Wednesday, February 9, 2011

What did we Learn From the Saudi Cables?


For the most part, the cables just released seem to me consistent with my overall views on Saudi Arabia (developed in 2006-2007).  Let me highlight a few points of interest.

In the overheating cable, the US embassy says (in September 2007):
Saudi Aramco is half way through a $50 billion capital investment program that aims to expand Saudi's maximum sustainable daily oil production capacity from 9.5 mbd currently to 12.5 mbd by 2009. In May 2007, Saudi Minister of Oil and Mineral Resources Ali al-Naimi announced that Saudi Arabia would invest $75 billion to move from the world's tenth largest to third largest producer of petrochemicals by 2015. The bulk of these planned enormous capital investments and the megaprojects emerging from them are heavily concentrated in Saudi Arabia's Eastern Province.
I note that here the embassy states as though it's uncontroversial that Saudi Arabian production capacity at the time was 9.5mbd.  This was not conventional wisdom.  Here is the production graph again:


My interpretion has always been that Saudi Arabia in this period could not produce more than 9.5mbd, and that the excusions downward were probably not primarily voluntary, but due to production difficulties in tired parts of their fields.  However, in this period, the Energy Intelligence group was claiming that OPEC had 4mbd of spare capacity (much of which would have had to be in Saudi Arabia), while CERA was saying there was 2mbd and rising.  Apparently the embassy knew better.

Next are the statements on total reserves:
In a December 1 presentation at an Aramco Drilling Symposium, Abdallah al-Saif, current Aramco Senior Vice President for Exploration and Production, reported that Aramco has 716 billion barrels (bbls) of total reserves, of which 51 percent are recoverable. He then offered the promising forecast - based on historical trends - that in 20 years, Aramco will have over 900 billion barrels of total reserves, and future technology will allow for 70 percent recovery.

4. (C) Al-Husseini disagrees with this analysis, as he believes that Aramco's reserves are overstated by as much as 300 billion bbls of "speculative resources." He instead focuses on original proven reserves, oil that has already been produced or which is available for exploitation based on current technology. All parties estimate this amount to be approximately 360 billion bbls. In al-Husseini's view, once 50 percent depletion of original proven reserves has been reached and the 180 billion bbls threshold crossed, a slow but steady output decline will ensue and no amount of effort will be able to stop it. By al-Husseini's calculations, approximately 116 billion barrels of oil have been produced by Saudi Arabia, meaning only 64 billion barrels remain before reaching this crucial point of inflection.
Here is al-Husseini's view of the world:



Here the blue line is cumulative production in billions of barrels (which I have updated through 2010), the black line is his estimate of ultimate recovery, and the red line is the half way point.  His estimate is based on an estimated recovery factor of about 50% across all the reserves.  My estimate of ultimate recoveries from the waterflood in Ghawar were 58%*0.9 = 52%, so this doesn't sound crazy.  It may be a little high, given that Ghawar is a good reservoir with light oil - some of the other reserves are heavier oil that may be harder to recover.
It is al-Husseini's belief that while Aramco can reach 12 million b/d within the next 10 years, it will be unable to meet the goal of 12.5 million b/d by 2009. The former EVP added that sustaining 12 million b/d output will only be possible for a limited period of time, and even then, only with a massive investment program.
For example, in al-Husseini's estimation, it is not the amount of oil available that will prevent Aramco from reaching 12.5 million b/d by 2009, but rather issues such as a lack of available skilled engineers, a shortage of experienced construction companies, insufficient refining capacity, underdeveloped industrial infrastructure, and a need for production management (if too much oil is extracted from a well without proper planning and technique, a well's potential output will be significantly damaged). As previously reported by post (Reftel), the Eastern Province economy is facing severe industrial expansion limits, and despite Aramco's willingness to invest up to 50 billion USD to achieve the 2009 goal, availability of labor, materials and housing may end up as determinative factors.
This goes to dimposter's comment last night.  Publicly, al-Husseini was saying things like:
Saudi Arabia has a very credible and professional record in terms of declaring capacity and meeting its production targets. When the Kingdom announced a target of 12.5 million barrels of capacity, they actually committed funds to develop that capacity and we’ve seen them now commissioning those: 250,000 additional barrels in Shaybah; 1.2 million barrels in Khurais; 500,000 in Khursaniyah; 900,000 coming on stream in a couple of years in Manifa. So these are real projects and real capacities. I don’t think there is an issue that Saudi Arabia can deliver the oil it says it can deliver.
Apparently, he was singing a different tune to US diplomats in private.  Clearly, al-Husseini is an actor with complex motives and not everything he says can be taken at face value.

Finally, in the Prince Abdulaziz cable,
Queried about Monday's record surge in crude prices to above $120/barrel, Prince Abdulaziz noted, "We are extremely worried about demand destruction, like in the early 1980s. Aramco is trying to sell more, but frankly there are no buyers. We are discounting crudes, now we're at a $10 differential between West Texas Intermediate (WTI) and Dubai Light, sometimes as much as a $12-$13 differential. Our buyers still bought less in April than they did in March." Prince Abdulaziz attributed the lack of willing buyers to the current low refining margins. He indicated that that current high crude prices were squeezing refining margins, as refiners were unable to pass on the full brunt of crude prices to the end consumer. "There are no refining margins, refining margins have been shocked. It's purely technical, not policy-induced. There are commercial impediments." The consequence of poor refining margins was a declining refining utilization rate. Prince Abdulaziz fretted, "the U.S. refining utilization is 84 percent now, it's usually above 90 percent. The quickest relief would be if crude prices would come down from these highs, if some of these political crises would resolve." He queried if the USG could do anything to assist current political situation in Nigeria.
I cannot find any support for the Prince's views in the data.  Here is EIA data on the price for WTI, together with prices of Saudi light and heavy:


Saudi oil generally sells at a discount to WTI because it's located in a less convenient place for consumers, and of course heavy oil always sells at a discount to light oil. However, in 2007 and 2008, these spreads were smaller than usual, not larger.

If the Prince was concerned that refining margins were small and demand destruction in progress, the obvious solution was to produce more oil.  I think Saudi Arabia didn't do this because it couldn't, and the comments about the market not demanding more were a smokescreen.

9 comments:

Mr. Sunshine said...

The expected Wall Street Journal (FOX / Murdoch) coverage of this story:
http://blogs.wsj.com/source/2011/02/09/saudi-oil-reserves-and-the-wikileaks-chinese-whispers-effect/

"Just a misunderstanding."

Stuart Staniford said...

The numbers are confusing, and now that I've examined the original cable, I can't quite see how the Guardian gets 40%.

I believe al-Saif was saying the Saudi URR (ultimately recovered reserves) will be 70% of 900 = 630gb. al-Husseini is not buying more than 51% of 716, which is 365gb. 365/630 = 58%.

For Ghawar, my analysis came out to 95gb URR, whereas the official position seems to be 135gb (or was as of 2006/2007 anyway). 95/135 = 70%.

So the agreement on the degree of overstatement is only quite rough.

Fixed Carbon said...

Stuart: What is your take on the Prince's statement, ""We are extremely worried about demand destruction, like in the early 1980s...."
Thanks, Don

JoulesBurn said...

Stuart,

I think part of the problem is that the words coming out of the Saudi Aramco and KSA "suits" are often inconsistent and contradictory. Claiming a certain number for reserves and then saying they will be able to extract 50% (or 70%) is a misstatement that is bound to confuse. I really don't think there is a unified opinion being voiced from Saudi Arabia, or often much forethought into what is said. King Abdullah says "leave it in the ground", and everybody gets excited.

Stuart Staniford said...

Fixed Carbon: That episode must be burned into their memories pretty good. They had to cut production by almost 2/3, and at the same time, the price/barrel fell by almost 2/3 too. So their revenue must have fallen by almost an order of magnitude between 1981 and 1985. I doubt the generation of senior Saudi's that dealt with that is ever going to forget the episode.

Stuart Staniford said...

Joules:

Agreed.

Stuart Staniford said...

Well, except I think using the words "reserves" for OOIP could well have been the mistake of the embassy staff, rather than the Saudi guys.

dimposter said...

al-Husseini has always sounded very consistent in the past, and maybe the issue of SA's endowment really is just a mistake by the embassy staff of his point about OOIP not being recoverable reserves.

The bit where he says "he does not subscribe to the theory of peak oil" is probably also just a difference in terminology, given that they immediately then note that he believes world production will plateau then decline, and he's consistently warned that adaption is needed. My guess is that "peak oil camp" means those who believed the world had peaked already at that time.

He is also consistent on Matt Simmon's Twilight, eg 2005 Peter Maas "he [al_Husseini] says that Simmons is wrong to state that Saudi Arabia has reached its peak" vs Embassy cable 2007-12-10: "Al-Husseini was clear to add that he does not view himself as part of the "peak oil camp," and does not agree with analysts such as Matthew Simmons"

However on the issue of SA's current capacity and expansion program if he really advised the embassy that "it is not the amount of oil available that will prevent Aramco from reaching 12.5 million b/d by 2009, but rather issues such as a lack of available skilled engineers, a shortage of experienced construction companies, insufficient refining capacity, underdeveloped industrial infrastructure, and a need for production management",
then that still seems at odds with his ASPO interview 2009 "Saudi Arabia has a very credible and professional record in terms of declaring capacity and meeting its production targets. When the Kingdom announced a target of 12.5 million barrels of capacity, they actually committed funds to develop that capacity and we’ve seen them now commissioning those: 250,000 additional barrels in Shaybah; 1.2 million barrels in Khurais; 500,000 in Khursaniyah; 900,000 coming on stream in a couple of years in Manifa. So these are real projects and real capacities. I don’t think there is an issue that Saudi Arabia can deliver the oil it says it can deliver"


He lists nearly 3 mb/d increased production to reach a target of 12.5 so the start point must have been about 9.5 mb/d, in agreement with Stuart's opinion that they didn't pump more in 2008 because they couldn't. Stuart your analysis still seems the best, thanks for all the work.

Emil said...

You're overly focused on narrow production numbers, discounting internal consumption. Net exports is what the world ultimately cares about. Especially Chindia. And they've been steadily falling for five straight years.

And as for the 'spare capacity'.
If you have ' sparecapacity' then that is something you can turn on, very quickly, usually within a few mere weeks. Capacity is a valve, something you turn off on on. Like the OPEC cartel did in the 70s after the Yom Kippur war to 'punish' the West(and the U.S.)

Or what the Saudis did in 2004, or perhaps even more so the U.S. (or Texas) did in 1967 due to an Arab embargo where they flooded the market very quickly since they had actual spare capacity.
Or when they

Saudi Arabia failed to do that consistently despite the personal pleas from their benefactor, the U.S., and even made personally from the President himself. Twice.

It may be true that they can raise production to 12-12.5 mb/s over the years to 2020, but that is not 'spare capacity' as it is normally understood, where you can stabilise the market very efficiently because of the brisk pace it takes to put out the extra oil on the market.

The only possible answer to their repeated failure is that they simply had no more spare capacity to put out quickly or they had so little that it would buy them, and the world, very, very little time.


Unless of course one accepts a conspiracy theory that the Saudis wanted the world to crash. But how credible is that?

This just doesn't pass the smell test.

The implication is that we cannot trust the Saudis to 'flood' the market of an eventual oil rally, and that the much-reported myth of 'The Saudis Will Save Us' failed in 2008 for the very reasons I have underlined and will fail again if we come to a similar situation. If not in this year then in the next, at the latest.

And add to all of this, their actual declining net exports. Even if they get to 12 mb/d in, say, 2015, it's still a lot less in net exports than in 2005. Saudi Electric needs rise by 10 % a year, added with desalination plants.