Saturday, March 03, 2007

Saudi Oil Production Down: Production Problems or Just Propping Up the Price?

It's now clear that North Sea oil production and Mexico's large oil fields are in decline. It's also clear that discoveries of light sweet crude are simply not keeping up with worldwide demand. Increasingly, oil companies are saying we have enough oil while they look to other sources of fossil fuels such as oil sands and heavy crude. This is not good news. World oil production is now heavily dependent on Saudi Arabia's capacity to keep up with world oil demand and the entire Persian Gulf factors in this as well. A general war in the region would endanger the world's oil supplies and certainly send oil prices into new territory.

Saudi Arabia has never had a transparent oil industry. We cannot verify anything they say about future production or the size of their oil reserves. Ten years ago, the secrecy of the Saudis was not that crucial but it is now. We consider them our allies but it's probably more correct to say that they are the allies of various people in our oil industry and other wealthy Americans first, and American allies second. Of course, any number of factors, including our relationship with Israel and other countries in the Middle East complicate the relationship and then the Saudi royal family have problems of their own to consider. Nevertheless, not knowing much about Saudi Arabia's long-term oil picture is real cause for concern.

Stuart Staniford of The Oil Drum has done a serious analysis using what information we have available to come up with an educated guess about Saudi oil production:
Overall, I feel this data is clear enough that I'm willing to go out on a limb and conclude the following:
• Saudi Arabian oil production is now in decline.

• The decline rate during the first year is very high (8%), akin to decline rates in other places developed with modern horizontal drilling techniques such as the North Sea.

• Declines are rather unlikely to be arrested, and may well accelerate.

• Matt Simmons appears to be right in [his book] Twilight in the Desert, but the warning did not come until after declines had actually begun.

I suggest that this is likely to place severe political strains on Saudi Arabia within a year or two at most.

I also looked at the question of whether there is any evidence for the idea claimed by OPEC that the Saudi's deliberately cut production starting in November. ...

(snip)

... This excess decline [by OPEC, which includes Saudi Arabia] does not exceed 200 thousand barrels per day. On the whole, media coverage of OPEC production cuts appears to be almost completely unmoored from the data the agencies are reporting. The entire "production cut" may be a public relations exercise to disguise other processes.

(snip)

I'll bet $1000 with the first person who cares to take me up on it that the international oil agencies will never report sustained Saudi production of crude+condensate of 10.7 million barrels or more.

Current Saudi oil production is around 8.75 million barrels a day and the Saudis are claiming that the are putting in the infrastructure to increase to 10.7 million barrels but do not say when. I'm mildly skeptical of Staniford's analysis, but if I had that kind of money to bet, I don't think I would make it. However, looking at numbers too closely over a short period of time as Staniford has done can produce a false picture, particularly if the people in charge of Saudi oil production aren't particularly open about what they're doing. If Stuart Staniford is right, however, an unplanned 8% drop in Saudi oil production would be a major cause for concern.

Some argue that the recent high prices over the last two years has destroyed some demand and that too may explain the drop in production. We could ask the Saudis but we're not likely to get a straight answer, just as we're not likely to get a straight answer from Exxon-Mobil or some of the other oil giants. And we're not likely to get a straight answer from Dick Cheney or George W. Bush.

It might be a good idea to buy that hybrid.

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