Customer Logins

Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.

Customer Logins
Same-Day Analysis

Limited Fanfare for World's Largest Oilfield Increment as Saudi Heavyweight Treads Lightly on Oil Prices

Published: 15 June 2009
The start-up of a 1.2-million-b/d increment in the oil market of a year ago would have been the subject of major fanfare, but Saudi Arabia's Khurais has begun production almost below the radar and with minimal detail as the heavyweight seeks to tread lightly amidst sensitive market dynamics and tight OPEC quotas.

IHS Global Insight Perspective

 

Significance

At full stretch, the newly commissioned Khurais complex is expected to produce 1.2 million b/d, plus 330 mmcf/d of gas and 80,000 b/d of natural gas liquids (NGL), making it the largest oilfield increment in world history at a time when global oil demand is estimated to have contracted by over 2 million b/d year-on-year.

Implications

The field development—plus Shaybah later this year—will complete the field expansion outlined in Saudi plans to the end of 2009, although rather than spare capacity in the hoped-for range of 1.5–2 million b/d, the country will be facing a 4.5-million-b/d overhang compared to current OPEC quotas.

Outlook

The Khurais start-up—and others this year—represents a fairly serious test of Saudi control, with US$10 billion poured into field development and extraordinary spare capacity levels to contend with. Against this are reports that the country will take the opportunity to refurbish its largest oilfield at Ghawar, potentially reigniting debate over that supergiant oilfield's future.

Nearly a week into the operations at the largest reported oil increment in history, details of the Khurais start-up are still minimal, with production reportedly onstream from Khurais itself—firstly flowing into the three 600,000-b/d storage tanks before reaching the export market "within days" and gearing up to full capacity "in time", according to chief executive, Khalid al-Falih.

The US$10-billion-plus project has involved the development of the Arab light Khurais field itself from 150,000–200,000 b/d to 1 million b/d, alongside the 110,000-b/d Abu Jifan and the 90,000-b/d Mazalij, through the use of the seawater injection system (see Saudi Arabia: 9 June 2009: Giant Khurais Field in Saudi Arabia Comes Onstream). That, and high contractor costs at the time of development, brought the costs of development to a lofty (for Saudi Arabia) US$9,000/per incremental barrel, according to the Saudi Aramco head of exploration and production Amin Nasser in 2008, at a time when the project was still very much needed in the run-up to US$147/b last July.

Project developer Saudi Aramco's recent coyness on the start-up phasing is no surprise given fragile oil market dynamics since that time, which have seen a dip to the low US$30s/b before stabilisation and incremental rises to the current US$70/b, amidst ongoing concern about stock levels that equate to 62 days' forward cover for Organisation of Economic Co-Operation and Development (OECD) countries and some 130 million-plus barrels in floating storage.

Alongside Khurais, which has started up to the original schedule, Aramco has also recently completed work at the 100,000-b/d Nuayyim field (delayed from the end of 2008) and is soon to complete development of the next 250,000-b/d Shaybah increment with the intention of reaching its pledged capacity target of 12.5 million b/d by the end of 2009. That will then bring to a close the project slate promised in 2005, making Saudi Arabia one of the only OPEC members to follow through on 2010 capacity targets. However, the market changes since that time mean that the current implied OPEC target of 8.05 million b/d leaves Saudi spare capacity theoretically in the range of 4.5 million b/d—far in excess of hoped-for levels of 1.5–2 million b/d—and a strong incentive for some slippage in OPEC quota adherence in the months ahead, supported by current price levels.

Testing Control

Indeed, having pledged to under-produce on OPEC quotas to the tune of some 300,000 b/d in January, Saudi Arabia has already been less diligent in compliance than early figures suggested, never dipping far below the 8-million-b/d mark—as the January pledge suggested—and in March apparently exceeding quota by some 300,000 b/d, according to Saudi figures released to the Joint Oil Data Initiative (JODI). That is hardly significantly on the scale of Iranian or Angolan non-compliance, but important nonetheless given the market leader's role within the group, and its wide credibility going forward, if the influence of current positive financial market sentiment on oil prices starts to wane.

Higher oil prices in the late US$60s/b are another further attraction in Saudi slippage—within reason—with lack of transparency an aid in this regard, enabling the country to modify its physical sales according to sentiment and demand without necessarily affecting sentiment.

Another approach—highlighted by the Middle East Economic Survey—is the use of the Khurais increment and the "break" in rising demand to carry out work at the country's largest oilfield at Ghawar, where production is regularly reported at 5 million b/d. The field itself has been the key focus of speculation on Saudi Arabia's long-term ability to sustain capacity at the 12.5 million b/d pledged, with much of oil analyst Matthew Simmons' controversy over the Saudi reserve figures based on what the Saudis call "partial" data from Ghawar.

Outlook and Implications

Despite the slightly less than auspicious timing, the Khurais start-up is likely to have been a welcome breakthrough for Saudi Aramco. The gas supplies in particular will be a welcome boost for Saudi domestic users, natural gas liquids (NGL) an OPEC-free export boost, and the start-up another feather in Saudi Aramco's cap for achieving a major capacity increment on schedule in a difficult contractor market—albeit with the full capacity "test" still to be proven (as too with Khursaniyah).

While a modest increase in output from Saudi Arabia seems almost inevitable given current oil prices and the new start-ups (and evidence of the March slippages), it is arguable that there is no better time to take some production offline at Ghawar, in order to carry out the aforementioned workovers, with Khurais crude on a par in terms of gravity at 33°API compared to Ghawar's 34°API, and another 250,000-b/d increment due later in the year from the lighter Shaybah facility after 100,000 b/d of Arabian extra light at Nuayyim. That does carry some cost of igniting a debate over Ghawar's reserves that Saudi Aramco fought so hard to counter a few years ago, again favouring an opaque approach to realising its plans—rather than the greater transparency of the 2005–08 era, when the company found its targets picked over to an uncomfortable degree. Meanwhile, the 900,000-b/d heavy Manifa field development planned for post-2009 now seems to have been dropped from the company agenda for the time being, leaving it available in the event of any future market shortages—albeit with a two- to three-year lag.
Filter Sort