Saudi Arabia´s crude oil production is at a 30-year high.
Aramco wants to restart production at its oldest field.
Saudi Arabia struggles to increase its export capacity.
It ends where it began: in Dammam. SOCAL (Standard Oil of California) drilled well number seven in Dammam in 1938. They hit oil and propelled Saudi Arabia into the oil game. Some 30 years ago, the Saudis mothballed Dammam. But Dammam is back on the agenda – Aramco wants to bring the kingdom´s oldest oilfield back into production.
As I wrote in “Don´t toil – trade oil”, the Saudis rely upon old oilfields. Decline has already started to lower the kingdom´s production capacity. Aramco, the state-owned oil company, used every available oilfield technology in order to fight decline in its old fields. Furthermore, they reopened production at problematic fields they had once mothballed.
As Libya descended into civil war, the Saudis increased their crude oil production. Global demand continued to grow. While Libya has almost restored its prewar production capacity, the Saudis didn’t scale back production. They currently produce at a 30-year high of 10.0 mb/d. Only the Saudis have spare capacity left, but it may be less than the 12.5 mb/d they advertise publicly.
We get the big picture by collecting the news we get from the kingdom:
The Saudis want to shift their power production from oil fired plants to natural gas fired plants.
Aramco continues to fill its crude oil storage sites.
700 tb/d of Saudi Arabia´s spare capacity will only be available within three months, not immediately.
Aramco wants to restart production at Dammam, its oldest oilfield.
Using natural gas for power production frees crude oil for export, filling storage facilities allows the company to provide crude oil to its customers during the period of peak demand, the third and fourth quarter, telling the world that 700 tb/d will take some time to produce allows the Saudis to keep the fiction of its 12.5 mb/ production capacity alive for some time even without producing 12.5 mb/d. Drilling into Dammam tells me that they are desperate to keep production at its current level.
The Saudis have every reason to fool us. They pledged to make up any oil shortage caused by the sanctions against Iran. To avoid a nuclear armed Iran is priority number one for the Saudis.
Global spare capacity is less than 2.5 mb/d; it may be close to zero. Don´t get fooled by last week´s falling oil prices. It is refinery maintenance time; global demand is lower during the second quarter.
The real test will be the third and the fourth quarter; global demand will stretch the supply system to its limit and possibly beyond.
Matthew Simmons, Twilight in the desert – The coming Saudi oil shock and the world economy, 2005.
“Cushions to stem Iran oil price spike are proving elusive”, FT, 28 February 2012.
“Saudis seek to cool red-hot prices, FT, 21 March 2012.
“Once more over a barrel”, FT, 24 March 2012.
“Kingdom´s power broker role at risk”, FT, 28 March 2012.