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Page added on July 16, 2017

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Aramco’s Odd Response to a Future Oil Shortage

Production

Let’s say you’re the holder of the world’s largest reserves of conventional, low-cost crude oil and you believe the supply outlook is “increasingly worrying” due to a lack of investment. Enhancing production capacity so as to cash in when prices soar would seem like a good idea. Apparently not if you’re Saudi Aramco.

Saudi Arabian Oil Co. CEO Amin Nasser spoke at the World Petroleum Congress in Istanbul last week, describing his company’s plans to invest $300 billion over the next decade. But that cash won’t go toward boosting the rate at which Saudi Arabia can get oil out of the ground, even though as much as 20 million barrels a day of new output could be needed over the next five years to offset rising demand and the natural decline of fields that are currently in production. Instead, that money will be used to maintain current capacity, and double gas output.

Am I alone in seeing this as an odd response to the supply crunch Nasser sees looming?

In Reserve
Saudi reserves jumped by 85 billion barrels in 1998, but have changed by less than 1.6 billion each year since 1990
Sources: Bloomberg, BP

Saudi Arabia sits atop 266.5 billion barrels of proven oil reserves. That’s more than any other country, if you exclude the extra-heavy crude in Venezuela’s Orinoco Belt. At under $9 a barrel, the cash cost of production is the lowest in the world, according to consultants Rystad Energy. To me, this screams, “drill, baby, drill.”

I would go further and argue that Saudi Arabia should be opening its upstream oil sector to foreign or local private investors — under carefully controlled conditions, of course. If Mexico can do it after almost 80 years, then why not Saudi Arabia? Yes, I know there are issues of national pride and memories of unfavorable concession terms from the 1930s, ’40s and ’50s, but these are battles of the past, not of the dynamic, forward-looking nation that Crown Prince Mohammed bin Salman wants to build.

Foreign Aid
Iraq’s foreign investors have helped boost capacity by more than 2 million barrels a day
Source: Bloomberg

Just look at the impact that foreign investment has had on Iraq, and think what the opportunity to invest in Saudi Arabia would do to the attractiveness of alternatives in Iran.

Why wouldn’t Saudi Arabia position itself to reap the rewards of the industry’s failure to invest in boosting oil production capacity?

There are a number of possibilities.

It can’t afford to raise upstream capacity on top of its other plans. This would seem unlikely. While Saudi Arabia has certainly been hurt by the halving of oil prices since 2014, financial reserves are still plentiful and it could redirect part of its planned investment budget to developing known oil reserves.

Hardly Hard Up

Reserves aren’t as big as reported. This is a long-running claim by those who point to the big jumps in oil reserves disclosed by OPEC countries in the 1980s when they were a factor used to determine output quotas.

A former colleague, who previously worked in both OPEC and the Iraqi oil ministry, argues that the revisions corrected previous under-reporting of discoveries there had been no incentive to divulge.

Don’t expect the Aramco IPO to shed any light on the matter, either. With oil in the ground remaining the property of the Crown, there won’t be anything like a full audit of Saudi oil reserves in the foreseeable future.

Decline rates at existing fields are so steep that Aramco must run as fast as it can just to stand still. This was certainly a popular theme a decade or so ago when Matt Simmons published his book Twilight in the Desert, but one that has found few supporters in recent years.

Maybe Nasser doesn’t believe his own story of a future oil shortage and if the need for additional Saudi capacity doesn’t exist, then there’s no point investing in it. He wouldn’t be alone in that view. The “new normal has emerged,” India’s Petroleum Minister Dharmendra Pradhan said in an interview at the same event in Istanbul. “This is a reasonable price for everyone.”

I have no idea which, if any, of the above is closest to the truth. But I’m sure everybody will have their own favorite, and probably plenty more besides.

bloomberg



2 Comments on "Aramco’s Odd Response to a Future Oil Shortage"

  1. bobinget on Sun, 16th Jul 2017 11:50 am 

    One way KSA plans to deal with gas shortages and wasted exportable oil.

    Wind:

    Build more wind and solar apparatus.

    https://www.bloomberg.com/news/articles/2017-07-16/saudi-arabia-starts-bidding-process-for-400-megawatt-wind-plant

    Solar:
    http://www.sunwindenergy.com/news/35-mw-solar-farm-saudi-arabia-completed

  2. bobinget on Sun, 16th Jul 2017 12:19 pm 

    A side bar for investors;
    KSA just put out bids for one of the biggest wind projects ever.
    The three obvious competitors: GE, Siemens, and Chinese company ‘GoldWind’ {XJNGF}.. A fourth,
    Denmark’s ‘Vestas’ (a dark horse)

    I say dark horse because KSA will doubtless award
    contracts to politically sensitive nations.
    Denmark is free of crude oil imports. No dog in fight.
    The US; KSA might wish to better its image here.
    Europe: currently seeking gas/oil imports from US
    shale. Watch GE volume.

    My money is on GoldWind, (really).
    It’s not that their turbines are any better or much cheaper. KSA knows full well its export future is inextricably tied to China. China can also supply cheaper labor both technical and blue-collar.
    GoldWind has an excellent record for timely delivery and performance on three continents.
    (look it up, I did)

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