Even as Saudi Arabia’s oil production reached record levels, with total output hitting 11.1m barrels per day (bpd) in November 2018, the country is boosting levels of investment to ensure there is spare capacity to meet a global supply shock and subsequent increase in prices. According to Khalid Al Falih, the minister of energy, industry and mineral resources, the country will invest $20bn to pump another 1m bpd of crude in order to maintain spare capacity.
The US Energy Information Administration defines spare capacity as the volume of production that can be brought on-line within 30 days and maintained for 90 days. Typically, lower capacity can trigger an increase in oil prices. In recent years Saudi Arabia has had the world’s largest spare capacity, of between 1.5m and 2m bpd. In October 2018 that buffer slimmed to 1.3m bpd as the country began pumping 10.7m bpd, as it has a maximum output capacity of 12m bpd. The buffer fell further to 900,000 bpd when output increased in November.
Saudi Aramco was able to reach record output levels in November 2018 due to its increased capacity as one of its fields came on-stream and a bottleneck in another field was repaired. The company’s 2017 annual report noted it was on course to boost output from its Khurais oil field by 300,000 bpd in 2018 to give the field a total daily output capacity of 1.5m bpd. Khurais, which produces Arabian light crude oil, was first discovered in 1957. The latest boost in capacity is the result of an improvement programme launched in 2012, which developed the Lower Fadhli field and built new processing facilities to handle 300,000 bpd of crude, 143m standard cu feet per day (scfd) of associated gas and 34,000 bpd of natural gas liquids (NGLs). As part of this programme, approximately 650 km of pipeline was constructed to transport crude oil, gas, NGLs and seawater.
As the additional supply from Khurais entered the market in late 2018, a technical issue at the offshore Manifa field, which has the capacity to produce 900,000 bpd of heavy crude oil, was solved. The field, which is comprised of 27 drilling islands linked by a 42-km causeway, was reportedly hit by a technical issue in 2017. Reuters reported that corrosion of the water injection system used to maintain pressure in the reservoir was reducing output and that costly repairs would potentially require a shutdown period. It was reported that the repairs resulted in a combined increase in production of 550,000 bpd from Khurais and Manifa in the fourth quarter of 2018.
In Saudi Aramco’s 2017 annual report the company noted it made two new oil field discoveries in 2017 at Sakab and Zumul. However, the report did not give an indication of the capacity of the two fields or of how long the development of the new sites could potentially take. In his message in the annual report, Al Falih said that the oil industry globally had lost $1trn in planned investments since the 2014 fall in oil prices, despite the growth in global demand, which rose by 1m bpd to 1.5m bpd, as well as the declining returns from some of the world’s more mature oil fields. “Significant new investments are required in additional capacity and expanded and upgraded infrastructure, as well as the development of pioneering technology to make petroleum energy more sustainable and accessible,” he wrote. “Saudi Aramco is committed to playing its unique part in meeting the world’s energy needs today and tomorrow by continuing to invest wisely throughout the cycle and across the value chain.”
If a diplomatic bottleneck can be eased, Saudi Arabia can also tap its half-share in an additional 500,000 bpd of production in the neutral zone it shares with Kuwait. The offshore Khafji field was shut down in October 2014 and the onshore Wafra field ceased production in May 2015. Khafji is owned by Saudi Aramco Gulf Operations Company and Kuwait Gulf Oil Company (KGOC), while Wafra is operated by KGOC and Saudi Arabian Chevron. The shutdowns were caused by disputes over flaring regulations and Kuwait’s objection to having an international oil company operating in the zone. Talks between the two countries over the operation of the fields began in the summer of 2018; however, these appeared to stall in October after a meeting between Saudi Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud and Sheikh Sabah Al Jaber Al Sabah, the emir of Kuwait, failed to reach an agreement. S&P Global Platts reported that many observers believed the dispute would only be solved through international arbitration unless a sudden drop in the level global oil supply prompted the two sides to return to negotiations.
Saudi Arabia’s ability to meet spare capacity needs was given a boost in January 2019 with the publication of an independent auditor’s report on Saudi Aramco’s proven reserves of oil and gas, which increased the estimated total by over 2bn barrels. The audit, conducted by Texas consulting firm DeGolyer and MacNaughton (D&M), was commissioned as part of Saudi Aramco’s preparations for an initial public offering that is now slated to take place in 2021. The audit found the company had proven reserves of 263.1bn barrels of oil, 2.2bn barrels more than the estimates of the 2017 annual report. It also put total reserves of natural gas at 319.5trn cu feet, compared to the figure of 302.3trn cu feet that was previously reported. When the neutral zone total was included, D&M estimated oil reserves of 268.5bn barrels, compared to an earlier figure of 266.3bn barrels.
In a statement Al Falih welcomed the findings and said they underscored three important aspects of the country’s hydrocarbons sector: that world-leading economies of scale make the fields the lowest cost globally; the carbon intensity of Saudi Arabia’s oil is among the lowest in the world; and the findings underline the accuracy of the country’s reporting. “This certification underscores why every barrel we produce is the most profitable in the world,” he said. D&M’s assessment was based on 54 reservoirs that make up 80% of Saudi Aramco’s reserves. These reservoirs were found to contain around 213.1bn barrels compared to Saudi Aramco’s own estimate of 210.9bn barrels. The audit was limited to booked oil and gas reserves and did not include more recent discoveries including unconventional gas deposits.
The volumes of crude oil Saudi Arabia has available to export abroad are also affected by levels of domestic consumption. Historically, the country’s power stations have burned crude oil in the summer months as an extra feedstock to meet peak demand for air conditioning. However, a key part of upstream strategy is the development of natural gas fields that can provide a replacement source of feedstock for those power plants and industrial users. Data from the Joint Organisations Data Initiative (JODI) shows Saudi consumption of crude oil in power generation fell in recent years as the new gas came on-stream. At its summer peak, the use of oil can typically rise by 600,000 bpd, but JODI figures show it fell to 430,000 bpd by 2017. JODI data also showed that stockpiles of Saudi crude fell by 95m barrels, or 29%, from October 2015 to April 2018 as production decreases from the Organisation of Petroleum Exporting Countries (OPEC) were implemented. This suggests that as Saudi Arabia complies with new OPEC production cuts from January 2019 there will be ample storage to hold spare capacity.
Developing a deeper oil and gas spare capacity is a priority of Saudi officials to protect the sector and the economy as a whole from potential supply shocks and subsequent price instability, especially as in 2018 the energy sector contributed an estimated 34% of the country’s GDP. Substantial investment in spare capacity and reports that the country’s oil and gas reserves are larger than previously estimated support these efforts and put Saudi Arabia’s energy sector in a position of strength should a future supply shock arise.
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