Saudi Arabia Blowing Smoke

Jim Brown
 
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Saudi Arabia's oil minister Ali al-Naimi is actively involved in telling bogus stories as a method of damage control over future production. This is not new but cracks are forming around the edges.

Ali al-Naimi must have felt the new ASPO timetable for peak oil was a little too close for comfort and decided to talk down those claims. The ASPO crew now believe peak flows will occur in 2014 if current production capacity claims are real and 2012 if those claims are bogus. A common comment is that "all the easy oil is gone."

Al-Naimi made a point on Wednesday to claim that the days of easy oil were not gone but were alive and well in Saudi Arabia. He claimed there were still 88 billion barrels in Ghawar. That is the largest field on the planet and it has been producing since 1951.

There has been a lot of doubt in the analyst community over the remaining oil in Ghawar for many years and that doubt grew when Matt Simmons penned the highly researched book "Twilight in the Desert, the end of Saudi Oil."

Ghawar has been producing with a sustained water flood for many years. That means they pump water in at the edges of the field in hopes the water will move through the formation and push the oil ahead of it into the areas where the oil can be pumped out. As a flood ages they start getting water out with the oil. This is called a water cut. There have been rumors for a couple years that the water cut for Ghawar had risen to 9:1 or nine barrels of water for every barrel of oil. This is right at the point where the oil would not be commercially viable except that Saudi has massive separation units and they pipe the water back to the edges of the fields to be reinjected.

The problem with the Saudi story is this. Saudi currently produces at the rate of 8.1 mbpd, They had been expected to increase production capacity to 12.5 mbpd from the current stated rate of 11 mbpd. However, the king has said more than once that they will not increase capacity but leave it in the ground for future generations. That makes al-Naimi's comments even more troubling. Are they going to increase capacity or just provide makeup capacity to replace capacity that is slowly slipping away?

Al-Naimi's comments also included claims that Saudi had plenty of cheap oil. I agree with that in theory because having multiple billion barrel fields on land and at relatively shallow depths makes their oil cheaper than almost anyone else on the planet.

Here is where the cracks appear. He said the next field to be developed would be the Manifa field. Previously they claimed it would produce at 1.0 mbpd when completed. Today they claim 900,000. That is close enough for government work that I won't quibble about 100,000 barrels. Manifa is a heavy, sour, vanadium contaminated oil. It will require a special refinery to process the oil and that refinery does not currently exist. Why spend money to produce oil that nobody can use and nobody wants? Saudi has had a couple refineries on the drawing board for years but they keep getting delayed. The last target date for a specialized refinery to process this oil was 2013. The new date he just announced is 2024. That means any oil produced from Manifa cannot be used until 2024. The facts of the story simply don't add up. Why spend billions developing a field when the oil is currently unusable?

The only reason you would do it is to make false capacity claims. They are pros at this since quite a bit of their oil is the grades nobody wants. It may sound good to continually say Saudi has 4 mbpd of excess production capacity but if there is no way to use that spare capacity because it is not refinable then it must be a smoke screen to disguise the real truth.

I believe that truth is that we are moving into a period where there is a shortage of light crude and Saudi's oil minister will not be able to cover it up. His inconsistencies in today's comments could have been generated by the stress he could be feeling as supplies dwindle. They don't want oil prices to suddenly shoot up and drag down demand. For them it is all about keeping prices reasonable for as long as possible so there is no urgency to develop alternative fuels, create more fuel efficient cars and break our oil addiction. If Saudi can keep us thinking there is plenty of oil right up until the last minute then they will have been successful.

Jim Brown

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