Wael Mahdi
I guess by now we all know that Saudi Arabia will not raise its production capacity beyond 13 million barrels a day by 2027 after the Kingdom’s Crown Prince Mohammed bin Salman made it clear in his address during the regional summit this month that was attended by US President Joe Biden.
“The Kingdom will contribute to this field to increase its production capacity to 13 million barrels per day, and after that the Kingdom will not have any additional ability to increase production,” the Crown Prince said.
To many who are still under the influence of what Matt Simmons wrote 17 years ago in his book “Twilight in the Desert”, the Saudi statement was a testament to the argument laid in the book that Saudi Arabia can’t rescue the world anymore as its oil fields are aging and reaching a peak.
Those who remember the days of peak oil theory will definitely remember the many statements put out by officials from the ministry of petroleum and Aramco. Communication and PR practices back then weren’t as elaborate and sophisticated as today because at that time Aramco wasn’t listed yet on the Saudi stock exchange and the petroleum ministry was running the show.
The result was many statements that sounded contradictory or unrealistic when everyone was trying to defend their position against Matt Simmons’ theories.
Those statements maybe were needed at that time to maintain confidence in Aramco but it surely didn’t serve it well two decades later.
Aramco’s officials thought that the market has very short memories that won’t last this long, but they tend to forget that there are observers who have an agenda against the company because Aramco treated them with negligence or denial — the most common practice for Aramco officials when someone from outside the company has any say about it.
Those who remember that period would certainly recall Aramco’s statements about being able to pump 12 or even 15 million barrels a day for decades.
So in retaliation, some observers now are trying to show how Aramco was contradictory about its production capacity in the light of the Crown Prince’s recent statement.
In fact, the issue is more complicated than this.
Yes there were some contradictions because Aramco’s officials were always speaking in fear in public.
They always feared that something they said would upset someone in the ministry in Riyadh so the focus was on keeping Riyadh happy but not explaining it right to the media what the company is capable of producing.
Thank God things have improved significantly today as the listing of Aramco on the Saudi stock market has served us all well.
Everything is public after being documented, audited, and scrutinized. We have better sourcing and understanding of the numbers of the company now than ever.
This, however, didn’t solve all the problems because officials in the past left many ends untied.
Former minister of petroleum Ali Al-Naimi, for example, explained many technical terms with reporters who didn’t have any knowledge about petroleum engineering practices or who simply weren’t interested in more than a simple statement they needed to send back to their editors.
Other officials from Aramco were even very aggressive in their response to the media on the output capacity issue. The result we all know: more confusion and less trust in the statements.
The issue of Aramco’s ability to produce massive amounts of oil was at the center of any media discussion with Al-Naimi for years. Yet, there were periods when the issue was more pressing, especially during supply crises and skyrocketing oil prices.
In 2008, when oil prices were already on their way to $147, the world was looking for solutions and an energy meeting in Jeddah was held where tens of energy and oil ministers from around the world met to discuss the root cause of the crisis and where to go next.
As consuming countries like the US were accusing OPEC of being responsible for the crisis due to its inability to increase capacity, the producers were claiming that speculation and paper market trading practices are behind the price hikes. As a response and to assure the market and consumers that there was never a supply crisis, Saudi Arabia told the ministers in Jeddah that it’s already on its way to complete its program to increase maximum sustainable capacity to 12.5 million barrels a day by end of 2009, and it pledged to raise it further to 15 million if the world needed it.
For Saudi output capacity to hit 15 million barrels, the further daily capacity includes 900,000 barrels from the Zuluf field, 700,000 barrels from Safaniyah, 300,000 barrels from Berri, 300,000 barrels from Khurais and 250,000 barrels from Shaybah, as explained by minister Naimi at the time.
When Saudi officials were asked in later years about the 15 million barrels a day figure, they responded by saying that this was a scenario and never was a solid program.
I think the world now can say goodbye to the 15-million-barrels-a-day scenario. Many of these increments have already been developed to maintain Aramco’s 12 million MSC. Khurais 300,000 and 250,000 are history now. As for Berri’s increment, it is coming online over the next two years.
Now we will rely on Zuluf and Safaniyah to hit the 13 million barrels a day target and to compensate for the declines in older fields such as Abqaiq and Ghawar.
But is it really “that’s it” for Saudi Arabia?
The confusion about Saudi production capacity always starts when answering this question. It’s confusing for people inside Aramco, let alone people outside of it.
The simple answer is NO, but let’s clear few misunderstandings about the issue first.
First of all, Saudi Aramco as a company has 12 million barrels a day as a maximum sustainable production capacity. This means Saudi oil reservoirs can only go up to this level without being damaged.
It can produce 12 million barrels and keep this level for a long period but this won’t happen without massive investment in managing and maintaining the wells and without an aggressive drilling program.
The more an oil company produces from a well, the faster output declines. So oil companies keep drilling new wells all the time to first replace the oil produced, and second to keep the production rate steady from the field.
However, Saudi Aramco doesn’t produce at this maximum production capacity as per policy. The Kingdom took on its shoulders the responsibility of keeping between 1 and 2 million barrels a day of oil as spare capacity. By industry definition, this is the amount of oil it can produce within 30 days and sustain for 90 days.
So in order for Aramco to increase production from 10 million barrels a day — its current comfortable level that forms the high end of the comfort zone for the company — to 11 or 12 million barrels a day and dive into its spare capacity, it needs more drilling and one month at the minimum. It’s not a switch it can hit and output will go up by a million or two barrels.
Second of all, there is a big difference between maximum sustainable capacity or MSC and potential production. Whereas MSC is the amount of oil the reservoirs will allow Aramco to produce for a long period, potential production is what the company’s surface facilities can process at any given day.
The shocking number for many of those who don’t know the reality of Saudi oil production, is that the surface facilities of Aramco can allow it to produce up to 15 million barrels a day.
Yes, you heard it right, 15 million barrels as of today.
Then, how come Aramco only said it can pump 12 million barrels a day?
Aramco’s daily production is constrained by many factors. First, it can’t produce whatever it likes. It gets its output targets from the minister of energy based on the agreement the Kingdom has under OPEC and OPEC+.
Second, the government policy mandates Aramco to always keep 1 to 2 million barrels a day at any given time as a spare capacity that is to be used during any energy crisis. This spare capacity is a buffer for the global oil market and the unique proposition for Aramco and the Kingdom as there is no other producer in the world who has this much oil idled. This idle capacity isn’t free. It comes at a cost. There is an economic cost of not selling that oil, and there is a financial cost in the form of capex and opex to keep these wells and the surface facilities ready to pump this crude at any time.
The next question is, did Aramco ever produce 12 or 15 million barrels a day in its history? Are these numbers real or just on paper?
Let’s look into history.
A decade ago, Al-Naimi told a limited number of journalists in one of the briefings that Aramco did process 14 million barrels a day in one single day and it loaded that much crude on ships on that day.
Now, supplying 14 million barrels a day is totally different from producing that quantity from below the ground on that single day. What Al-Naimi was trying to sell to reporters was that Aramco can put that much crude out because its surface facilities can handle that much.
He also went on to say that the company actually hit near 12 million historically but that was in a “flush production” and he said “you guys don’t need to worry about this.” Flush production is the amount of high oil flow rate that comes out from new wells. As Society of Petroleum Engineers explains on its website, it “delivers a small, high rate flow every time the well is shut-in (recharges) and is brought back on line”.
Al-Naimi didn’t give much details about the timing for all this or any further information.
Moving on to recent times, in April 2020, Aramco finally showed the world it has 12 million barrels a day and it did pump at that level but not for too long. It was just a matter of days.
Aramco did produce at 11 million barrels a day, though, for weeks.
This year it will need to revisit this number when its OPEC+ agreement comes to an end in September.
I don’t doubt the ability of Aramco to produce at 11 or 12 million barrels a day because I didn’t get my information from the officials who smile at the media but from those who were against seeing the company producing at that level.
Aramco can do it but it will require more work for petroleum engineers who don’t want to walk the extra mile and it will need massive investments and above all more reservoir management.
The internal pushback isn’t new and as former Aramco’s executive Sadad Al-Husseini pointed out in his account of the launch of Aramco’s MSC program, engineers were against seeing Aramco producing more than 9 million in the late 1970s. Things haven’t changed today.
Othman Al-Khowaiter, another Aramco veteran, is among those who made it publicly that he doesn’t want to see Aramco pumping at more than 10 million barrels a day and sometimes stressed on the need to keep output at lower levels.
The decision, at the end, rests with the government. There are international commitments for Saudi Arabia and there are state financial needs that have to be covered. There is also a monetization strategy for oil resources that the government is implementing to ensure that the oil wealth is turned into cash income.
In the end, no matter what Aramco said or tried to prove when it comes to MSC, its words will fall on deaf ears as the jury is out and there has been an agenda against Aramco for years.
I can’t blame the media entirely because the responsibility also falls on the shoulders of Aramco’s and other officials who unfortunately confused the public or were unable to tell the truth in the best possible way.
They had no trust in the media and the media had no trust in them.
Setting the issue of trust aside, we need to know if Aramco can produce more oil. The world needs to know this.
I can’t speak for the company but I can share all what I’ve learned about this issue throughout the years.
I can comfortably register my testimony on this knowing that my words will be remembered years from now.
Aramco can hit 13 million barrels a day and Saudi Arabia as a whole can hit 13 million barrels a day or even more.
First, there are tens of fields that are still not developed. There are more than 100 discovered fields but the majority if not all of production is coming from less than 25 of them.
Yes all these undeveloped fields are giant but when combined can add something between 500,000 and 1 million barrels a day extra. However, the economics for bringing them online is still not there, not until the big fields are on decline.
Second, observers tend to forget that Saudi Arabia shares massive resources in the partitioned zone with Kuwait. Khafji network of offshore fields can produce up to 300,000 barrels a day, while onshore fields in Wafra are able to add 200,000 barrels a day.
Saudi Arabia was trying for years through Chevron to implement a steam flooding program that can unlock at least 5 billion barrels extra of heavy oil from Wafra. The steam injection project was undergoing until the two countries halted production from the entire zone between 2014 and 2015.
With operations resuming normally in the zone, the prospect for seeing more oil from Wafra and Khafji is high.
Third, Aramco can supply the world with more oil not only by pumping more but freeing more oil for exports. Let’s be reminded that Saudi Arabia is embarking on a program to replace liquids in all power plants with natural gas. In addition, the energy mix in Saudi Arabia by 2030 should be split between gas and renewables, which can free an additional 1 million barrels a day of oil at least.
Fourth, Saudi Arabia is turning to unconventional gas in its massive Jafurah field to power its future and that will free more oil.
Fifth, technology, technology, technology. No one can predict the impact of technological breakthroughs on oil production. The life of Aramco’s reservoirs was extended thanks to horizontal drilling practices that the company followed in the 1990s. It’s now investing big on research and development in an effort to find better ways to extend the lives of its fields. From small robots that can go into the reservoirs to better water and carbon injection methods, Aramco is not standing still.
It even has one of the largest supercomputers in the world at its EXPEC ARC center to simulate reservoirs.
So in conclusion, the world can still expect to see more oil from Saudi Arabia above the nameplate capacity.
The question that the world needs to answer is whether there is enough demand in the future for Saudi Arabia to make big investments in its oil production?
What the world must know is that producing an extra barrel of oil comes at huge cost. Why would the government allocate billions of dollars a year to invest in new capacity at a time when it needs every dollar to move its economy away from oil?
If the world wants Saudi Arabia to carry the responsibility of opening its oil taps endlessly, it must secure demand for oil.
What we are seeing, nevertheless, is the opposite. Therefore, I think the Crown Prince’s statement seems to be fair and the world should live with 13 million barrels a day instead of complaining about it.
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