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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The Great Saudi Shale Swindle

Saudi Arabia’s oil and gas giant, Aramco, has been given the go-ahead to launch the Jafurah shale gas field project, which will be the biggest shale gas development outside the U.S. The official reason is that the project will boost domestic gas supply and end the burning of oil at its power generation plants. The first reason is true by dint of the fact that it is a simple truism whilst the second is only partly true. It is extraordinarily unlikely to end Saudi Arabia’s oil burning at its power generation plants - given Saudi Arabia’s history of lying in this regard - but it may possibly reduce it. The core element that Saudi did not mention in its official comments on this issue is that the Kingdom will desperately need another primary energy source in the relatively near future because it has nowhere near the amount of oil remaining that it has stated since the early 1970s. So, will Saudi Arabia’s further comments that the Jafurah field will be a key part of the Kingdom becoming a significant gas exporter in ‘the near future’ also turn out to be nonsense?

If the provenance of these comments - Saudi Oil Minister Prince Abdulaziz bin Salman – is anything to go by, then the global energy markets would be better off reading the latest Harry Potter book as guidance to what Saudi Arabia may achieve in the years to come. This is the individual who said at the time of the 14 September attacks against two of Saudi Arabia’s key oil facilities that “the Kingdom plans to restore its production capacity to 11 million bpd by the end of September and recover its full capacity of 12 million bpd two months later.” Bearing in mind that he was Oil Minister at the time, it was surprising to see that both figures were wrong. In reality, from 1973 to the end of 2020, Saudi Arabia has averaged crude oil production of just 8.151 barrels per day (bpd) and had never averaged anywhere near 11 million bpd until it finally did so in November 2018 (11.093 bpd, to be precise, and only briefly) because U.S. President Donald Trump had expressly told King Salman to get the oil price down ‘or else’ Related: Oil Prices In Freefall As Pandemic Fears Grow

The reality as well is that Saudi Arabia’s long-stated ‘spare capacity’ of between 2.0-2.5 million bpd, based on the assumption of a 10 million bpd crude oil production average, is, and has always been, highly exaggerated. Quite aside from the actual mathematics involved, it is fair to assume that if the Saudis had been in possession of anything near 12 million bpd capacity, the absolute number one occasion to have pumped it on a sustained basis would have been in 2014 when it had just embarked on the neo-existential strategy of trying to destroy the then-nascent U.S. shale oil industry by dumping prices through overproduction.  Additionally, the EIA defines spare capacity specifically as production that can be brought online within 30 days and sustained for at least 90 days. In a rare moment of reality a couple of years ago, even Saudi Arabia admitted that it would need at least 90 days to move rigs to drill new wells and raise production to the mythical 12 million bpd or 12.5 million bpd level.

At the same time, of course, Saudi Arabia’s reserves numbers appear to be of the Hans Christian Andersen school of economics, as highlighted in my latest book on the global oil markets. At the beginning of 1989, Saudi Arabia claimed proven oil reserves of 170 billion barrels but only a year later, and without the discovery of any major new oil fields, the official reserves estimate somehow grew by 51.2 percent, to 257 billion barrels. Relatively shortly thereafter, it increased again to the longstanding 266 ‘or so’ billion barrels level. Bewilderingly – and a mathematical impossibility – Saudi Arabia’s proven oil reserves figure has stayed at around the same level for nearly 30 years, despite Saudi pumping an average of nearly three billion barrels of oil every year from 1973 to the end of 2017 – totalling 132 billion barrels – with, again, no new significant oil finds being made during that period.

So, Saudi Arabia really needs Jafurah to work and, to this effect, announced that it is to spend at least US$110 billion on the project, with the intention being as well that it will become the world’s third largest gas producer by 2030, after the U.S., and Russia. As even Aramco has noticed that Saudi Arabia does not have abundant freshwater supplies - Aramco chief executive officer, Amin Nasser, highlighted this shrewd observation last week (“we are not rich with water”) – Aramco is apparently going to use seawater instead for the fracking process. Unsurprisingly, there is no shortage of U.S. companies keen to provide their fracking technology and engineering services to Aramco, a situation dripping in irony as the U.S. shale players are now in a position to screw Saudi Arabia to the wall in terms of extreme pricing for their services just as Saudi wanted to completely destroy them from 2014 to 2016. Precisely how screwed Saudi Arabia is going to be will be evident when Aramco holds its bidding rounds for the work, technology, engineering, and chemicals on the fields in the coming weeks. Related: Shale Decline Inevitable As Oil Prices Crash

So, is this project likely to make Saudi Arabia a major gas exporter by 2030? No, is the short answer, and here is why. According to the aforementioned weaver of fairy tales - Prince Abdulaziz bin Salman - the Jafurah field has an estimated 200 trillion cubic feet of gas (TcF), a figure that should be taken in context of all other Saudi energy reserves estimates but let us pretend that it is true. In the meantime, Aramco has gas reserves supposedly of around 233.8 Tcf, which for the purposes of this analysis, we can also pretend is true. The plan is for Aramco to start production from Jafurah in 2024 and to reach 2.2 billion cubic feet (Bcf) per day (Bcf/d) of gas by 2036. Last year – without Jafurah - Aramco produced 8.9 Bcf/d of natural gas, a notional total of 11.1 Bcf/d. Crucially, however, even with this current 8.9 Bcf/d of gas production in place, Saudi has been burning around 400,000 bpd of oil for power generation (on top of enormous actual volumes of fuel oil and diesel).

All other factors remaining equal, one billion cubic feet of gas equals 0.167 million barrels of oil equivalent, so 2.2 Bcf/d (the future Jafurah output) equals 0.3674 million barrels of oil equivalent, or 367,400 barrels. Therefore, the total projected new amount of gas to come from Jafurah is around 367,400 barrels per day, which is not even enough to cover the current amount of oil being (400,000 bpd) burned for power generation in Saudi Arabia, even if Aramco’s already elevated gas production holds steady. Based on independent industry estimates on changing Saudi demographics and corollary changing power demand patterns, the Kingdom will probably need gas production of around 23-25 Bcf/d within the next 15 years just to cover its own power and industrial demand, compared to the 11.1 Bcf/d of Aramco’s current peak production added to the notional production from Jafurah. In sum, then, even if the quality of the Jafurah find is unparalleled in the history of gas finds, then Saudi would still be in deficit in its power generation sector if there was a straight switch from crude oil burning to gas-only burning.

By Simon Watkins for Oilprice.com

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