GCC States See Record Oil & Gas Drilling As Rest Of World Falls Behind

GCC States See Record Oil & Gas Drilling As Rest Of World Falls Behind

GCC States See Record Oil & Gas Drilling As Rest Of World Falls Behind

$OIL, $USO, $BHI

The Arabian Peninsula accounts for nearly 30% of all active Crude Oil and Nat Gas drilling rigs outside of the US

A record number of rigs are drilling for Oil & Gas on the Arabian Peninsula even as drilling in the rest of the world slumps in response to low prices.

There were almost 290 rigs active in Saudi Arabia and the neighboring states of Kuwait, the United Arab Emirates (UAE) and Oman in March, according to oilfield services company Baker Hughes (NYSE:BHI).

The rig count has increased by 50 since Crude Oil prices started to fall in June of Y 2014 and has almost 2X’d over the last 5 years.

As a result, the Arabian Peninsula now accounts for nearly 30% of all active rigs outside North America, up from less than 18% when the slump began.

Saudi Arabia alone had 127 operating rigs in March, with 67 targeting primarily Oil-bearing formations and 60 hunting for Nat Gas.

Some analysts suggest the drilling uptick is part of Saudi Arabia’s strategy of defending or even increasing its Crude Oil market share.

There have even been suggestions the Kingdom is reviving its previously abandoned plan to raise capacity from 12.5 to 15-M BPD.

But it is at least as likely the increase in drilling is driven by the need to replace declining output from mature fields and the need to develop new sources of Nat Gas for power generation.

Writing about Saudi Arabia’s Crude Oil reserves, future production and spare capacity is a professional graveyard for Oil analysts.

Just 10 years ago, respected Oil analyst Matthew Simmons wrote an alarming book about the depletion of Saudi oil reserves and its impact on the global economy.

On the basis of a detailed study of field production records, Mr. Simmons argued the Saudis were overstating the remaining recoverable reserves and would struggle to maintain let alone increase their output in future.

As Crude Oil prices surged between Y’s 2004 and 2008, Mr. Simmons’ book provided powerful ammunition for analysts convinced global Oil supplies were “peaking”.

Subsequent events proved Mr. Simmons wrong, as Saudi Arabia increased Oil & Gas production to record levels and appeared to have no difficulty sustaining them.

Mr. Simmons also missed the advent of the tight (shale) Oil revolution in North America which added significantly to global reserves and production.

However, even if concerns about reserves have receded, there is much uncertainty about just how much spare production capacity there really is in Saudi Arabia.

No one knows for certain just how much more crude the Kingdom could produce in an emergency if the order was given to open all the wells to the maximum.

Almost nothing is reported publicly about how much is produced from each field, how much they could produce if the spigots were opened fully, and how much still remains to be produced.

Field production and reserve figures are closely-held state secrets. It is not  clear if the Saudis themselves have accurate data on reserves and spare capacity.

Saudi Aramco declares it has 267-B bbl of remaining recoverable oil reserves, a figure which has remained unchanged since 1988/89.

Since then, the Kingdom has produced 92-B bbl of Oil, which implies it has added a similar amount to the reserve base.

The Kingdom has not discovered any new super-giant fields since the 1960’s but it is not unusual for reserves in existing fields to be revised upwards as a result of better estimates and improvements in technology.

In many countries, reserve growth from existing fields has exceeded the volume of new field discoveries.

But Saudi reserves have remained unchanged for almost 30 years despite shifts in technology and prices, which would have produced some variation if they were calculated according to normal commercial standards for “proved reserves”.

Most analysts treat Saudi Arabia’s declared reserves as a placeholder. The Kingdom clearly has large reserves but just how big no one knows.

Following talk about a part-privatiszation of Saudi Aramco at the start of the year, many commentators attempted to put a valuation on the company using its declared reserves of 260-B bbls.

The reality is that no one has any idea how much Crude Oil the country could produce because everything about the production system is shrouded in secrecy.

As a result, Aramco’s upstream production assets could never be included in any normal stock market listing since there is no reserve basis on which to value them.

The majority of the kingdom’s output comes from fields that have been producing for decades and are increasingly mature.

Among the big oilfields, Dammam was discovered in Y 1938, Abqaiq in Y 1940, Qatif in Y 1945, Ghawar in Y 1948, Safaniya in Y 1951, Khursaniya in Y 1956, Khurais and Manifa in Y 1957, Berri in Y 1964, Zuluf in Y 1965, Jana, Karan and Marjan inY  1967, and Shaybah in Y 1968.

Not all these fields were put into production immediately, but most have been producing for several decades. As is normal, the natural reservoir energy in all the major fields has declined and the Oil-to-Water production ratio is falling.

Saudi Aramco and its contractors have sustained production by drilling additional wells and employing enhanced Oil recovery techniques to sweep the remaining Oil towards the wells.

But the older fields like Ghawar must be coming under increasing pressure as they enter their 50th and 60th years.

At the same time, Saudi Arabia has been increasing its total production to meet rising demand from domestic consumers and defend its share of export markets.

Saudi Arabia raised Crude production from an average of 7.6-M BPD in Y 2002 to 9.7-M in Y 2014 and 10.3% in Q-3 of Y  2015, according to the US Energy Information Administration (EIA).

Sustaining production at these rates and even increasing it has required a Herculean effort to offset the natural field declines.

Drilling has been rising for at least 20 years as the Kingdom seeks to squeeze more Oil from its ageing fields and develop more Nat Gas for power generation to conserve Crude for export.

In this context, it makes sense to increase development and production from newer and less-developed fields like Shaybah and Khurais to ease the pressure on older fields like Ghawar.

By reducing production pressure on old fields, Saudi Aramco plans to extend their lives and increase the amount of Crude Oil ultimately recovered from them.

Saudi Aramco has taken advantage of the global downturn to secure big cuts in drilling fees from its contractors.

The problem is that increased output and capacity at newer fields tends to be announced, but declining output and capacity from older fields remains a secret.

Without accurate statistics on production and reserves for individual fields, it is impossible to know how much of the drilling is adding net production capacity and how much is offsetting field declines.

But it seems safe to assume that at least part, perhaps a big part, of the increased drilling reported over the last decade is being driven by the need to sustain production in the face of heavy exporting from ageing fields.

The same is true across the other countries on the Arabian Peninsula, more drilling is needed to offset the natural decline in output from ageing fields.

Stay tuned…

 

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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