No Increase in Oil Drilling for Saudi Arabia

Jim Brown
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On Monday Saudi Aramco said it would not increase oil drilling in 2010 but would keep active rigs level at 100. Aramco just completed a five-year expansion to boost capacity to 12 million barrels per day just as the financial crisis killed demand.

Aramco, said they see oil drilling as stable for the rest of the year. The 100 rig level is down 30 rigs from the 130 in 2008. Saudi is sitting on the largest cushion of excess capacity in decades at roughly 4.5 million barrels per day.

However they are planning on increasing exploration for natural gas. Gas consumption in Saudi Arabia is growing at 7% per year. Saudi currently uses gas for electricity and to power some oil facilities. Where Saudi would like to use gas more is in the desalination plants. Saudi currently burns 1.5 mbpd of oil just to desalinate water for use in the cities. Switching to natural gas would be cleaner, cheaper and allow that oil to be sold into the global market.

PDVSA, Venezuela's national oil company, said it may withdraw from the lease of the 320,000 bpd refinery on the Dutch island of Curacao. They have been leasing the refinery since 1985. The claim they may withdraw from the lease in protest because of reported "provocations" by the U.S. military launched from the island against Venezuela. Hugo Chavez claims Curacao allows the U.S. military to launch spy flights over Venezuelan territory. Curacao and the U.S. denied the claims.

The real story behind the announcement is probably money. The Isla refinery processes mostly Venezuelan crude. Gasoline and other refined products are shipped to the U.S. and South America. PDVSA has experienced numerous operation issues at the plant and units have been shutdown for long periods for maintenance issues. If the government takes all the cash to stay in power and does not let PDVSA have enough to keep things running then problems develop.

On top of no cash for operations a Curacao judge ruled last May that PDVSA would have to invest $100 million in the plant to reduce emissions or face multimillion dollar fines. PDVSA claims the new emission standards being enforced on the plant would cost $1.5 billion to upgrade.

Obviously PDVSA does not have $1.5 billion because Chavez took the money for social programs. Now PDVSA is using the military excuse for pulling out of the plant lease rather than admit they can no longer afford to keep it running.

Refineries in general have taken a beating over the last year. There are 3.5 mbpd of idle capacity and that is after a long list of refineries were closed for good. Tom Kloza, an analyst with the Oil Price Information Service said unless surplus capacity is slashed even further, refineries will continue to operate at a loss and that could result in another six U.S. refinery closures.

Kloza claims biofuels have replaced about 10% of gasoline on the road and many consumers have changed their driving habits and their cars after paying $4 per gallon in 2008.

Refiners are suffering from an anemic crack spread because of low demand. Plants must keep some production flowing through the plant or be forced to shut down processes that require lengthy and expensive restarts. Some of these processes have not been shutdown in over a decade.

BP reported strong profits for last quarter but said ts refining margins fell from $5.20 a barrel in Q4-2008 to $1.49 per barrel in Q4-2009.

Several refineries undertook expensive upgrades after the ramp up in prices in 2007-2008 only to have demand die after the upgrades were begun. Marathon is currently spending $3.2 billion to upgrade its Garryville, LA refinery to increase capacity to 425,000 bpd. Now that capacity is not needed.

Valero shutdown the 230,000 bpd Delaware city refinery. In June they shutdown the 275,000 bpd refinery in Aruba. Several more of Valero plants are up for sale. Valero, once the most prosperous of U.S. refiners, lost $2 billion in 2009.

Iran was back in the news making threats again. Hardly a day goes by without some stupid attempt to gain attention and elevate themselves in the eyes of the region. A senior commander in the Islamic Revolutionary Guards Corps (IRGC) reiterated Iran's control over the world's energy supplies. He warned that Iran has the power to cut energy to the "Green Continent" whenever needed, especially in the cold season.

"Iran sits on 50% of the world's energy supplies and it if wants, Europe will spend the winter in the chill." Iran only has 16% of the world's natural gas, second only to Russia, but they control the Strait of Hormuz. Over 40% of the world's oil supply moves through that strait every day. Iran has always threatened to block the strait if they were attacked over their nuclear program.

The U.S. would quickly move to surpress any attack on the strait but once fighting broke out no tanker driver/owner is going to want to risk taking their $125 million tanker through the strait to test the hidden Iranian weapons. Just sinking one tanker in the 2-mile wide strait would be a major psychological barrier to future passage.

I believe this is an empty threat by Iran because they would incur the wrath of many nations if they played this card. It is of more value as a high stakes bluff than an actual military action that would bring a strong reprisal. Keep up the tough talk Iran and pretty soon you won't even be able to import toilet paper.

Jim Brown

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