The Oil Drum has been featuring some very interesting speculation as to the meaning of the
ongoing drop in Saudi Arabian oil production.
First, let me recap the basic facts: (1) Saudi oil production is now down more than 10% from its peak level in 2005; (2) this decline in production has followed an erratic pattern, beginning in October 2005 when oil was selling for $62 and continuing through July 2006 when oil briefly touched $75, making it difficult to see these cutbacks as an effort to stabilize oil prices; (3) the production decline coincided with a doubling in the number of oil rigs employed in Saudi Arabia since 2004 and tripling since 1999.
To this Stuart Staniford adds the observation that, when one averages the slightly conflicting estimates of Saudi production from different sources, the production decline does not appear entirely haphazard, but instead fits the pattern of an 8% annual decline rate temporarily offset by the boost in production from the Saudis’ new Haradh III project:
Euan Mearns responds that on previous occasions, when we would all agree that the Saudis were deliberately cutting back production in order to stabilize the price, production also followed an erratic pattern. Mearns suggests (also here) that the Saudis might well achieve this intentional production cutback by shutting down some highly productive wells and opening a larger number of smaller wells. Moreover, despite the tripling in the number of Saudi oil rigs, Mearns notes that the total number is still quite small relative to the U.S.:
Whether comparing these two series on the same scale is appropriate is not clear. On the one hand, the U.S. has four times the number of square kilometers as Saudi Arabia, so perhaps equal intensity drilling should mean that the U.S. would employ four times the number of rigs as Saudi Arabia. Furthermore, oil fields in different locations can have very different physical characteristics. Even so, Mearns emphasizes that, with far less area and fewer rigs, the Saudis are producing significantly more oil than the U.S., and concludes:
There is no sign of a looming productivity crisis in these data and it would appear that increasing production may be achieved quite simply by drilling more wells.
Stuart in turn has a very interesting rejoinder, based on digging through some technical reports on Saudi oil fields. The Saudis have achieved remarkable recovery rates by injecting water underneath the oil, which causes more of the oil to rise to the surface of the reservoir where it can be extracted most efficiently. The graphs below display numerical simulations of how the water content for two vertical cross-sections from the Ghawar oil field has changed over time. Red and pink sections, which made up most of the original reservoir in 1940, have less than 20% water content. The now-dominant green sections are more than 50% water.
Stuart argues that once production gets into the green regions, the oil yield will start to fall significantly. Extrapolating the rate of loss of the red area from the time-series trend, Stuart calculates that the red would have been all gone by the second half of 2005, exactly when the production declines began.
I think it would be hard to overstate how big a deal this would be if true.
Saudi Arabia produces almost a quarter of the oil globally available for export. Furthermore, nearly a third of the increase in global production by 2010 that is assumed in the EIA’s reference case forecast is supposed to come from Saudi Arabia.
Half of Saudi Arabia’s current oil production capacity comes from the
Ghawar oil field.
And what if Stuart’s speculation that Saudi production has already peaked turns out not to be the case? I turn again to
the skeptic of Stuart’s thesis cited above:
I am in total agreement that Saudi oil production is entering a new era. In the past, over 9 million barrels per day could be achieved with relative ease. Their best assets are mature and may be in decline. In the future, much greater effort will probably be required to sustain production over 9 million barrels per day.
Elsewhere Mearns writes that he believes the peak in global oil production will occur between 2009 and 2015.
Whether or not that is so, if tensions with Iran escalate to the point that there is a significant disruption of Iranian oil production, at least that should give us some additional hard data on Saudi capabilities and intentions. As objective observers of the world scene, we’d welcome some additional data, wouldn’t we?