PIW, Apr 25, 2011
Although Saudi Arabia’s desire to keep oil markets in balance saw it cut supply by 800,000 barrels per day in March [please see remarks below -- D.R.], the kingdom’s bigger and longer-term concern is over whether it needs to increase oil production capacity to meet likely future demand. The Saudi view on oil markets has altered sharply from where it was a year ago, when a battered global economy was still limping out of recession. Riyadh thinks medium- to long-term oil demand growth may be higher than it had previously anticipated, driven by China, India and also the Middle East itself, and PIW understands that discussions are now taking place on whether the kingdom should raise oil output capacity beyond its current 12.5 million b/d (PIW Apr.11,p1). The pickup in Asian demand in the second half of 2010 surprised Saudi officials, forcing them to start increasing output in November and December to try to cool rising oil prices. A tumultuous start to 2011, which has seen political upheaval across the Arab world and an earthquake and subsequent nuclear emergency in Japan, has further complicated the picture, and helped drive oil prices to levels last seen in 2008. While Saudi Aramco cut output in March in response to weak buying interest for its sour crude [please see my post here; and refiners also started to cut production on top of planned seasonal maintenance, thus reducing intake of crude oil -- D.R], demand is expected to surge again over the summer. A significant part of that surge will come from the Mideast's power plants, which have shown a recent preference for direct crude burning to power air conditioning systems to cool their cities; in a speech last week, Saudi Oil Minister Ali Naimi lumped "the [Mideast] region's oil and gas producers" together with China and India as "the main drivers of this increase in petroleum consumption.”
Riyadh has always said that it could move to capacity of 15 million b/d if required, but such statements have typically been made at times of uncertainty, as in 2008, with officials saying privately that such capacity was unnecessary. Now, while no decisions have yet been made and while work is unlikely to start this year, expansions at Shaybah, Manifa and Khurais are back on the table (PIW Jun.30'08,p3). With little help likely from other Opec producers apart from Iraq, discussions are underway on whether to reactivate plans for a 250,000 b/d expansion at the 18 billion bbl Shaybah field to bring capacity to 1 million b/d. Aramco has already decided to bring forward the 10 billion-14 billion bbl Manifa project, and could now expand its capacity from 900,000 b/d to 1.2 million b/d (PIW Apr.18,p7) [For Manifa, please see my post here -- D.R.]. Another new field, the 27 billion bbl Khurais, could add a further 300,000 b/d [sic] to its existing 1.2 million b/d capacity (PIW Mar.7,p3) [For Khurais, please see my post here -- D.R.].
Saudi sources expect the kingdom will need to keep oil output around 9 million b/d or higher over the next few years, which helps explain the decision to accelerate development of the 900,000 b/d Manifa heavy oil project. The new timetable for Manifa will help offset natural declines at fields now being asked to produce more, as well as provide strategic crude for two new deep-conversion refineries at Jubail and Yanbu. The kingdom's newer fields have annual decline rates of 2% or less, while its older fields average around 4%, so the higher overall Saudi output climbs, the sooner Manifa will be needed. The development has also been earmarked to feed Jubail and Yanbu, which will need 800,000 b/d of Arab Heavy by 2014. Taking that amount of Saudi crude off the market could be disruptive, however, particularly if the supply-demand balance has tightened by then, industry sources tell PIW. In the context of stronger demand and higher oil prices, of course, Aramco can more easily justify the $15 billion investment needed for full Manifa development, despite the $130 billion increase in social spending announced by Riyadh this year to head off potential political unrest at home (PIW Apr.4,p1). [Full story]
(Saudi Arabia's oil minister said on Sunday/Apr 17 the kingdom had slashed output by 800,000 barrels per day in March due to oversupply. "Our production in February was 9.125 million barrels per day, in March it was 8.292 million bpd. In April we don't know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied," Saudi Oil Minister Ali Naimi told reporters---please see Reuters, Apr 17, 2011, here. Saudi Arabia was the world's second largest crude oil producer in 2010, behind Russia---please see Aaron and David Rachovich, "World's Top 22 Oil Producers, Full Year 2010," here. It maintains the world's largest crude oil production capacity. The kingdom's Ghawar field alone accounts for more than 40% of Saudi Arabia's total oil production capacity, and is the world’s largest oil field. It produces more than 5 million bbl/d of Arabian Light crude. Ghawar also produces more than every other country except Russia and the United States---please see U.S. EIA, Saudi Arabia Country Analysis Brief, Jan 2011, here. Also, Saudi Arabia was the sixth largest oil consumer in the world in 2010, behind the United States, China, Japan, India and Russia, according to the latest estimates, and the eighth largest oil consumer in the world in 2009---please see my post "Top 25 World Oil Consumers, 2009-2010," here. Saudi Arabia is the world's biggest holder of proved oil reserves---please see our post "World's Top 22 Proven Oil Reserves Holders, Jan 1, 2011 -- OGJ," here. And the world's fourth largest holder of natural gas proven reserves as of Jan 1, 2011, behind Russia, Iran and Qatar---please see our post "World's Top 22 Natural Gas Proven Reserve Holders," here. -- D.R.)