Last week Saudi Aramco - the national oil company of Saudi Arabia and the world's largest oil company - lifted a veil of secrecy around the company's operations. For the first time in decades, operational details for Saudi Aramco were revealed in a bond offering. (A PDF link of the prospectus is here).
The immediate takeaway - which I covered in the previous article - was that the reported breakeven costs for Saudi Aramco were higher than the numbers that are frequently reported. However, other news stories have focused on an apparent bombshell around production at the Saudi Ghawar oilfield, which is the world's largest conventional onshore oil field.
Conventional wisdom held that Ghawar has been producing 5 million barrels per day (BPD) of crude oil for decades. The prospectus notes that Ghawar has produced more than half of the Kingdom's cumulative oil production to date, but it reported that 2018 production was only 3.8 million BPD.
That number resulted in several stories that suggested that Ghawar production has peaked and is falling fast. (For example: The Biggest Saudi Oil Field Is Fading Faster Than Anyone Guessed).
I don't believe this number alone supports such conclusions. I think it is an example of confirmation bias, which refers to a person's tendency to interpret information as confirmation of existing beliefs.
There is another possible interpretation. Saudi Arabia has long played the role of the world's swing producer in the oil markets. They maintain spare production capacity. This has allowed them to raise and lower production according to their views of market demand and agreed-upon OPEC quotas.
So, it is possible that Ghawar is simply not operating at full capacity. Given the information from the prospectus, one can just as easily make this conclusion as to conclude that Ghawar production is in decline. I don't know which interpretation is correct, but we shouldn't make hasty conclusions based on limited information. Related: Soaring Permian Output To Cap Oil Rally
Notably, the people most likely to accept the interpretation that Ghawar is rapidly declining are the same people who reject Saudi Arabia's claim - repeated in the prospectus - that its oil and gas reserves are equivalent to 257 billion barrels. Again, unless there is good objective reasoning for rejecting a reserves number while embracing a production number, this may be confirmation bias in action.
Last week Saudi Aramco - the national oil company of Saudi Arabia and the world's largest oil company - lifted a veil of secrecy around the company's operations. For the first time in decades, operational details for Saudi Aramco were revealed in a bond offering. (A PDF link of the prospectus is here).
The immediate takeaway - which I covered in the previous article - was that the reported breakeven costs for Saudi Aramco were higher than the numbers that are frequently reported. However, other news stories have focused on an apparent bombshell around production at the Saudi Ghawar oilfield, which is the world's largest conventional onshore oil field.
Conventional wisdom held that Ghawar has been producing 5 million barrels per day (BPD) of crude oil for decades. The prospectus notes that Ghawar has produced more than half of the Kingdom's cumulative oil production to date, but it reported that 2018 production was only 3.8 million BPD.
That number resulted in several stories that suggested that Ghawar production has peaked and is falling fast. (For example: The Biggest Saudi Oil Field Is Fading Faster Than Anyone Guessed).
I don't believe this number alone supports such conclusions. I think it is an example of confirmation bias, which refers to a person's tendency to interpret information as confirmation of existing beliefs. Related: BP Pulls Out Of China's Shale Patch
There is another possible interpretation. Saudi Arabia has long played the role of the world's swing producer in the oil markets. They maintain spare production capacity. This has allowed them to raise and lower production according to their views of market demand and agreed-upon OPEC quotas.
So, it is possible that Ghawar is simply not operating at full capacity. Given the information from the prospectus, one can just as easily make this conclusion as to conclude that Ghawar production is in decline. I don't know which interpretation is correct, but we shouldn't make hasty conclusions based on limited information.
Notably, the people most likely to accept the interpretation that Ghawar is rapidly declining are the same people who reject Saudi Arabia's claim - repeated in the prospectus - that its oil and gas reserves are equivalent to 257 billion barrels. Again, unless there is good objective reasoning for rejecting a reserves number while embracing a production number, this may be confirmation bias in action.
By Robert Rapier
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Comments
Saudi oil production peaked at 9.6 million barrels a day (mbd) in 2005 and has been in decline since. Saudi Aramco couldn’t under any circumstances be able to produce 11 mbd as it claimed in 2018. Real Saudi production is estimated at 8.5-9.0 mbd with the balance of 2.0-2.50 mbd coming not out of real production but from stored crude oil on board oil tankers or on land. Therefore, the talk about Saudi production capacity of 12.0 mbd and a spare production capacity of 2 mbd couldn’t be substantiated under any circumstances and I will explain why.
The mainstay of Saudi oil production are five giant oilfields: Ghawar, Safaniya, Kurais, Hanifa and Khafji (shared with Kuwait) all of which are more or less 70 years old and which are being kept producing by a daily injection of billions of barrels of water, have over the years accounted for more than 90% of Saudi oil production with Ghawar accounting for 50% of the total.
Conventional wisdom held that Ghawar the world’s largest onshore oilfield has been producing 5 mbd of crude oil for decades. Now the Saudis are admitting for the first time that Ghawar which is the cornerstone of Aramco’s oil production can only produce 3.8 mbd. If this is the case, then the persistent reports about depletion of reserves which have been circulating for years about Ghawar must be true. It is fair then to suggest that the same depletion would have also affected other oilfields of the same age. In a nut shell, Ghawar could prove to be the Achillies heel of Saudi oil production.
If this is the case about Ghawar, this means that the Permian in the U.S., which is claimed to pump some 4.1 mbd according to government data, is already the largest oil- producing basin in the world. However, because of the hype about the potential of US shale oil production by the US Energy Information Administration (EIA), any figures produced by the EIA are very questionable and, therefore, can’t be substantiated. That is because so many unquestionable and authoritative sources have been confirming a slowdown in US oil production particularly the Permian which accounts for some 60% of total US production.
Furthermore, these very sources have been projecting a decline of 1-2 mbd in US oil production mostly from US shale oil production by 2020 which could translate into a production of 10.0-11.0 mbd in 2019 and 10.0 mbd or less in 2020. This contradicts projections by the EIA of 12.3 mbd and 13.00 mbd in 2019 and 2020 respectively.
For these reasons, I can’t accept the claim that the Permian is the world’s top oilfield. For that, I will need more than the word of the EIA.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London