Saudis Talking And Pumping Down The Price Of Oil

A report published in the Emirates Business 24/7 posted below detailing Saudi plans for increasing oil production looks very much like it came directly from the Saudi Aramco PR department. Each of the four fields discussed in the report has been extensively analyzed in prior posts.  What is interesting is partly that this one report summarized the entire Saudi program in one place.  But even more interesting is that the report was issued at all.  It seems to be designed to assure the oil market that it will be adequately supplied for the next few years at least, thus eliminating oil market pressure for higher prices.

Why would the Saudi’s want to push oil prices down?  One reason might be to help the Republicans win the White House in November.  The King does a lot of strategic thinking, planning, and acting in coordination with the President of the U.S.   It is not unlikely that he would like to see a President be elected who  he believes will continue the past 60 years of confidential and cooperative relations.  There is good reason to think that his relations with the Bush family going back decades has convinced him that Republicans will continue to honor the special U.S.-Saudi relationship.  Moreover, since the relationship is based on personal  credibility, it is not unreasonable that the King may have assured Mr. Bush that he will in fact lower oil prices in advance of the U.S. election in exchange for Mr. Bush’s assurance of continued U.S. guarantees of Saudi security.  The King may be virtually required to make good on his promise.

A second possibility is that with both Iran and Russia becoming increasingly belligerent, and with both countries highly dependent on high oil prices to finance there belligerency, the King might find his own security interests coincide more closely with low oil prices than high ones, as least for a time.  Perhaps both reasons are correct.

What seems clear, however, is that whatever the reason, the King of Saudi Arabia has wanted oil prices to go back down for a number of months, so much so that he called an unprecedented global meeting of oil ministers to foster lower oil prices.  Until the Khursaniyah field came on stream recently, the King had limited ammunition to get prices down.  It seems like his decision to reduce production in 2007 to about 7.5 mb/d, down from the prior 8.4 mb/d may have been designed to reflate the pressure of certain fields so that he could later increase output from those fields when the new  Khursaniyah capacity came on stream during the summer/fall of 2008 in order to assure low oil prices prior to the U.S. election.  Now that the Saudi’s are pumping out 9.5 mb/d, lower prices are the result.

In any event, here are all the visible sources of Saudi production capacity improvements which extend out to 2013:

Khursaniyah 500 kb/d of light, sweet crude due 2007, now on stream,

Khurais: 1.2 mb/d due in 2009.  A huge project with some risk of failure, the next-to-last untapped large Saudi field,

Shaybah: 250 kb/d expansion of existing field due in 2009

Manifa 900kb/d of heavy crude due in 2011 - last giant Saudi field left

In total, these projects are planned to add 2.85 mb/d of capacity.   If the present capacity of Saudi production is not far above their 9.5 mb/d output level, the new 2.85 mb/d would bring their capacity to roughly the 12.5 mb/d that they are saying is their objective.  Interestingly, they now are admitting that some of their existing fields are experiencing decline, so the net capacity, by the time all four new fields are finally on line, may be less than than 2.5 mb/d.

In addition to their plans for new production, the Saudis are also in the process of joint ventures with western oil majors to build an additional 2.8 mb/d of capacity to refine heavy oil scheduled to come on line in 2013.  Their new refining capacity will effectively increase the utility of existing Saudi production since it seems to include an increasing excess of heavy oil production compared with heavy oil refining capacity.  One would have to assume that the Saudi’s believe such excess production is in the range of their new refining capacity.

If there is now or will be by 2013 excess heavy oil production capacity of 2.8 mb/d, then one would need to adjust downward to some degree the stated affective Saudi production capacity of 12.5 mb/d.   If you can produce the oil but nobody can refine it into useful fuels, then there is no point to bringing it to the surface.   On the other hand, to the extent that the new Saudi refining capacity is simply designed to reduce exports of Saudi heavy oil to existing heavy oil refineries overseas and allow the Saudis to refine it themselves, thus increasing Saudi profit margins, then the new refineries would not increase global product capacity.  In that case the stated Saudi 12.5 mb/d production capacity objective would be accurate.

In any event, there is no visibility of any further Saudi production increases beyond 2013.  If global production is in fact falling rapidly at that point in 2013, then the Saudi’s will not be in the position they are today to stanch the increase in the price of oil.   All of this is developed in the mega project analysis I recently posted.

Here is the article:

Saudi pursues plan to raise output

Staff Writer  on Monday, September 15, 2008

Saudi Arabia is pushing ahead with mega projects to lift its sustainable oil production capacity to 12.5 million barrels per day at the end of 2009 but it appears to have suspended long-term plans, a Saudi group said yesterday.
The kingdom, which sits atop a quarter of the world’s recoverable crude deposits, is pumping nearly $60 billion (Dh220.38bn) into five major projects to expand output capacity from its present level of about 11.3 million bpd.
“The five capacity expansion projects will cost nearly $60bn. They will bring on-stream 2.95 million bpd of oil. This is equivalent to three per cent of global oil supply and greater than the total production of Kuwait,” the Riyadh-based Jadwa Investment Company said in a study, citing government data. “Total production capacity will increase by less than this as Saudi Aramco assumes some production declines elsewhere. The net addition lifts capacity by about 12.5 million bpd and the bulk of the capacity to come on-stream over the next couple of years is light crude.”
Buoyed by a surge in its petrodollar income, Saudi Arabia kicked off the world’s largest capacity-building programme five years ago to expand its sustainable output and maintain existing capacity by offsetting a decline in some fields. Opec’s de facto leader has set a target of 12.5 million bpd by the end of 2009 and 15 million bpd in the following years. But the Saudi Oil Ministry has said recently the extra capacity would not be needed at least at present.
“It will be some time before the decision is made as to whether to go ahead with the new capacity but by providing the basic details, the kingdom has reassured the oil market that additional supply will be forthcoming if required,” Jadwa said.
Oil analysts said Riyadh is pressing ahead with major capacity expansion projects although the country already maintains the world’s largest spare capacity of about two million bpd. They considered such a decision as a message of reassurance to the market and a cushion against fresh price spikes.
Although it has been overtaken by Russia as the world’s largest oil producer over the past few months, Saudi Arabia has remained the dominant crude exporter.
The largest single oil capacity expansion venture is at the Khurais oilfield that will add about 1.2 million bpd of light crude, which is favoured by global refiners for its low sulfur ratio and the fact that it is easier to process, said government-owned Saudi Aramco.
“Saudi Aramco’s ambitious capital programme achieved many milestones during 2007 toward construction of crude oil increments,” Aramco said. “Since 2001 through the completion of Manifa in 2011, we will have built more than four million bpd of oil production capacity.”
Khurais, one of the largest oilfield development projects in the world, would add 1.2 million bpd of light Arabian crude to the production capacity. Manifa will add 900,000 bpd while Khursaniyah involves an additional 500,000 bpd and Shaybah will pump an extra 250,000 bpd. Another 100,000 bpd will come from Nuayyim field.

Largest oil projects

The largest oil projects in Saudi Arabia are:
- Khursaniyah: Production facilities were completed at the end of 2007 and it is slated to come on-stream this year. The plant has the capacity to process and stabilise 500,000 bpd of Arabian light crude.
- Khurais: The programme, the largest integrated project in company history and the largest industrial project in the world, is on track for facilities completion. It will increase production capacity of Arabian light crude by 1.2 million bpd through a new central processing facility, the largest of its kind in Saudi Arabia.
- Manifa: The Manifa oilfield programme will be developed with onshore and offshore wells using electric submersible pumps to produce 900,000 bpd of Arabian heavy crude oil starting in the third quarter of 2011.
- Shaybah: Major installations of the Shaybah crude oil expansion programme include a gas-oil separation plant and gas compression and injection facilities. When the facilities are complete in December this year, Shaybah field production capacity of Arabian extra light oil will increase from 500,000 bpd to 750,000 bpd in 2009.

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