THE Saudi Arabian Oil Co. (ARAMCO) pt 2 (merged)

[seahorse3]

I disagree that the demand is not there. Demand is being killed by higher oil prices hurting the economy. So, it oil were back at 1999 levels of less than $10 a barrel and gas was under $1 gallon US, then the demand and economy would significantly improve. In my opinion, they don't, bc the price of oil has risen dramatically since the glory days of the late 90s economic boom. The price of oil has risen because world demand rose and bc the cost to develop the oil has risen, in part bc the easier to reach cheap oil is gone and the oil we get is more costly to extract. I think the evidence is the world economy can't grow (world GDP) can't grow with $100 plus oil. It maintains, but certainly doesn't grow. I'm not really sure we are maintaining, bc in most measurably sectors, there is still ongoing contraction limited in part, or ameliorated in part, by gov'ts throwing money out there to create inflation in a deflating economy environment. I believe that the "Arab Spring" was a direct result of this plateau oil. Why? One of the motivators was high food prices. They import their food and the cost of food is rising in direct response to higher cost to grow food. Many years ago, the Saudis said they would defend $30 barrel oil and they said this for good reason. High oil doesn't benefit anyone. The problem is, $30 oil is gone (absent a depression). If the world economy is to grow, oil will be much more than $30 barrel.

I wish the old Saudi thread had not been deleted. A lot of time and effort went into that and some other threads, which was all lost along with all the thoughts that went into it.

[pstarr]

They promised those megaprojects long before the prices rose, back in 2005. At the time SA knew Ghawar was in decline. We knew here at PO.com the projects would come on line in 2010. Yes, the Saudi's made good, but Ghawar and the other giants continued to decline. And now no more pronouncements from the Kings. They are laying low for good reason. They can not expand production, their population is absorbing more and more exports. And the young poor non-royal saudies are about to lose their cool--Saudi Spring and all that. I'd shut my mouth also.

Ghawar was not in decline according to 3 or 4 papers that were published in the SPE back a number of years ago. We talked about all this a long time ago in the Saudi Arabia Reserves thread, a huge thread that spoke about reserves, production, errors made in the Twighlight in the Desert analysis etc. and which some moderator decided to destroy a couple of years ago. The projects, as I said were started at the point that the Saudis predicted they were going to run out of spare capacity and based on their initial experimentation with MRC wells the economics supported the massive investment. They got caught in the midst of their campaign by the quick run up in oil price. Remember that in mid ’05 oil prices were in the $40/bbl range but that was a substantial buildup from the previous $20 range that the industry had indured for a number of years. Within a year prices had doubled once again to around $80 before they took a brief respite and rose to over a $100 in 2008. During that whole time period the Saudis were in the process of completing the mega-projects so they didn’t have additional spare capacity to bring on stream. It wasn’t until the bigger projects reached completion in late 2009 and throughout 2010 that the spare capacity became available. By that time the world was struggling it’s way out of a massive recession so there was hardly any need for that oil.

You and SPE may be willing to repeat assurances from the Royals at face value. I don't, nor do analysts like JoulesBurn over at OD. Here is his latest paper on that subject, regarding the Haradh III development at the southern tip of the Ghawar oil field. Simple tools, historical data and new GeoEye satellite images offer proof the Royals deceive, exagerate productivity of the field, and under report the extraordinary nature of their efforts. Similar analysis at OD using these same tools have shown over the last 7 years have shown the same pattern; that old production wells on the perimeter of the Ghawar field have become new injectors/observation wells and that production have moved into the center of the field, at the top of the oil reservoir anticline where it will water out sooner or later. Pictures tell a thousand tales. Ghawar has long ago peaked.

Yes. And so why is oil at $120? And how and when will the "new projects" bring it back down to $80. And what about falling/failing SA exports in the face of extraordinary demand?

Well firstly oil isn’t at $120, WTI is at $86 and Brent is at $112. The higher Brent price is at least partly a result of the risk premium that has been imposed by on-going Middle East/North Africa tensions. The lower WTI is somewhat controlled by the fact eastern US terminals are full of North American crude. Brent ships mainly into markets that are also served by MENA crude and it has similar characteristics. When the turmoil in Egypt started the spread between Brent and WTI increased and continued to increase as we saw the domino effect with Tunisia, Libya and Syria. As the Libya debacle appears to be coming to an end the spread between WTI and Brent has been decreasing.
Whether or not the Saudis have the intentions of bringing the price down to $80 has more to do with their belief that the fair price of $80 - $90 is really what their analysis of demand and supply currently should have the price at. Their belief is the higher prices are due to “fear premiums” and not a lack of supply and if that is true by opening up the taps they run the risk of driving prices down to levels that are unhealthy for the oil industry as a whole and especially SA.
I am not sure what you mean by “extraordinary demand”. The Opec analysis that comes out each month is not showing extraordinary demand and rather shows the market as being balanced. Remember that the Saudi crude is a slightly different quality than Libyan crude. So when the Saudis said they could make up for Libyan crude shut-ins it really meant that they would have to produce more of their crude and swap it or blend it so as to sell to the European refineries. My understanding is that the Euro refineries which took Libyan crude could not deal with virtually any sulphur which made the task of making the Saudi crude attractive to them as problematic. Note that the Saudis did increase production for sometime earlier in the year as a consequence of the Libyan issue. My guess is production response after that has to do with how well they have been able to sell their crude. The economies in all of the countries which are their major markets has been slowing so you would expect exports to slow as well.

You imply WTI is the world-price standard and that Brent's high price is somehow an unrealistic/fickle indicator, only a consequence of short-term current events. The opposite is true. West Texas Intermediate is the price at Cushing Oklahoma, which is suffering a glut of ND and Canadian oil that can't be piped to the Gulf. WTI has limited application as a world benchmark anymore. The low price for WTI is only applicable to Midwest refineries. East, West, and Gulf Coast refineries pay a price similar to Brent. Granted I exaggerated the current price of Brent. However it is the spread that counts and Brent and others are the real-world indicators.

[rockdoc123]

ou and SPE may be willing to repeat assurances from the Royals at face value. I don't, nor do analysts like JoulesBurn over at OD. Here is his latest paper on that subject, regarding the Haradh III development at the southern tip of the Ghawar oil field. Simple tools, historical data and new GeoEye satellite images offer proof the Royals deceive, exagerate productivity of the field, and under report the extraordinary nature of their efforts. Similar analysis at OD using these same tools have shown over the last 7 years have shown the same pattern; that old production wells on the perimeter of the Ghawar field have become new injectors/observation wells and that production have moved into the center of the field, at the top of the oil reservoir anticline where it will water out sooner or later. Pictures tell a thousand tales. Ghawar has long ago peaked.

this article you point to is a tempest in a teapot and demonstrates the author doesn't know much about normal oil and gas practices. The ifield that is referred to in the article is simply a digital accumulation of all monitoring instrument data such that the field behavior can be measured against the full field model that was developed. This gives them the opportunity to intervene quickly and hence maintain production and pressure as optimally as possible. I can't qualify whether his assessment of new wells is correct as it comes down to interpretation of satellite imagery that is not meant for the resolution needed to determine where water lines, gas lines, separators etc go. He might be right, but so what? The whole idea of the original plan they had was not that this would be all they had to do...intervention is always assumed and given the monitoring they have it becomes that much more efficient. How many of the wells are producing currently or more importantly how many of the multi-laterals are producing can't be determined from a satellite image. The point of SMART completions is the ability to monitor individual laterals at surface and shut them in when water production increases beyond a certain point. The field model may be telling them that rather than drill another lateral from the main hole with the use of expandable liner it might be more useful to drill an additional well. This is all driven by cost benefit analysis and is not something new to the industry....we have been downspacing for as long as I can remember.

I am not sure why you are on this kick about whether Ghawar has peaked or not. There are a couple of SPE articles that I quoted from years ago on this site that state current recovery as being in excess of 50% and that full field models benefiting from the understanding of MRC well production, mobility ratios and wettability changes in the various reservoir units that ultimate recovery will be in the the area of 73% from the northern part of Ghawar and somewhat less from the remainder. The production rate is determined not by how much reserve is there anymore but by economic factors coupled with reservoir management.

This whole worry about whether SA has peaked or not is a red herring to my mind. Their production rates are largely impacted by political and economic issues. What is important is how much reserves were originally inplace and what ultimate recovery will be. Yes at somepoint natural decline will take over but given the current assessment of spare capacity and the notion that as natural decline happens that spare capacity can be eaten into a long flat rolling peak is likely achievable.

[pstarr]

Rock, how come you never engage the experts at TOD?

[rockdoc123]

I disagree that the demand is not there. Demand is being killed by higher oil prices hurting the economy. So, it oil were back at 1999 levels of less than $10 a barrel and gas was under $1 gallon US, then the demand and economy would significantly improve. In my opinion, they don't, bc the price of oil has risen dramatically since the glory days of the late 90s economic boom.

of course thats the rub, it's demand for what price of commodity. But costs have risen such that you will never see $10 or even $20 a barrel oil for more than the time it takes for some trader to smack himself in the forehead and say "what am I thinking". The bottom of the fair price the Saudis speak to is based on a price that it takes to make new oil projects economic. As an example a price somewhere between $75 and $80 has been talked about as a price necessary to get new heavy oil projects started in Canada. The breakeven price of current production is, of course much lower. As a consequence price can fall below the levels above but can't stay there very long before many companies close up shop and start to shutin production, simply because intervention becomes too costly. It was interesting to watch what happened to costs throughout the last collapse in prices. Within a few months on bottom we saw the price of steel drop which helped with respect to tubular prices and the cost of consumables (mud etc) dropped somewhat. Rig prices retracted some but labor costs remained high (and that is an important part of the equation). And as you say over time oil has become more costly to extract simply because it requires a higher level of technology. As a consequence costs are now as high as they ever were although prices are somewhat lower than the peak.

What is important of course is how much demand there is for oil at $80 and then at $90 and then at $100 and so on. I remember reading an analysis of the last collapse and even if you ignore all the other things going on (banks and the mortgage scams being the biggest) and look to oil as being the primary driver it wasn't until prices were up over $120 that the economy started to retract. I'm sure there are other analyses on this.

My own view on this is our dilemma is in the lack of efficiency in our businesses coupled with high expectations in the workforce. You can't drive down the cost of goods unless you become more efficient in how you spend and manage your business. In the oil and gas business we learned that fact quite well when oil dropped and stayed below $20 for sometime. All aspects of our business were streamlined, unnecessary functions were outsourced with a result of decreased Operating costs and G&A. If you can't drive down the cost of goods then you have no chance of impacting the cost of manpower. Its a nasty circle but the fact of the matter is that expensive oil is here to stay so unless someone comes up with a magical and cheap replacement we need to somehow figure out how economies can run properly at the higher prices.

[rockdoc123]

Rock, how come you never engage the experts at TOD?

I have from time to time over the years, most recently on the MacCondo well disaster thread.

My original reason for staying more on this site was I felt the information I could bring to the table would be helpful to more people. I find I likely spend too much time here as it is. I note that some of the other industry folk migrated away from PO and stay exclusively on TOD. I think either I'm thicker skinned or have more patience than they did.

I do think you need to qualify the term "expert". There is some good analysis done on TOD and there are a handful of experienced oil and gas professionals who report from time to time. But often there are authors who present in an authoritative manner and fail to point out the uncertainties in their analysis/statements which can easily be construed by less knowledgeable folks as "expert opinion". Don't get me wrong I think it is OK to speak with conviction but at the same time you need to acknowledge where the uncertainty lies. This is especially true of what I refer to as "remote sensing" analyses which aren't to do with satellites and the like but rather analyses where you have no direct measure and must infer conclusions based on sparse information. That was the whole point of the Saudi reserves thread of years gone by. It was intended to amalgamate all the bits and bobs of information from various sources and discuss them with respect to what was valid, what wasn't and what was still unknown. I think the best example of someone who was touted as an "expert" but who was far from it in the fields he dabbled in was Matthew Simmons (god rest his soul). For the average person reading his book and viewing his presentations it would appear that he really knew what he was talking about but once you went and looked at all the SPE publications he claimed to have read it was pretty clear that he had likely only read the abstract and worse yet did not really understand what was being said.

[seahorse3]

Well, I appreciate your staying here. I like more direct access to experts than can be had at TOD. Over the years, we have had a number of good "experts" here, and like you, they all took PO seriously and believed it was more an immediate concern than CERA, Yergin or the like would have us believe. Unfortunately, not all the experts we have had here have stayed.

As for the non-experts like Simmons, he may have made mistakes, but he also made great contributions to the issue of PO and SA in particular. Like it or not, SA is critical to every assumption we make about world politics, economics, etc, bc of the role they play in oil production. The same can be said of Russia and a few others. His book was critical in getting many MSM economic types to ask critical questions about BAU, which always assumed the world GDP could grow indefinitely because it was assumed Opec could increase oil production indefinitely. BAU never foresaw any limits. He was right, and we are increasingly seem that there are limits, that oil production doesn't always just go up (our plateau) and that leads to consequences and change - Arab springs, falling GDPs, bankrupt countries, etc.

Further, I believe, he pointed out that SA is at maximum production. Now, we can argue about another 2mpd in spare capacity, but even if they have it, they don't claim to have anymore than that. That was critical and is critical for MSM economist to understand that world GDP cannot grow indefinitely at 3-4% as was expected. Finally, the IEA and others are changing those assumptions that used to assume Opec would always make up the difference needed to grow world GDP until 2030. So, Simmons made a necessary contribution in a way that others were not able to.

[rockdoc123]

I don't disagree with the fact Simmons made a contribution. on a couple of threads here when we argued about his various statements my comment was his major contribution was in bringing the concept of Peak Oil to the general populace. The unfortunate part was too many people took his statements regarding SA going belly up based on his reading of SPE articles as fact. having read the articles and knowing quite a bit about the subject matter it was pretty obvious the situation was not as dire as depicted which I believe has been shown to be the case.

[misterno]

I don't want to change the course of discussion here but I can't help asking this question

Now that we are deep in recession and as a result the depressed oil prices, how would you think SA will compensate the additional revenue to balance the budget?

According to what I read, they need at least $100/barrels next year to balance the budget. Yet we are heading towards $70 this year. Maybe lower

If they can not balance the budget, then what would happen?

[OilFinder2]

Saudi Arabia Crude Production Rises to Highest in Three Decades

Saudi Arabia, the world’s biggest crude exporter, boosted output last month to the most in more than three decades to meet customer demand.

“We produced 10 million and 40 barrels in November because that’s what the customers wanted,” Ali al-Naimi said in an interview in Durban, South Africa, where he is attending a climate conference. That’s the highest level since at least 1980, according to data from the U.S. Energy Department. The desert nation pumped 9.4 million barrels a day in October, al- Naimi said on Nov. 20.

Saudi Arabia, the largest and most influential member of the Organization of Petroleum Exporting Countries, will meet with other members of the group on Dec. 14 in Vienna to set output targets for early 2012. The kingdom raised supply this year to make up for halted production in Libya and help prevent oil prices from surging

[...]

[OilFinder2]

dude. SA is still below their 1980 9.9 mbpd peak.

[rangerone314]

The # of rigs they have deployed, their public touting of the sufficiency of tar sands & shale oil to meet demand & their oil production level suggest they have no spare capacity left and will be going off the cliff soon.

[Bruce_S]

The # of rigs they have deployed, their public touting of the sufficiency of tar sands & shale oil to meet demand & their oil production level suggest they have no spare capacity left and will be going off the cliff soon.

Seems like things along these lines have been claimed since the oil crisis of the 70's. Back then we were told it required finding a new Saudi Arabia every 3 years to keep up with demand. Here we are, 34 years later, and still, only 1 Saudi Arabia. And they are still running out of oil. I wonder if we can keep running out of oil into the next century as well?

[rangerone314]

The # of rigs they have deployed, their public touting of the sufficiency of tar sands & shale oil to meet demand & their oil production level suggest they have no spare capacity left and will be going off the cliff soon.

Seems like things along these lines have been claimed since the oil crisis of the 70's. Back then we were told it required finding a new Saudi Arabia every 3 years to keep up with demand. Here we are, 34 years later, and still, only 1 Saudi Arabia. And they are still running out of oil. I wonder if we can keep running out of oil into the next century as well?

Is that the best you can offer, snarkiness?

[Bruce_S]

Is that the best you can offer, snarkiness?

You confuse snarkiness with the point. The point being (for those who confused it with snarkiness) that Saudi Arabia has been running out for a long time. Their oil production peaked back like 30 years ago. And yet...there they are....pumping oil..again...some more...and some more....

Takes a few more wells now? Okay. Certainly those who assumed previously that they were nose diving towards the desert were a bit premature.

http://www.theoildrum.com/node/2331

[rangerone314]

Is that the best you can offer, snarkiness?

You confuse snarkiness with the point. The point being (for those who confused it with snarkiness) that Saudi Arabia has been running out for a long time. Their oil production peaked back like 30 years ago. And yet...there they are....pumping oil..again...some more...and some more....

Takes a few more wells now? Okay. Certainly those who assumed previously that they were nose diving towards the desert were a bit premature.

http://www.theoildrum.com/node/2331

Nice that oil is $100/bbl during a crap economy. Thats a sign of how plentiful oil is and how high production is.

[OilFinder2]

The # of rigs they have deployed, their public touting of the sufficiency of tar sands & shale oil to meet demand & their oil production level suggest they have no spare capacity left and will be going off the cliff soon.

I wish I had a dime for every time someone predicted Saudi oil production was about to fall off a cliff.

[OilFinder2]

Nice that oil is $100/bbl during a crap economy. Thats a sign of how plentiful oil is and how high production is.

[rangerone314]

Nice that oil is $100/bbl during a crap economy. Thats a sign of how plentiful oil is and how high production is.

The real price of crude was higher during the late 70's/early 80's. During a crap economy. Plus we had shortages and rationing, which we don't have now. And production is higher now than it was then, plus we are in the process of reversing US production rates as Oilfinder2 has pointed out previously. Over at TOD some of the industry guys are making cash hand over fist. I recommend finding a job in the oil patch, allowing regular people to then laugh at those who think retail jobs are worth spit.

#1) Oil supply was artificially constrainted in 70s.
#2) China and India didn't have many cars in the 70's.

[rangerone314]

The # of rigs they have deployed, their public touting of the sufficiency of tar sands & shale oil to meet demand & their oil production level suggest they have no spare capacity left and will be going off the cliff soon.

I wish I had a dime for every time someone predicted Saudi oil production was about to fall off a cliff.

Yup it'll never happen. Just like Cantarell never happened or Indonesia leaving Opec. And I'm sure it'll never happen to Iran either, and their ONLY interest in nuclear power is weapons.