Something Stinks In Saudi Arabia

Jim Brown
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We found out from Halliburton this week that Saudi Arabia was upping its rig count significantly in preparation for adding additional excess capacity. While that sounds good as a bullet point the actual details could give us an insight into the real story.

In any conversation about OPEC and excess capacity everyone quickly arrives at the realization the only real excess capacity in OPEC is in Saudi Arabia. Saudi claims they can produce 12.5 mbpd for the next decade without breaking a sweat. They are currently producing 9.16 mbpd giving them a theoretical excess capacity of 3.34 mbpd. Like all theories it sounds good on paper.

Earlier this week Halliburton said Saudi was going to increase its rig count in the Manifa project from one to ten in order to increase spare capacity. They met with service companies over the weekend to cement plans to raise the rig count in the country from 92 to 118. Again, it sounds good on paper.

Two years ago the Saudi king said that Saudi would never pump more than 12.5 mbpd in order to leave oil for future generations. Later he vowed to not develop any new discoveries in order to provide for future generations.

A Simmons and Company analyst said this burst of drilling, adding nearly 30% to the rig count, did not fit with recent statements by the king and with their claims of 12.5 mbpd total capacity. In theory that 3.34 mbpd of excess capacity would be more than enough to cover an near term shortages. He questioned the sudden need to explode drilling activity. With that kind of excess production they could have continued to grow capacity with their existing drilling programs.

Evidently, according to the analyst, Saudi does not have the excess capacity they claim. Perhaps they are experiencing the same rapid acceleration in their giant fields as we are seeing in Mexico and the North Sea. They have been stimulating those giant fields with water and CO2 injections for over a decade so the productive limits may have been reached. When a big field goes into terminal decline it can happen rather quickly. A point is reached where underground stimulation is no longer effective and suddenly you are producing more water than oil.

If Saudi has suddenly experienced a decline jump they may be in panic mode because they know from experience how fast a big field can decline once on that slippery slope of a terminal decline.

The other problem is why Manifa? The Manifa reserve are heavy, sour crude and the type of crude nobody wants. If you are going to suddenly spend billions to increase production or to replace existing production shortfalls wouldn't you accelerate production on reserves with the type of oil everybody wants? Of course you would produce the oil with the highest resale value first. If light, sweet is selling for $115 and heavy, sour is $75 then why race to produce the heavy crude? The only reason analysts have been able to come up with is a serious lack of any higher quality reserves.

This calls into question the recent claims of excess capacity by Saudi Arabia and lends credence to the dozens of analysts, geologists and past officials at Saudi Aramco that claim the Saudi capacity/reserve claims are either outright bogus or grossly overstated. Matt Simmons wrote Twilight in the Desert in 2005 after years of painstaking research into every bit of data relating to Saudi fields. He contends in the book that Saudi reserve and capacity claims are grossly overstated and will be a serious shock to the system when the truth comes out.

We may be getting closer to that shock than we previously thought. Panic drilling by Saudi Arabia tells us there is a problem. We may be unable to determine what the problem is but we do know a problem exists. Eventually it will manifest either from an inside leak of data or from a shortage of oil on the market. If they ever admit decline rates have spiked or excess capacity has shrunk the result will be $150 oil within days. They know that and will do anything to keep suppressing the news. However, the bigger the secret the harder to keep it under wraps especially in a market that depends on daily flows of 89 million barrels of oil. The flow is king. If the flow begins to diminish the results will be instantly apparent in prices.

Jim Brown

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The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?