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Michael Lynch: Declining Production At Saudi Arabia’s Largest Oil Field Is Not Cause For Concern

Production

Saudi Aramco has now released its IPO Base Prospectus and the reaction has been varied and often confused. The headline was its $111 billion in profit, which many appropriately pointed out is not so much profit but rent. (See explanation below.) Second, the cost per barrel, put at $x, surprised many as seeming rather low. Recent supply curves have put Middle East onshore oil costs at $20-40/barrel, but before prices soared after 2003, estimates were much lower. Given that the big Middle Eastern producers were not experiencing depletion on any significant scale (Saudi Arabia was producing less than 2% of its reserves each year in the 2000s), implying that costs should not have increased as a result of depletion, and that the increases were cyclical, reflecting the stresses on the service industry as global upstream investment soared.

The other item that created at least a few headlines was the table on page 88 which referred to production capacity by field, showing that the supergiant Ghawar field has a capacity of “only” 3.8 million barrels per day, down from the conventional wisdom of 5 mb/d. Most considered this a surprise; one blogger said the news “shocked analysts”  and one analyst claimed that “surprisingly low production capacity figure from Ghawar is the stand-out of the report”.

A reporter noted that the decline seemed to prove the late peak oil maven Matthew Simmons’ point that the Saudis would “struggle” to maintain capacity at Ghawar.  In fact, it merely shows that the oil company chose to replace declining capacity in Ghawar by investing in other fields. (The choice of the word struggle is telling; Simmons provided no estimate of how difficult—or not—it was to add capacity. I struggle to put my socks on in the morning, but I’m not running out of feet.) As the figure shows, Saudi Arabia has the largest conventional oil reserves and one of the lowest rates of depletion in the world.

Oil Reserves by Country

The author from BP data

The point is that the Ghawar field, like all fields, has been depleting since the first barrel was produced. That’s what depletion means. It has not been in decline (in the sense of production trends) because the company long chose to replace depleting production with new investment—wells, water injection, etc.—that is the difference between the rate of natural decline (the percentage of reserves produced, in theory) and the actual decline, or production trend. Peak oil advocates long noted that the natural decline in Ghawar was thought to be 8%, meaning that all else being equal, production would drop 400 tb/d from the 5 mb/d level (year one) and 368 tb/d in year two and so forth.

Why did Ghawar’s production decline? Since the field still has 48 billion barrels of proved reserves (according to Aramco’s numbers), maintaining 5 mb/d should be technically easy. However, the field is not a stand-alone operation; Aramco has a choice of investments among numerous fields, and explicitly chose to add capacity elsewhere, as proven by the fact that the national capacity is 12 mb/d, showing no signs of decline.

Why invest in other fields instead of Ghawar? The economically rational explanations would be that the company wanted to exploit more favorable pricing for different crude qualities or that additional capacity in other fields had become cheaper because of geological, engineering, or geographical reasons. A more exotic reason would be if the engineering department wanted to test some recovery method that applied to another field; a more mundane rationale could involve better housing or restaurants in the preferred location.

Regardless of what other judgments are made about the Saudi Aramco offering, the company and country clearly have the largest reserves and among the cheapest.

[Profit is what you earned through your own actions.  Rents are value that exists without the efforts of the producer, usually in commodities like gold or oil.  If oil is worth $70 a barrel and costs $3/barrel to produce including a return on investment for the producer the rest is rents.]

Forbes



71 Comments on "Michael Lynch: Declining Production At Saudi Arabia’s Largest Oil Field Is Not Cause For Concern"

  1. Cloggie on Sun, 7th Apr 2019 4:04 am 

    “Cloggmeister, sir, why are they not spread across the planet saving mankind?”

    Because they are new.

    Just like nobody had an internet connection in 1994, nobody has a salt-water battery, as of yet.

    It could be the ideal macro-storage-solution for flatland Holland:

    https://deepresource.wordpress.com/2019/04/03/energie-eiland-in-de-westerschelde/

    https://deepresource.wordpress.com/2019/04/02/energy-island-in-zeeland/

    The energy density per square km is 100 times higher than with a pumped hydro storage with a 10 meter height difference, like foreseen with this solution:

    https://deepresource.wordpress.com/2018/12/31/doggerbank-pumped-hydropower-storage/

  2. Davy on Sun, 7th Apr 2019 4:10 am 

    “Because they are new.”

    Bull shit cloggo, salt and plastic?? More hype from the forum hypster.

  3. Davy on Sun, 7th Apr 2019 4:16 am 

    I am not thupid liek DirtyJuan. I stay up untill 4am to purtect the pO.place, cuz I am fair and shmart. Not dumbaz like the jianP.

  4. Cloggie on Sun, 7th Apr 2019 4:22 am 

    “Bull shit cloggo, salt and plastic?? More hype from the forum hypster.”

    I give corporate and university links, but empire dave denies the significance, because it doesn’t fit his collapsenik worldview.

    I’m comfortable with that.

    Keep spreading doom and hopelessness and talk yourself into the grave, empire dave, the sooner your club will fall flat on its face.

    #SelfFulfillingProphecyOfDoom

  5. Not Davy on Sun, 7th Apr 2019 4:25 am 

    Davy on Sun, 7th Apr 2019 4:16 am

    JuanPee is up to stalk and prick. You got it this is a juanpee post and not Davy

  6. Davy on Sun, 7th Apr 2019 4:27 am 

    “I give corporate and university links, but empire dave denies the significance, because it doesn’t fit his collapsenik worldview.”

    You give your personal wordpress puke links cloggo. Look around you and tell me why these saltwater batteries are not everywhere?

  7. Davy on Sun, 7th Apr 2019 4:33 am 

    Floating nations is an idea for you cloggo. Check this out.

    “Floating cities – fantasy or the future?”
    http://tinyurl.com/y6pv2v3f bbc

    “Oceanix City, or the world’s first sustainable floating city, would essentially be groups of hexagonal platforms – anchored to the seabed – that could each house around 300 people, effectively creating a community for 10,000 residents. Cages under the city could harvest scallops, kelp, or other forms of seafood. Marc Collins Chen, the chief executive of Oceanix, said the technology to build large floating infrastructure or housing already exists. “The biggest question in people’s minds is if these cities can actually float,” Mr Collins Chen told the BBC. “There are thousands of such houses in the Netherlands and other communities around the world. It is now a question of scale and creating integrated systems and communities.”

  8. Davy on Sun, 7th Apr 2019 4:39 am 

    I have referenced these people in the past and this is a good time to revisit their message.

    “The Ancient Guardians of the Earth”
    http://tinyurl.com/y6ssarnn bbc

    “The Arhuaco are (with the neighbouring Kogi and Wiwa, or Malayo) one of three virtually indistinguishable remnant groups of the ancient and advanced Tairona civilisation. Brutally subjugated by Spanish conquistadors in the 16th Century, the survivors retreated into the pyramidal Sierra Nevada de Santa Marta that explode upwards from the Caribbean coast of Colombia. Their homeland – the world’s highest coastal mountain range – comprises every distinct climatic ecosystem in Colombia, from coastal wetlands and equatorial rainforest to alpine tundra and glacial peaks. Declared by Unesco in 1979 as a Biosphere Reserve of Man and Humanity, the mountain range was named as the most irreplaceable ecosystem on Earth by Science journal in 2013. The Arhuaco-Kogi-Wiwa community (pop. about 90,000, according to non-profit organisation Cultural Survival) is one of the world’s last uncorrupted indigenous civilisations to have survived culturally intact since the time of the Aztecs and Incas. They call themselves the ‘Elder Brothers’, are ruled by a mamo priesthood and maintain an ancient cosmovision (a conscious, cognitive interpretation of the world) based on a worship and custodianship of Mother Nature.”

  9. makati1 on Sun, 7th Apr 2019 5:08 am 

    Hypocritical Davy. You need to review YOUR posts for sexual references, animal and human. You are always talking about”neutering” and homosexual sex. My comments only refer to your previous delusional visions.

    Maybe someday, you could actually debate intelligently and prove your assertions? Nah! too difficult and you might be forced to see the real world. The WHOLE real world. It is not like you want it to be. You are drowning in propaganda fed to you by your masters. Not mine anymore. The view from the beach in the Philippines is much clearer than yours is in backward Missouri.

  10. JuanP on Sun, 7th Apr 2019 5:09 am 

    Davy frequently boasts that he’s a REAL GREEN as opposed to everyone else.

    What he fails to tell people is he is a lifelong RepubliCON supporter, which means by proxy Mr. REAL GREEN supports the wholesale destruction of the natural world. Trump and his RepubliCON enablers have used every opportunity to repeal, destroy, and weaken virtually every ecological policy adopted by the US including the sale of America’s parks to the highest bidder, repeal of the Endangered Species Act, global climate change is a hoax, etc.

    For Davy to label himself a REAL GREEN is the absolute height of hypocrisy.

  11. Cloggie on Sun, 7th Apr 2019 5:14 am 

    While empire dave is preparing himself for a delusional alliance with the local aboriginals, Holland moves away from empire:

    https://www.geenstijl.nl/5147088/renaissancevloot-loopt-zes-zetels-uit-op-vaasjesvlot/

    The FVD populists are picking up speed and increase their size in the polls.

    Here Baudet’s recent “boreal” victory speech (English subs) at the occasion of winning the local elections:

    https://www.youtube.com/watch?v=qURoK7oEhTQ

    Soon he will win the national elections and likely formerly libtard Holland will be the first core western European country with a populist heading government.

  12. Davy on Sun, 7th Apr 2019 5:15 am 

    “Davy frequently boasts that he’s a REAL GREEN as opposed to everyone else.”
    Got any backup on that?

    What he fails to tell people is he is a lifelong RepubliCON supporter, which means by proxy Mr. REAL GREEN supports the wholesale destruction of the natural world.
    I guess that explains why I voted for Obama twice.

    “Trump and his RepubliCON enablers have used every opportunity to repeal, destroy, and weaken virtually every ecological policy adopted by the US including the sale of America’s parks to the highest bidder, repeal of the Endangered Species Act, global climate change is a hoax, etc.”
    No disagreement there

    “For Davy to label himself a REAL GREEN is the absolute height of hypocrisy.”
    Obviously you are not “REAL GREEN”

    But we do have this evidence of what you are:
    “JuanP on Thu, 30th Jun 2016 4:56 pm I think I could use my antisocial, psychopathic, sociopathic skills to convince people to vote for Trump. I can be very convincing when I want and I am excellent at manipulating people.”

  13. Davy on Sun, 7th Apr 2019 5:20 am 

    “Hypocritical Davy. You need to review YOUR posts for sexual references, animal and human. You are always talking about”neutering”
    A makato, I don’t think neutering is a very sexual term?

    “ and homosexual sex.”
    Well, you and juanpee do act like gay boys. Nothing wrong with being gay except if you are a lying cheating like juanprick who also says he is married. I think his wife dumped him and that is why he is off in lunatic land.

    “My comments only refer to your previous delusional visions.”
    Sure they do makato, LOL, you obsessively talk about goat sex every chance you get when trying to do your 12 year old Davy putdowns.

  14. Davy on Sun, 7th Apr 2019 5:39 am 

    Here is some real green for you Juanpee:

    Heat Master wood boiler
    http://tinyurl.com/y5bfkxo6

    “The GS series continues the HeatMasterss tradition of rugged, easy to use outdoor wood furnaces. These ultra high efficiency wood burning furnaces. “Wood Gasification Wood gasification is the most efficient process available for wood burning. Wood gas is generated in a high temperature reaction (>700° F) between the wood and a limited amount of oxygen. The heat and lack of oxygen “bakes” the wood, causing the gases in the wood to be released. The wood gas mixture that is created in the firebox then gets forced through the base of the fire along with any ash that would come with it and burned at temperatures around 2000° F in the gasification chamber. This creates a very hot, very clean burn which helps you get the most out of your fuel. After the gas is burned, the heat is transferred to the water jacket using the heat exchange tubes. Normal exit temperatures of the exhaust are 200 – 300 F. The most notable indicator of effective gasification is the lack of smoke exiting the chimney. The gasification process creates longer burn times and can reduce wood consumption as much as 50% compared to a standard wood furnace.”

    I added this to my stove for hot water in the summer. I mounted it on a small roof next to the wood boiler to keep the wood dry. Here is an a picture of the concept:
    http://tinyurl.com/y68una7t
    Here is the great part about the set up:
    “This Pump that only Operates when the Sun is Shining pumps faster in bright sunlight and slower as the sun loses it’s strength. The water drains back into the furnace when the sun is down or weather won’t cooperate, this also protects it from Freezing. Your well insulated, Furnace, stores the hot water until needed then transfers it with a water-to-water heat exchanger to your water heater. This basically transforms your water heater to an insulated storage tank, saving you money every month on your water bill. Our solar units are designed using Evacuated Tubes that are Independent, so if one fails it can be replaced without disturbing the rest of your unit. They are designed so NO water flows through the tube itself , even if you break a tube, there is NO water loss. This State-of-the-Art design uses an efficient Quasi Tracking style tube, meaning that it is designed more rounded on the inside to keep the maximum amount of surface pointing at the sun at all times. This greatly improves the Effiency and the output of the Solar unit. The VACUUM TUBES heat an Element on the end that mounts directly into the Heat exchanger tube. This greatly reduces the risk of water pockets that will freeze in your system and it also reduces the maintenance of the system. You don’t use expensive special heat transfer fluid, just water. Our Unit processes 3.4 gallons of water per minute and raises that waters temperature 5 degrees each time it passes! Acme Energy’s Solar units are high quality, durable, and complete with the Solar Collector tubes, Aluminum Frame, Exchanger Housing(manifold), DC Solar Powered pump, Collector Panel , making this a totally self contained, off-the-grid system. Our Solar Unit can be added to almost any Outdoor Water Furnace with only a small amount of effort.”

    The key to this system addition is simplicity and adaptability. In the summer I want to heat hot water and not use wood. I can actually use both if I like. This system will also enhance my heating system during fall and early spring when heating needs are less. It adapts to the current water to water system I have that preheats water into the hot water heater. It is a low tech way to gather solar heat by enhancing a heating system already installed.

  15. makati1 on Sun, 7th Apr 2019 5:40 am 

    GO TRUMP! Keep destroying America one ‘Tweet’ at a time! You are doing a great job! So far you are hitting 100% with your lies…er…campaign promises. Keep burning up the national credit card! You are on track to make Obama’s ‘shop till you drop’ spending spree look like a miser by comparison. $700,000,000,000.+ in the first 6 months of the 2019 fiscal year! Good job! Try for $800,000,000,000.+ in the second half. You can do it! $2,000,000,000,000.+ next year?

    Go Trump! I am waiting for that DEBT can to hit that wall and explode into the Greatest Depression. Isolate America! You only need most of your imports as you make nothing yourself but expensive weapons that don’t work. Now your own farms are underwater in more ways than one. $50 milk in the future? $20 loaf of bread? Maybe higher?

    GO TRUMP! The US melt-down is the best show on the internet. Couldn’t happen to a more deserving people. The killing, starvation and death is coming home to America. Blow-back is a bitch! I hope it happens before the insane in DC can start a nuclear war. They are trying desperately with no sucess, thanks to Russia and China. A nuclear “false flag” in your future, America? We shall see.

  16. Davy on Sun, 7th Apr 2019 8:23 am 

    I’m real glad your back JuanPee. You stimulate my mental retardashun.

  17. Not Davy on Sun, 7th Apr 2019 8:49 am 

    juanpee posted this not Davy

    Davy on Sun, 7th Apr 2019 8:23 am

  18. Pete Bauer on Sun, 7th Apr 2019 12:11 pm 

    Emboldened by the peak of Al Ghawar ( 3.8 million b/d) and Permians increase to leadership (4.1 million b/d), the US congress is moving ahead with NOPEC Act.

    In turn, Saudis are threatening to ditch US $ in oil trade and move to other currencies. Now this is mainstream news.

    See how a big change in 2 oilfields is moving 2 countries towards collision course.

  19. george on Mon, 8th Apr 2019 12:29 pm 

    Strangest headline I have ever seen .

  20. Michael Lynch on Tue, 9th Apr 2019 8:42 am 

    Hey, Mob, explain this: https://oilprice.com/Energy/Crude-Oil/Oil-Gas-Discoveries-On-The-Rise-As-Oil-Majors-Dive-In.html

  21. I AM THE MOB on Tue, 9th Apr 2019 10:45 am 

    Mike

    From your link;

    “Global discoveries of conventional resources in the first quarter reached a robust 3.2 billion barrels of oil equivalent (boe). Most of the gains were recorded in February, posting 2.2 billion barrels of discovered resources – the best monthly tally on record since August 2015.

    “If the rest of 2019 continues at a similar pace, this year will be on track to exceed last year’s discovered resources by 30%,” says Taiyab Zain Shariff, Upstream Analyst at Rystad Energy.”
    https://oilprice.com/Energy/Crude-Oil/Oil-Gas-Discoveries-On-The-Rise-As-Oil-Majors-Dive-In.html

    The world is consuming around 37 billion barrels a year ie 100 million barrels a day..And you are crowing about 3 billion barrels being discovered so far..That is only about 1/3 of the amount we need to cover annual consumption..

    And last year the world only discovered around 9 billion. source: RYSTAD
    https://www.rystadenergy.com/newsevents/news/press-releases/oil-gas-exploration-winners-2018/

    So even a 30% increase this year wouldn’t even be half of the worlds annual consumption..

    Did you ever read your own references?

    Thanks for proving my point..

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