Signs of Saudi Production Struggle

Jim Brown
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Analysts are constantly looking for minute details in announcements from Saudi Arabia that could be construed as a symptom of a bigger problem. Saudi's formal policy is always "we will produce any quantity needed to fill demand." Informally there are cracks forming in those statements.

Last week Saudi Arabia announced it was going to spend $100 billion on solar, nuclear and other renewable energy sources. That is a pretty ambitious program for a country that is floating on all the oil and natural gas it should ever need. They did not specify a time table and as usual with most Arab countries there is a bit of ego stroking behind the headlines. "We are spending more than other countries so that makes us better."

In a statement about the $100 billion effort at a recent conference the Saudi Deputy Minister for Electricity said "Fuel supply is one of the major challenges facing the power sector and the nation. The current policy is to work intensely on saving energy and making sure every barrel of oil that can be saved is made available for export."

In theory the country with the largest readily available oil reserves in the world is suddenly considering spending $100 billion on alternative energy so they will have more oil to export. Does that strike anyone else as strange? Wouldn't it be a lot cheaper to just punch a few more wells and produce more oil from the billions of barrels they have in reserve?

Saudi Arabia burns a lot of oil generating electricity (1.1 mbpd) and on water desalinization (1.5 mbpd). They have an even bigger desalinization plant underway, Ras Azzour IWPP, that will produce 226 million gallons per day and 2400 MW of power and completely fueled by oil. That plant will come online in two phases with the first in 2012 and the second in Q1-2014 and require a lot more oil to burn. For a country that grew in population from five million in 1965 to more than 25 million today, generating electricity in a desert is a major problem. However, they have plenty of oil to keep feeding those generators based on their claims.

Saudi currently consumes 2.7 mbpd (27%) and that is expected to grow to 8.0 mbpd by 2025. That compares to the current U.S. consumption of roughly 19.5 mbpd. Saudi currently produces around 10.5 mbpd so with consumption currently growing at a very rapid rate that would mean very little oil to export just over ten years from now. I can definitely see why they would want to expand their alternative energy production but we still have the bigger problem of current Saudi production.

Despite the reduction in exports due to OPEC quotas we have seen Saudi production return to its all time highs but net exports in 2009 were at their lowest level since the first Gulf War.

We also heard just over a week ago from Halliburton that Saudi was upping its rig count from 92 to 118 with the majority of those new rigs going to the Manifa field. However, that news prompted even more concerns because the Manifa oil is heavy, sour crude. Why would you escalate production in heavy crude if the real problem facing the world right now is light sweet crude?

The only reason analysts could come up with was the lack of light crude reserves in Saudi. It has been common knowledge for decades that Saudi got the short end of the stick when high-grade oil was being formed. The majority of their reserves is heavy crude. They are also having trouble selling this heavy crude on the market so that makes it even more confusing why they would spend billions in a sudden race to produce more if they really have the 12.5 mbpd of existing capacity. The only obvious answer is they don't have that capacity.

Most real world analysts, those not politically or financially attached to Saudi in some way, believe Saudi's real excess capacity could be more in the range of 1.0 mbpd than the 2.5-3.5 mbpd they claim. Prior to the Libyan production halt they claimed they had 4.2 mbpd of spare capacity.

In a nutshell we need to watch what Saudi Arabia does and not what they say. I have reported in these pages before on the various discrepancies in their claimed reserves with most analysts, including the former head of Saudi Aramco, claiming they could be over stated by up to 300 billion barrels. I have also reported on the accelerating decline rates in Saudi fields and some claim several could be over 7% per year. That means they are losing 700,000 bpd per year to depletion and that requires a lot of drilling to produce 700,000 bpd of new production every year.

As old fields go into terminal decline they can experience sudden and unexpected drops in production that can never be recovered. Ask Mexico about the Cantarell field and the massive decline rate over just the last three years. I suspect Saudi was not expecting demand to recover so quickly from the recession and they encountered some accelerating decline problems at the same time. The race to produce more heavy oil is the only option open to them and it is not a solution to the world's light sweet crude shortage.

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?