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More and more Saudi oil

Saudi Arabia has the capacity and resources to significantly increase production, should it want to

THE KINGDOM may be planning for life without oil, but its state company, Aramco, is busy keeping the kingdom’s lifeblood ticking over.

Crude output this year has averaged 10.2m barrels a day. A modest increase is possible in the very short term, possibly reaching last year’s heights of 10.5m b/d if demand surges more than expected during the peak summer months.

Fuel from the Wasit gas plant, processing non-associated gas from the offshore Arabiyah and Hasbah fields, may lessen by about 100,000 b/d the need for crude oil to be burnt in power plants this summer, says the International Energy Agency (IEA). Next year, production is expected to inch higher, averaging 10.34m b/d, says the IMF.

But bigger leaps are always possible. Deputy crown prince Mohammed bin Salman said the kingdom could produce 11.5m b/d overnight, if it wanted to. Not everyone agrees. The IEA reckons Saudi output could reach 11m b/d “without strain”, but further rises would be expensive and take a while, because offshore reserves would be involved.

But further supply growth – that is, not just maintenance of spare capacity – is now politically plausible. Mohammed bin Salman has talked of 20m b/d in the long term. That’s considered fanciful by many analysts, but the market is suddenly beginning to realise the young prince means what he says. (Most were sceptical about his pledge earlier this year to list part of Aramco, too.)

Crucially, Aramco’s forthcoming valuation is likely to be based on cashflow, not on its reserves, which means oil-supply volume will be important.

In the context of Saudi Arabia’s determination to pursue market share, not price, in its oil-export business, and the replacement of Ali al-Naimi with the free-market-minded Khalid al-Falih as oil minister, that makes a new phase of output growth plausible.

Barrels of potential

Already, the bulk of Aramco’s spending is now focused on upstream activities, though that hasn’t translated into a surge of greenfield drilling. Mohammed al-Qahtani, senior vice president for upstream operations, has said Aramco would operate between 211 and 214 oil and gas drilling rigs this year, broadly flat with last year.

Mohammed bin Salman has talked of 20m b/d in the long term. That’s considered fanciful by many analysts, but the market is suddenly beginning to realise the young prince means what he says

Much of the present focus is about replacement production. So Aramco is occupied now with expansion of the Shaybah oilfield, in the Empty Quarter, where it is lifting output by 250,000 b/d to 1m b/d. That target should be reached imminently, and will yield more light crude to the overall Saudi production mix, compensating for declines in maturing fields. Also underway is an expansion of the Khurais oilfield, where output should rise from 1.5m b/d to 1.8m b/d in 2018.

Gas remains a focus too – partly because by policy Saudi Arabia does not import any. Aramco was reported in April to have awarded India’s Larsen & Toubro, an engineering firm, a contract to carry out the expansion of its Hasbah offshore sour gasfield. It already has capacity of 1.3bn cubic feet a day but should produce 2bn cf/d. The kingdom is also keen to explore for tight gas and other non-associated gasfields, though upstream success has been lacking so far.

But, for the global market, the oil upstream will remain the focus. If Saudi Arabia is to start serious expansion of its capacity − rather than just maintaining it − a new drilling campaign involving exploration of new fields, many offshore, will be necessary. That will only be visible in the rig numbers over the coming months.

This article is part of an in-depth series on upstream in the Gulf. Next article: Kuwait's big plans, tricky politics.

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