Saudi Talk and Production Bring Down Oil Price 13 comments
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A report published in the Emirates Business 24/7 detailing Saudi plans for increasing oil production looks very much like it came directly from the Saudi Aramco PR department. Each of the four fields discussed in the report has been extensively analyzed in prior posts. What is interesting is partly that this one report summarized the entire Saudi program in one place. But even more interesting is that the report was issued at all. It seems to be designed to assure the oil market that it will be adequately supplied for the next few years at least, thus eliminating oil market pressure for higher prices.
Why would the Saudi’s want to push oil prices down? One reason might be to help the Republicans win the White House in November. The King does a lot of strategic thinking, planning, and acting in coordination with the President of the U.S. It is not unlikely that he would like to see a President be elected who he believes will continue the past 60 years of confidential and cooperative relations. There is good reason to think that his relations with the Bush family going back decades has convinced him that Republicans will continue to honor the special U.S.-Saudi relationship. Moreover, since the relationship is based on personal credibility, it is not unreasonable that the King may have assured Mr. Bush that he will in fact lower oil prices in advance of the U.S. election in exchange for Mr. Bush’s assurance of continued U.S. guarantees of Saudi security. The King may be virtually required to make good on his promise.
A second possibility is that with both Iran and Russia becoming increasingly belligerent, and with both countries highly dependent on high oil prices to finance there belligerency, the King might find his own security interests coincide more closely with low oil prices than high ones, as least for a time. Perhaps both reasons are correct.
What seems clear, however, is that whatever the reason, the King of Saudi Arabia has wanted oil prices to go back down for a number of months, so much so that he called an unprecedented global meeting of oil ministers to foster lower oil prices. Until the Khursaniyah field came on stream recently, the King had limited ammunition to get prices down. It seems like his decision to reduce production in 2007 to about 7.5 mb/d, down from the prior 8.4 mb/d may have been designed to reflate the pressure of certain fields so that he could later increase output from those fields when the new Khursaniyah capacity came on stream during the summer/fall of 2008 in order to assure low oil prices prior to the U.S. election. Now that the Saudi’s are pumping out 9.5 mb/d, lower prices are the result.
In any event, here are all the visible sources of Saudi production capacity improvements which extend out to 2013:
Khursaniyah 500 kb/d of light, sweet crude due 2007, now on stream,
Khurais: 1.2 mb/d due in 2009. A huge project with some risk of failure, the next-to-last untapped large Saudi field,
Shaybah: 250 kb/d expansion of existing field due in 2009
Manifa 900kb/d of heavy crude due in 2011 - last giant Saudi field left
In total, these projects are planned to add 2.85 mb/d of capacity. If the present capacity of Saudi production is not far above their 9.5 mb/d output level, the new 2.85 mb/d would bring their capacity to roughly the 12.5 mb/d that they are saying is their objective. Interestingly, they now are admitting that some of their existing fields are experiencing decline, so the net capacity, by the time all four new fields are finally on line, may be less than than 2.5 mb/d.
In addition to their plans for new production, the Saudis are also in the process of joint ventures with western oil majors to build an additional 2.8 mb/d of capacity to refine heavy oil scheduled to come on line in 2013. Their new refining capacity will effectively increase the utility of existing Saudi production since it seems to include an increasing excess of heavy oil production compared with heavy oil refining capacity. One would have to assume that the Saudi’s believe such excess production is in the range of their new refining capacity.
If there is now or will be by 2013 excess heavy oil production capacity of 2.8 mb/d, then one would need to adjust downward to some degree the stated affective Saudi production capacity of 12.5 mb/d. If you can produce the oil but nobody can refine it into useful fuels, then there is no point to bringing it to the surface. On the other hand, to the extent that the new Saudi refining capacity is simply designed to reduce exports of Saudi heavy oil to existing heavy oil refineries overseas and allow the Saudis to refine it themselves, thus increasing Saudi profit margins, then the new refineries would not increase global product capacity. In that case the stated Saudi 12.5 mb/d production capacity objective would be accurate.
In any event, there is no visibility of any further Saudi production increases beyond 2013. If global production is in fact falling rapidly at that point in 2013, then the Saudi’s will not be in the position they are today to stanch the increase in the price of oil. All of this is developed in the mega project analysis I recently posted.
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This article has 13 comments:
> jack
paulk8756 said, "I was simply parrying that ridiculous notion with another..."
If you pretend that political factors don't come into play, go back to early 2004 and look at what the Saudis did. They increased production massively over quota and kept it there thru the election. This was before the huge price spikes we've seen in recent years (over $70 in 2006, over $90 in 2007, plus 2008). You can pretend politics didn't factor in to that if you want, but at least articulate an alternative theory to explain the behavior.
I think the KSA holding hands with Bush at the ranch says it all.