Saudi Arabia’s oil output ‘stretched to the limit’

Jan 13, 2012 12:00 AM

Saudi Arabia, the world's leading oil exporter, has for decades used spare production capacity to cover shortfalls in output by other oil states and prevent prices spiralling in times of crisis. But questions are being asked now whether the kingdom will be able to come to the rescue if Iran blocks Persian Gulf exports, at least one fifth of the world total, in its current confrontation with the West.
On paper, Saudi Arabia has spare capacity totalling around 2 mm bpd. Earlier this year, it raised its output to 10 mm bpd, in part to pick up the slack from the drop in output by Libya because of its seven-month civil war and other drops in strife-torn Syria, Yemen and South Sudan. That's the highest level for the kingdom in 30 years.

In December, the OPEC, which includes Saudi Arabia, increased its production ceiling from 24.84 mm bpd to 30 mm bpd. But apart from Saudi Arabia and possibly the United Arab Emirates, no OPEC member has any spare production capability to act as a cushion in the event of a major supply crisis. So the kingdom, as it has so often in the past, will be expected to play a crucial role if the global oil supply is heavily disrupted, as it would be if the Strait of Hormuz is closed.
In November, Khalid al-Falihj, chief executive of state-owned Saudi Aramco, disclosed that Riyadh has halted a planned $ 100 bn expansion after the kingdom had reached 12 mm bpd capacity. He said the pressure on Saudi Arabia to raise its output capacity had ‘substantially reduced’. The kingdom launched the expansion program in the early 2000s, when production was pegged at 8.5 mm bpd. The target was 15 mm bpd.

Energy analysts said the decision to curtail the drive to boost production capacity may have stemmed from pressing budgetary problems as the ruling House of Saudi Arabia grapples with the pro-democracy uprisings that have convulsed Arab republics for the last year.
"The current focus of Saudi Arabia is on domestic social spending on the back of the Arab Spring," observed Amrita Sen, an oil industry analyst with Barclays capital in London. King Abdallah announced a social welfare and public spending package worth $ 130 bn earlier this year in a bid to stifle any demand for political reform by the kingdom's 12 mm citizens.

Industry sources say Saudi Arabia would have difficulty sustaining production rates higher than its declared capacity for lengthy periods. It has declared reserves of 262 bn barrels of oil, the highest in the world. But these are what the Saudi Arabian’s say they are, and there have been suspicions for some time that Riyadh's reserves may not be what they seem.
In February 2011, diplomatic cables from the US Embassy in Riyadh to the State Department, released by WikiLeaks, cited Aramco's senior vice president for exploration, Abdallah al-Saif, as claiming Saudi Arabia had 716 bn barrels of total reserves, of which 51 % was recoverable. He further claimed that in 20 years Aramco would have reserves of 900 bn barrels. That's roughly the combined reserves of the seven other leading producers, including Venezuela, Canada, Iran, Iraq and Russia.

But the US diplomats quoted Sadad al-Husseini, a geologist and Aramco's former head of exploration, as warning in November 2007 that the kingdom's production capacity target of 12.5 mm bpd, needed to keep a lid on prices, could not be achieved. This, he said, was because the kingdom's reserves may have been over-estimated by as much as 300 bn barrels, nearly 40 %.
One cable said that in al-Husseini's view, "once 50 % of original proven reserves had been reached … a steady output in decline will ensue and no amount of effort will be able to stop it."

The US consul in Riyadh observed that al-Husseini “is no doomsday theorist” and “His pedigree, experience and outlook demand that his predictions be thoughtfully considered."
Al-Husseini, who had publicly questioned Saudi Arabia's state reserves before his encounter with the US diplomats, later claimed he had been misrepresented in the cables.

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