Saudi Arabia is all over the news. Every time a minister speaks, headlines reverberate through all of the O&G industry sites, and even Harold Hamm’s recent Cowboyistan manifesto points to the Saudi’s November decision to maintain production levels as the major piece of context.
What makes Saudi Arabia such a force in our current oil price situation? To have a richer understanding, I thought I would do some research on the Kingdom and their oil production capabilities and share it here.
The most prevalent narrative to explain Saudi Arabia’s refusal to scale back production (at least in the US) is “they want to destroy the US shale boom.” The reasoning is likely a bit more complex, although the most obvious result in the US so far has been a huge downscaling of drilling activity.
On a global scale, Oil Supply/Demand projections indicate a 1 (or more) million barrels of oil a day (MBOD) overage through the first half of the year.
So this means that every single day for the short-term, 1 million barrels of crude oil or so will be introduced to the market that will not be consumed. Those barrels (each of them 42 US Gallons) will need to be stored in tanks, tankers, or even in some cases, right where they are in the ground.
In the past OPEC has scaled back or increased production to help stabilize the price of oil, but also in the past they have lost market share by propping up higher-cost production elsewhere. This ability to regulate the supply spigot has traditionally made the Saudi Kingdom the defacto swing producer, which role they appear to be transferring to the US Shale Plays this time around.
Why is it so cheap for Saudi Arabia to produce hydrocarbons?
According to the EIA, Saudi Arabia has 266 billion barrels of proven reserves, 70% of which are considered light gravity. Currently they are producing an estimated 12-12.5 MBOD.
Despite some recent endeavors with modern horizontal drilling and hydraulic fracturing techniques, most of the Saudi’s reserves are in large conventional formations. For example, the Ghawar super-giant field is known for abundant heavy crude (32-34) API trapped in relatively porous rock at a reasonable depth of ~6500 ft. So generally the oil is easy to extract
Saudi Arabia is a kingdom, and their national oil company, Saudi Aramco, has no royalties to pay out, low exploration costs, and access to a wide variety of crudes, from light sweet to heavy sour. They handle their own transportation, processing and refining which means profits are assessed over the whole enterprise, not each point in the chain. Labor costs and transportation costs within the Kingdom are inexpensive, and the land under which the oil fields sit is not really in competition for other resources.
History of Production
Oil on the Arabian Peninsula was discovered as early as 1908, but consideration of the area as a likely source of hydrocarbons didn’t really take off until a 1932 oil discovery in neighboring Bahrain. The first significant Saudi Arabian discovery was at Dammam well no 7 on March 4, 1938. The discovery of hydrocarbons was key to transitioning the country’s economy from tourism (or more specifically pilgrimage) to the oil & gas giant it is today.
The Dammam field, near the eastern coast of Saudi Arabia, proved to be a very good discovery and produced into the early eighties. In 2012 Saudi Aramco announced intentions to reopen the field to the tune of 100,000 Barrels/Day in order to tap the estimated 500 million barrels the field still contains.
Some of the Major Fields
Most of Saudi Arabia’s oil fields are in the eastern part of the country.
The Ghawar Oil Field is the largest in the world with an estimated 60-70 billion barrels of remaining reserves. At an estimated 5.8 MBOD, it accounts for as much as 60% of Saudi Arabia’s O&G output. Producing since 1951, southwest of Dammam, the field is 160 miles long and 16 miles wide. The Upper Jurassic Arab-D producing interval is estimated at 150-300 feet thick throughout the formation.
The Safaniya Oil Field is the world’s largest offshore oilfield located north of Dammam in The Persian Gulf. Estimated reserves are in the 37 billion barrel range, and current output appears to be 1.2 MBOD. The field started production in 1951.
The Shaybah Oil Field is located in the southeastern tip of the country and has 14 billion barrels of oil in reserve and produces an estimated 1 MBOD. It is a relatively new field explored and developed in the 90s.
The Khurais Megaproject, partially developed in the 80s, and re-explored in the 000’s, will focus on the Ghawar adjacent Khurais, Abu Jiofan and Mazalij oil fields. 27 billion barrels of reserves are estimated in the Khurias field alone, but the more complex geology makes extraction more expensive. Currently estimated to be producing 1.2 MBOD, an additional 300,000 barrels per day should come on line by 2017.
The Manifa Oil Field is an offshore oil field first discovered in the 50s that has recently been revived, and is expected to add 900,000 barrels of oil production per day to Saudi output. Saudi Aramco have invested about $10 billion in the project including a large system of causeways and islands in addition to the platforms, pipelines and other fixtures normally found in offshore projects.
Manifa Causeways and Drilling Islands http://www.pennenergy.com/articles/pennenergy/2013/02/aramco-s-manifa-offshore-oil-field-wins-innovative-oil-project-o.html
Mid/Down Stream capabilities
The East-West pipeline which runs from the port of Yanbu on the Red Sea to Abqaiq in eastern Saudi Arabia (746 miles!) has a capacity of 4.8 MBOD. All of the major fields have pipeline connections into Abqaiq as well.
Image Source: http://www.eia.gov/countries/cab.cfm?fips=sa
In Abqaiq, Saudi Aramco’s processing and stabilization plant has a capacity of more than 7 MBOD, making it the world’s largest.
Saudi Aramco operates quite a few refineries in the country between 85,000-550,000 barrels a day, and also has some joint venture refineries, notably the Yanbu refinery with ExxonMobil (designed to refine cleaner burning fuel), as well as other partnerships with Total, Shell and Sumitomo.
Saudi Arabia’s crude and refined exports exit the country through major oil ports on the Persian Gulf (notably the Ras al Ju‘aymah Oil Terminal and the port city of Ras Tanura) and on the Red Sea (Yanbu). Saudi Arabia’s access to eastern markets through the Persian Gulf, and western markets through the Red Sea are a tremendous asset, particularly during times of regional unrest – if things get hot in the Persian Gulf like during the 80s Iran-Iraq Tanker War, Saudi Arabia still has a pathway to market. Starting in 1950, the Trans-Arabian Pipeline carried up to half-a-million barrels of Saudi Arabian oil a day through Jordan, Syria and Lebanon to a port on the Mediterranean, but political instability ultimately made that arrangement untenable, and the pipeline was shut down in the 90s.
As you might expect, Saudi Arabia also has large gas reserves in place, a lot of it trapped in shale formations. They have been exploring unconventional methods, recently investing $7 billion in unconventional gas E&P. According to DI Scout, Saudi Aramco has extended the deadline to March 15, 2015 for companies to bid for work on its unconventional gas facilities in the northern part of the country:
Saudi Aramco | Bidding extended for unconventional gas project It was reported in mid-February 2015 that Saudi Aramco has again extended the deadline for companies to bid for work on its unconventional gas facilities in the north of the country to 15 March 2015. The ‘System A’ project incorporates the construction of processing facilities, wellheads and pipelines in the northern Turaif region, where the Waad al-Shamal mining project is under development –Saudi Aramco seeking to produce up to 200 MMcf/d of unconventional natural gas by 2018 to support the project and associated power plant. Four companies are reported to have expressed interest in bidding for work to help Saudi Aramco progress its unconventional gas development plans – GS Engineering & Construction (South Korea), JGC Corp (Japan), Maire Tecnimont (Italy) & SNC-Lavalin (Canada). Furthermore, several companies are reported to have pre-qualified for a further unconventional gas project involving pipelines – the ‘System B’ project also believed to be located in the north of the country. Saudi Aramco President and CEO Khalid al-Falih has declared that Riyadh will spend US$ 3 billion in developing its unconventional gas resources and has earmarked an additional US$ 7 billion.
Saudi Arabia has supergiant oil reserves that are easy to tap, they have the necessary infrastructure in place to stabilize, transport and refine large volumes of crude, and easy export access to the east and the west.
What do you think? Leave a comment below.
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