[Cog]

About time.

[eXpat]

Or it is because the Great and Mighty Kingdom of Saudi Arabia (Praise Allah!) is running out of petroleum.

Otherwise, why the frantic rush:

"It's not to expand capacity. It's to sustain current capacity on new fields and old fields that have been bottled up," one of the officials said.

State-run oil giant Saudi Aramco met leading oil service companies including Halliburton (HAL.N) over the weekend to discuss plans to boost the country's rig count this year and next to 118, from around 92 now, Simmons & Co analyst Bill Herbert said on Monday.

Link

That article, specially in Reuters, not in any fringe news website, should be a real shock for many...

[Outcast_Searcher]

This is getting interesting.

In practical financial terms, it seems to me the Saudis would want as high an oil price as they can get, as long as it doesn't cause:

1). Significant demand destruction.
2). A global economic crash (caused by plummeting oil demand and then prices).
3). The west to decide to just roll in and take the oil by force.

If the problem is really oversupply, then prices shouldn't get to a SUSTAINED level to cause major demand destruction. (I don't think we know what that price is -- pundits have it anywhere from $3.50 to well above $5.00 for a U.S. gallon of gas, yet they routinely deal with $10.00 and up for a gallon of gas in Europe).

Or if prices DID get to such a sustained level, the Saudis should increase supply accordingly - to avert a later price crash.

I think it will take having sustained very high crude prices causing the west to plunge into recession with no meaningful supply increase from the Saudis before we can make a strong bet on them running out of supply.

If that happens, then what? More volatility but lower average global economic output and then lower aggregate oil demand?
Or does Chindia plug along (as a trend) regardless, so despite high volatility, the average price of crude OVER TIME is much higher?

I suspect you need plenty of guts, cash set aside, and a longer timeframe than most people exhibit to play this game successfully. No wonder the rich find it easiest to win at this game, with cash flow to burn.

[eXpat]

This is getting interesting.

In practical financial terms, it seems to me the Saudis would want as high an oil price as they can get, as long as it doesn't cause:

1). Significant demand destruction.
2). A global economic crash (caused by plummeting oil demand and then prices).
3). The west to decide to just roll in and take the oil by force.

Another reason why high prices are here to stay
Saudi's 'hawkish' oil strategy to intensify oil geopolitics

The conversion of Saudi's oil strategy into a more hawkish one — similar to those of Iran, Venezuela and Algeria — will definitely intensify the geopolitics of oil
In my column last week, I voiced concern over the sustainability of the expansion of the Saudi welfare state vis-à-vis its new, significantly higher, oil target price ($100-$110 by 2015) required to balance its budget.

While the rest of the GCC states may well balance their budgets at lower oil prices, the conversion of Saudi's oil strategy into a more hawkish one — similar to those of Iran, Venezuela and Algeria — will definitely intensify the geopolitics of oil.

In short, with the exception of Oman (the GCC's only non-Opec member), the rest of the GCC now also operates in a higher oil economy.

Curiously enough, the Saudi oil minister said on Monday that the oil market was oversupplied. This was followed by Opec's secretary general noting that there was a $15-$20 fear premium as the regional unrest is priced in.

As oil continues to constitute a significant component of the GCC's GDP, higher oil prices seem to be the only way forward in sustaining economic development and staving off social discontent.

http://gulfnews.com/business/opinion/saudi-s-hawkish-oil-strategy-to-intensify-oil-geopolitics-1.796114

[Cloud9]

This does not have to be an either or premise. Both contentions could be right. On the one side you are seeing a perceptible decline in production and on the other the Saudi Royals want to hang on their gig a little while longer. It is probably a whole lot more fun being a real prince rather than being a has been prince living in exile.

[Plantagenet]

More info on the Saudi production cut: the Libyans produced sweet crude for the EU---the Saudis export more sulfur rich crude, and the refineries in the EU can't handle it.

So there is demand for crude after all----the EU desperately wants their Libyan crude back.

EU refineries in Italy etc. can only handle sweet Libyan crude

[rockdoc123]

OK some clarification is necessary I think.

Two Saudi officials told Reuters on Tuesday that the extra rig activity would maintain rather than increase the kingdom's oil capacity. It completed a multi-year expansion in 2009 meant to boost spare capacity by more than 3 million barrels per day.
"It's not to expand capacity. It's to sustain current capacity on new fields and old fields that have been bottled up," one of the officials said

What does this really mean? What they are saying is …we have the all the spare capacity we planned on building into the system, we are not producing anywhere near that. The rigs we are bringing will be used for workovers, in-fill drilling, drilling of new lateral sections in the MRC wells etc. The MRC wells are planned to have considerable amount of activity within the individual wellbores after they are initially drilled and completed. The Saudis are using SMART completions which allow them to monitor water production in each of the numerous multi-laterals and when it reaches a point they feel runs the danger of loading up the well then that particular lateral is shut-in and abandoned. They then use expandable liners to allow them to drill additional laterals from the same primary well and avoid down-sizing on tubing. This is not unusual stuff and not ominous. Aramco plans it's activities around the huge full field models simulations they have built, which tells them where they need to intervene on wells and where they need to infill.

As another point of interest, in the year 2000, the average output from a Saudi Arabian oilwell was 5,125 bbl/day. In 2009, the average was down to 2,817 bbl//day.

The fact that there is a couple of million barrels of day spare capacity suggests the lack of an immediate problem. They increased production in January and February so to say "their production is falling" is somewhat incorrect. Also you have to imagine that many of the wells that make up the total production have been producing at declining rates for decades but are still producing more capital than their operating costs which means you keep them producing. There are probably a lot of those wells in comparison to the MRC wells which by all accounts are producing at higher rates than in the past.

SPE paper 99281-MS 2006
Deployed Smart Technologies Enablers for Improving Well Performance in Tight Reservoirs—Case: Shaybah Field, Saudi Arabia Authors
S.P. Salamy, H.K. Al-Mubarak, D.E. Hembling, and M.S. Al-Ghamdi, Saudi Aramco

In addition, several advanced completion technologies such as downhole flow control systems (smart completions), expandable liners, and production equalizers were deployed in Shaybah Field. These technologies have shown major improvements to well performance and recovery. Smart controls assisted in optimizing production from each lateral in a multi-lateral setting in the event of premature gas or water coning. In addition, downhole smart completions improved well productivity in multi-lateral wells through an improved well cleanup process. Production equalizers when deployed in high GOR wells reduced gas coning by 50% and improved well productivity

SPE paper 118030-MS 2008
Maximum Reservoir Contact Wells: Six Years of Performance-Lessons Learned and Best Practices
Authors
Salam Salamy, Saeed Al-Mubarak, Hassan Al-Mubarak, Naseem Al-Dawood, and Ahmad Al-Alawi, SPE, Saudi Aramco

Results from the three fields have proven that MRC wells have significantly improved reservoir and well performance, minimized or eliminated water and gas production, and reduced development cost

SPE paper 115412-MS 2008

A Milestone for Smart MRC Wells in Saudi Arabia
Authors
Mohammed I. Al-Umran, Mohammad S. Al-Shenqiti, and Shaohua Zhou, Saudi Aramco; Mohammad A. Al-Nasif, WellDynamics; and Houssam Dayoub,

To date, results from 25 MRC wells have indicated a four-fold increase in well productivities and a three-fold decrease in unit-development cost when compared to the 1-km single-lateral wells

And as to the Italians not being able to handle the sour crude that's a bit over the top. The article referenced is incorrect in stating that Saudi produces Arab heavy sour.....in fact only 20% of their total production is heavy and about half has sulphur over 1%. When blended with Bonny Light the oil is very comparable to Libyan crude. If the Italians are missing Libyan crude I suspect it has more to do with missing tarrifs on the import line and the fact they are a producer in Libya (ENI makes money on both ends).

[eXpat]

And as to the Italians not being able to handle the sour crude that's a bit over the top. The article referenced is incorrect in stating that Saudi produces Arab heavy sour.....in fact only 20% of their total production is heavy and about half has sulphur over 1%. When blended with Bonny Light the oil is very comparable to Libyan crude. If the Italians are missing Libyan crude I suspect it has more to do with missing tarrifs on the import line and the fact they are a producer in Libya (ENI makes money on both ends).

Actually, i believe (but i may be wrong) that Italy is consuming Azerbaijan’s Azeri Light crude, which is more expensive than the Libyan oil.
And European refineries seem to be struggling

"There's a progressive deterioration in margins, and we don't see that changing this year. We see it continuing as a direct result of surplus refining capacity ... there aren't enough closures yet," said Mark Lewis of Facts Global Energy in a speech during International Petroleum Week.

Jean-Paul Vettier, the chief executive of Europe's largest independent refiner Petroplus, said he expected greater competition but he would not make further divestments after the sale of the French Reichstett refinery, which is expected in the second quarter.

"That's enough downsizing. Along with one or two others, we set the agenda for reducing capacity," Vettier told Reuters on Wednesday.

Political pressures could keep even loss-making refineries open for longer, with shutdowns in France and Italy seen as particularly difficult, analysts said.

Oil major Total was forced to close most of its French fleet in October last year because of a prolonged strike over pension reform.

European refiners have been putting up "For Sale" signs since the start of the economic recession in 2008.

http://www.futurespros.com/news/futures-news/ip-week-more-pain-seen-ahead-for-european-refiners-1000007983

Libyan energy company Tamoil said on Friday it would close a 90,000 barrels per day refinery in Cremona, Italy and gradually transform it into a depot by the end of 2011.

Tamoil did not say in a statement why it planned to close the refinery, but analysts and sector operators have said small and medium-size refiners are the most vulnerable in the refining sector downturn, which has been triggered by the economic crisis and weak demand.

Earlier this year, Tamoil had to suspended production at the Cremona plant to reduce excess stock.

Tamoil said on Friday its activity in sales and distribution of oil products to clients would continue regularly as well as its environmental protection and safety management activities.

It said it would work with local authorities and unions to reduce impact of the refinery closure on jobs.

http://www.libyaninvestment.com/index.php?option=com_content&view=article&id=149429:libyas-tamoil-to-close-cremona-refinery-in-italy&catid=42:libya-auctions&Itemid=54

Italy May Close Up to Six Oil Refineries as Consumption Slumps

Italy may close as many as six oil refineries in the next few years due to a decline in consumption and strong competition from Asia and the Middle East, the head of the country’s refiners’ association said.

“We risk losing between 10 million tons and 20 million tons of refining capacity,” Pasquale De Vita, president of the Unione Petrolifera, said in an interview. “The smaller refineries, the ones not directly linked to the sea, the ones that have more trouble taking on the huge investments in technology that are needed to keep up, are at risk.”

Italy’s small refineries, those with a capacity of 5 million tons a year (100,000 barrels a day) or less, include Eni SpA’s Porto Marghera, Livorno and Gela plants, Total SA and ERG SpA’s Pantano plant, Api SpA’s Falconara plant, Ies’s Mantova plant, and Iplom’s Busalla plant, according to the association’s latest annual report.

Lower profits from processing crude oil into fuels have forced refiners to cut costs and shut plants across Europe. In the last two years Petroplus Holdings AG has shut its Teesside plant in the U.K. and will close the Reichstett facility in France this year. Tamoil SA plans to close its Cremona plant in Italy and Royal Dutch Shell Plc is converting its Hamburg plant in Germany into a terminal next year. Total SA has closed its Flanders plant near Dunkirk in France.

Profits for refiners in the Mediterranean fell to an average of $3.24 a barrel in the quarter to Jan. 20, according to data from BP Plc. That compares with $3.44 in the fourth quarter.
‘Permanent Decline’

“It’s not just the economic downturn, there’s a permanent decline in consumption which means margins are not likely to improve,” De Vita said. He also said that environmental and labor costs are a strain that competitors in Asia and the Middle East don’t face allowing them to offer lower prices.

“European governments can’t have their cake and eat it,” De Vita said. “They want us to keep certain standards but then they lament the labor and social consequences of plant closures, we are asking them to think about what they want to do, we are a strategic sector.”

http://www.bloomberg.com/news/2011-01-25/italy-may-shut-up-to-six-oil-refineries-on-demand-slump-high-competition.html

[Serial_Worrier]

It's very simple, Ghawar is running out of oil. The world is running out. Doom!

[eXpat]

Oil Situation May Be Worse Than You Think

NEW YORK (TheStreet) -- Oil is the biggest single cost input into any business, good, commodity or product. We know it, but it bears repeating.
So, if you're looking for a reason for commodity prices to rise, you probably don't have to look any further than the single biggest input.
Right now, oil prices are scratching around the $110 a barrel range, a price unthinkably high even three and a half years ago. Laughably high. Ridiculous. Who could afford gasoline costing more than $4 a gallon?
The Financial Times recently published an astonishing story that just isn't getting enough attention. I like to think of the FT as the newspaper The Wall Street Journal would like to be if it weren't trying so hard to impress everyone with fancy Weekend sections and glossy magazine forays.
If you want to look distinguished, you might read the WSJ in public. But if you want to be informed, you'll also read the FT in private.
The story? The Saudis, as you may have heard, are increasing their social spending programs in an obvious attempt to deflate any "rebellious" ideas from their population.
They've recently announced a $125 billion spending program, which amounts to something close to 30% of GDP.
What it means is that the Saudi family will require a slightly ... higher sustained price of oil in order to break even. From the FT story:
"The break-even oil price the Gulf kingdom requires to balance its budget will jump from $68 last year to $88 this and then $110 in 2015, according to new estimates by the Institute of International Finance, a leading industry group."
Of course, even with the days of peak oil production likely in the rearview mirror, oil doesn't just double in price in a few years ... unless of course the currency you're using to price oil is also being devalued at a record pace.
So, you've got to start thinking that maybe Federal Reserve Chairman Ben Bernanke is starting to realize some of the disastrous effects of his devaluation policy
Oil contracts are settled in dollars, and the Saudis, as well as every other oil producer, don't have too much interest in playing along with the Fed's schemes.
The markets will continue to push oil's price higher and higher, as a simple function of dollar weakness. And the Saudis will continue to readjust their "break-even" number to account for dollar weakness. If they're not getting the price they want, they'll simply pinch the hose.

http://www.thestreet.com/story/11091698/1/oil-situation-may-be-worse-than-you-think.html

[Sys1]

So... we should do war with Saudis since they prevent western world to access cheap energy?
They can't stop having good ideas

[Pretorian]

So... we should do war with Saudis since they prevent western world to access cheap energy?
They can't stop having good ideas

no need for the war. Just stop feeding 'em

[Sys1]

no need for the war. Just stop feeding 'em

You mean stop feeding them with the food coming out of chemical pesticide made with their oil?

[Pretorian]

no need for the war. Just stop feeding 'em

You mean stop feeding them with the food coming out of chemical pesticide made with their oil?

exactly.

[Daniel_Plainview]

"The break-even oil price the Gulf kingdom requires to balance its budget will jump from $68 last year to $88 this and then $110 in 2015

Apparently, Saudi Arabia wants to be the only country in the world with a balanced budget. Good for them.

[rangerone314]

How about creating a FOODPEC?

Food producing and exporting countries. Jack up the price and make more money.

Good for the goose, good for the gander.

[Revi]

The Saudis are stuck between their people and the rest of the world which wants what they have got. They have to play a difficult game with keeping the people happy while sending enough crude out to keep their coffers full. I wonder what happens when they start to run out?

[Pablo2079]

If an exporting country wanted to make it seem like they had extra production capacity, wouldn't it make sense to pull back.... build up their stored oil and then release it in a surge later on? This would provide the illusion that they could provide a higher sustained production rate than they really could.

So the plan would look like:
1) "Increase" production (release some of the stored oil)
2) Claim the market is oversupplied (regardless of price) and pull back exports.
3) Build up storage again (as prices increase)
4) "Increase" production again (step 1 again)

This could go on as you go proceed up the price staircase. No real panic as many believe there is still plenty of excess production waiting in the wings...

Does anyone know how much storage they have? Would the outside world know what that status of that storage is at any given time?

[Pablo2079]

I'll have to look it up, but I thought Saudi Arabia was building a huge number of tank farms a few years ago.

Update: Just did a quick search and found this (as of 1992):

The kingdom had three main export terminals for crude oil with a number of smaller facilities closer to production units. The export terminals at Ras Tanura on the Persian Gulf were the largest in the world. Designed to export crude oil and LPG, the facilities included two piers and one sea island with a total of eighteen berths, which can accommodate ships of up to 550,000 deadweight tons (dwt). The facilities also included a tank farm with total storage capacity of 33 million barrels. Also on the Persian Gulf, thirty-three kilometers north of Ras Tanura, is the port of Al Juaymah. Tankers of up to 700,000 dwt could be accommodated at its six single-point moorings. Up to 4 million bpd of crude oil could be exported from Al Juaymah. Two additional berths were designed to export 200,000 cubic meters of LPG. Tank farm storage facilities had a capacity of 17.5 million barrels. The third Persian Gulf export terminal at Az Zuluf, located sixty-four kilometers offshore, served the Az Zuluf and Al Marjan fields with one single-point mooring.

http://www.country-data.com/cgi-bin/query/r-11616.html

Just one location (at that time) with a 33 million barrel storage capacity and then another with 17.5 million barrels. I'll keep searching.

[Nefarious]

I don't know about that. My mother used to work for Morton Salt. The Government came in and took control of one of their salt mines on weeks island and filled it with approx 73 million barrels. Made the salt company dig out a whole new mine on the side of the old one. Now I believe they have decommissioned the SPR at weeks island la. While it's not tanks or pools it is a storage facility that never had oil to begin with. There might be other locations similar to this one.