eight barrels of the world's crude oil production.  Interestingly, according to the company's website, Aramco produced the most oil that it has ever produced in its 80 year history in 2013.

Now, let's get to the "meat" of this posting.  As we are all aware, back in 2011, WikiLeaks released a virtual treasure trove of United States Department of State cables.  Among them, was this cable which outlined a meeting that took place between the Consul General of the Embassy in Riyadh and Dr. Sadad al-Husseini, the former Executive Vice President for Exploration and Production at Saudi Aramco:

Dr. al-Husseini notes that it is possible that Saudi Arabia's oil reserves are not as "bountiful" as described by Aramco insiders and that much of Aramco's reserve base is speculative rather than proven.  He believes that once 180 billion barrels of oil have been produced, output will decline at a steady rate and that "no amount of effort will be able to stop it".  By his calculations, Saudi Arabia had already produced 116 billion barrels of oil in 2007 and that the inflection point will arrive within the next 14 years (i.e. 2021).

Here is a quote from a June 2008 cable from the U.S. Embassy in Riyadh entitled "Is this oil market broken?":

U.S. officials were expressing further concerns that Saudi Arabia's ability to act as the world's oil swing producer was in jeopardy based on the fact that new oil production coming on stream was heavy crude, a problem since the world's refinery infrastructure has less capacity to refine it.  As shown on this screen capture, Saudi Aramco is touting its new Manifa field, the fifth largest oil field in the world:

By way of comparison, Ghawar's crude has gravities ranging from 33 to 36 degrees API compared to 28 degrees API for Manifa.

As an aside, a cable from November 2009 shows that the Saudi government had become increasingly concerned about the role of speculators in the oil markets as shown here:

Fortunately for Saudi Arabia, they have been salting away money in their reserve for years.  According to the Saudi Arabia Monetary Authority (SAMA), at the end of November 2014, the nation's central bank had total reserve assets of 2,776,500 million riyals or $739.7 billion US as shown here:

As we can see, particularly from the information provided by Dr. al-Husseini, the ability of Saudi Arabia to supply the world with endless volumes of good quality, light oil may be coming to a close over the coming years.  This could impact the delicate supply and demand balance in the world's oil markets, resulting in significant upward pressure in prices no matter how much high decline rate shale oil the United States produces.  It is also quite obvious that the current factors that affect the world's oil market are extremely complex and that one single issue alone (i.e. the move toward exploiting shale oil in the United States) is not single-handedly responsible for creating volatility to the downside.

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