The Financial Post has gone through the newly released Aramco oil production and reserve data and they think the most important new information is that the report shows that Ghawar has peaked. Ghawar used to produce ca. 5 million bbls/day just a few years ago, but now can only produce ca. 3.8 million/bbls/day today.
That means a ca. 20% decline in production has already occurred at Ghawar, apparently just in the last few years.
There is no way of telling from the Prospectus if the decline in average production rate at Ghawar is due to problems encountered or rather is a part of their overall management scheme. I’m thinking the latter based on some of the notes in the prospectus:
The Government determines the Kingdom’s maximum level of crude oil production in the exercise of its sovereign prerogative. Accordingly, the Government may in its sole discretion increase or decrease the Kingdom’s maximum crude oil production at any time based on its sovereign energy security goals or for any other reason, which may be influenced by, among others, global economic and political conditions and their corresponding impact on the Kingdom’s policy and strategic decisions with respect to exploration, development and production of crude oil reserves.
This is a simple way of stating that the government attempts to balance it’s internal needs for capital with the requirements it has as a lead OPEC member coupled with a healthy understanding of global supply/demand dynamics. It understands the need for some spare capacity in the system given the near train wreck they faced back in 2006 when spare capacity was zero and global demand was accelerating. They also understand that spending CAPEX today on spare capacity you might not utilize for sometime is money badly spent. As a consequence it is a bit of a juggling game and they have decided 2 MMB/d is the appropriate number.
The Government’s decisions regarding crude oil production and spare capacity, and the Company’s costs of complying with such decisions, may not maximise returns for the Company. For example, the Company may be precluded from producing more crude oil in response to either a decrease or increase in prices, which may limit its ability to generate additional revenue or to increase its production of downstream products.
And
The Company actively manages its prolific reserves base in accordance with the Kingdom’s laws and regulations to maximise long-term value while optimising ultimate recovery from its fields. Because of the size and number of its fields and spare capacity, the Company is able to maintain its desired level of overall production by tapping into new reservoirs when required to improve long term value through portfolio capacity optimisation. This approach, which differs from the typical industry practice of maximising production rates per field, is more capital efficient given the nature of the resources available and leads to stable production and higher ultimate oil recoveries.
When those two statements are taken in context what it means is ARAMCO can’t just bring new wells on in fields without understanding how it impacts their overall MSC. If they are already producing at MSC then bringing on a new well strategically in one field would require shutting in equal amounts of production elsewhere. As ARAMCO states they would do this based on their understanding of what the best management strategy is to optimize recovery. In the case of Ghawar we know that they have been busy bringing on new production in Khurais and Shaybah and that Ghawar has now produced somewhere around 60% of its currently recoverable Proven reserves. It is entirely possible that ARAMCO has brought on oil elsewhere at the expense of drilling new MRC sidetracks in Ghawar simply since they see this as helping them achieve their goal of optimizing overall recovery across the entire fields. As well the oil produced in SA is somewhat variable and ARAMCO may have decided to increase their capacity associated with the super light fractions to take advantage of demand from certain refiners. The numbers don’t tell you the reasoning unfortunately.
When it is all said and done whether Ghawar production has peaked or not is of much less consequence than was espoused in Twilight in the Desert. The comment was always made back then “where goes Ghawar so goes the whole of Saudi Arabia and the oil industry” and that has been shown in the prospectus assessment to be untrue. Ghawar production back when Simmons was ranting about this all the time was around 5 MMbbl/d according to ARAMCO and overall SA production was around 8 to 8.5 MMbbl/d meaning Ghawar indeed made up the majority of production. Rather than suddenly fall off a cliff as Simmons predicted Ghawar kept trucking along at a relatively stable water cut and depletion rate for another decade. And today Ghawar only makes up one third of the total ARAMCO production whereas total ARAMCO production is about 20% higher meaning Ghawar was not as important as suggested. Indeed ARAMCO has increased their spare capacity to 12 MMbbl/d while decreasing production at Ghawar. If Ghawar did peak Saudi Arabia as a whole certainly did not. All fields reach maximum production at some point and they all have a reserve life associated with them. For Ghawar the reserve life associated with Proven reserves is still pretty significant …48 Gbbls. To keep that reserve number in perspective that is larger still than the bulk of Super Giant fields original recoverable reserves (eg. Canteral, Aghajari, Tengiz, Majnoon etc) and there are only a few fields whose original recoverable reserves are bigger than the remaining reserves at Ghawar (eg. Burgan, Gachsaran) and it is pretty close to what was the total oil reserves of the US at the end of 2017. Not insubstantial by any stretch of imagination.
And the total reserve life for Saudi Arabia just based on Proven Reserves is around 60 years. What is significant in the prospectus is the statement:
The organic crude oil and condensate reserves replacement ratio based on the Kingdom’s reserves on a three year rolling average from 2016 to 2018 was 104%. The organic oil-equivalent reserves replacement ratio based on the Kingdom’s reserves on a three year rolling average from 2016 to 2018 was 127%. Reserves replacement ratios are calculated on reserves changes relative to net reservoir withdrawal from operated fields, rather than production volumes.
What that means is beyond the stated Proven Reserves which have been audited by D&M there is obviously a significant amount of Probable and Possible reserves that are continually being upgraded to replace produced Proven reserves. So the actual reserve life associated with 3P is probably very significant.