Tuesday, November 15, 2011

Saudi Oil Production Declining

Saudi oil production has been declining modestly for the last 2-3 months (depending on your preferred data source) while the oil rig count in country has continued to increase.  See above graph (the black line is the average of five sources of production information on the left scale, while the red curve in the lower part of the graph is the Baker Hughes rig count on the right scale).

For readers that don't follow every twist and turn of Saudi oil statistics let me sketch the back story since 2005.  In about 2005 when global oil supply appeared to plateau, Saudi Arabia also had appeared to plateau at around 9.5mbd.  At that time the rig count, having been stable for years, began to rise as Saudi Arabia launched a series of large megaprojects to expand production capacity (or replace oilfields that were in decline depending on your point of view).  Then in 2006, production began to mysteriously decline despite high oil prices (provoking a great deal of debate in the energy blogosphere as to whether this was a voluntary move to further increase prices, or an involuntary one due to underinvestment and/or declines in some of their fields).  Regardless, in mid 2007, production began to gradually increase again until by mid 2008 it had reached the previous plateau level of 9.5mbd.

With the financial crisis of 2008, oil prices dropped below $40/barrel and the Saudis, in co-ordination with other OPEC countries, made a moderate but sharp cut in production down to about 8mbd to protect prices.  Then in 2009 and more so in 2010 they began to gradually increase production as the global economy improved and prices got higher.  This culminated in a brief hiatus just below 9mbd around January 2011.

Indeed as the world lost Libyan production in January/February of this year, Saudia Arabia initially did nothing.  However, a few months later there was an agreement with the IEA such that the OECD countries would release oil from government strategic reserves for 30 days while the Saudis ramped up to a level of 10mbd.  Saudi Arabia did then increase oil production sharply in June to a peak of around 9.7 mbd or 9.8mbd - not quite achieving the promised 10mbd.

They have not then gone on either to increase up to 10mbd or to maintain production at the peak level, but rather have eased back to about 9.5mbd.

So are we any the wiser as to the great question of whether Saudi Arabia has significant spare capacity and could increase production to 12mbd or more if only they chose?  Only slightly I fear.  I interpret the fact that the Saudi's couldn't quite meet the 10mbd promise and almost immediately backed off that, despite amply high prices, as consistent with the story that the recent Saudi production expansions have only gone to offset declines elsewhere (perhaps especially in north Ghawar).  The increasing rig count also suggests a lack of comfort with the amount of spare capacity presently available.

However, I can see that someone who thought the Saudis were able to produce more but are profit maximizers who intend to keep prices as high as possible consistent with not actually throwing the world economy into recession might also be able to tell a story about how the Saudis did the bare minimum to moderate prices after it became clear that the Libya price spike was causing global economic harm but then began gradually lowering production as prices slowly began to fall following the price spike, keeping the world in a state of slow growth, but some growth, while maximizing the Saudi take for its oil.  The one weak point in this story is that it offers no explanation for the rising rig count.

Of course - at this point maybe the difference between the two views doesn't actually matter that much - either the Saudi's can't produce more or they won't, but either way the effect is to keep oil prices high enough to be a significant constraint on a world economy that is already struggling.


Burk said...

On the whole, the Saudis would be wise to keep their wealth in the ground, rather than selling it for cheap and buying US bonds with the proceeds.

On another note, I found Surowiecki's analysis of deleveraging quite persuasive. Jobs and income are the bigger drivers.

Kenneth D. Worth said...

Well, since the post-mid-08 decline was clearly voluntary, it was reasonable to assume that the Saudis could get back to the 9.6 mbpd level which they did. If they hold firm here, then we are probably in for the second oil price shock.

I'm not sure Europe has much relevance. I mean if the periphery defaults the core nation banks will get bailed out. Everyone knows that; the question is how much will the periphery do to pay the debt themselves and will they get kicked out or leave the EU if they don't do enough. That's essentially a question of who pays, right?

There is no fear of total collapse of the system like in 08, or the collapse of a major industry (home construction and mortgage finance); so maybe we get a mild recession which cuts a few hundred thousand barrels a day in demand? Meanwhile, China builds 1.7 million cars and trucks a month.

So, the developing world needs another 2 mbpd this year and where will it come from? It took six million people losing their jobs in the US to free up that much oil last time around. Hence, it took a oil price shock, a financial collapse and real fear in the markets. It just doesn't seem like we are there yet.

A said...

We also do not know how much of that Saudi June increase came out of their storage depots and how much came from producing wells.

As Non-OPEC supply continues to have difficulties in meeting increasing demand, more stress will be applied to OPEC to increase theirs. WE may find out their capability by 2013. For 2011, Non-Opec supply only increased by 100 kb/d, according to the IEA

noiseformind said...

My biggest problem right now is that tech on saudi oil rigging is just off the chart.

And the results are poorer by the day. I still remember, upon arriving at Jubail, that it was very rare to have discrepancies in 3d-surveyed fields output. But now its just a norm, and this in a mere 5 years.

Anonymous said...

Big deal, so the world is running out of primary energy (plus primary chemical feedstock.) It's not like there's anything going wrong; the economy is just smoothly humming along and everybody is happy.

Don said...

Meanwhile, the Brent WTI spread has been cut by over half in just a couple of weeks. WTI over a hundred with the spread circa $9 today...