What the Fall in Saudi Oil Production Might Portend

An interesting article in Econbrowser, “More speculation about Saudi Arabia,” highlights the issue of falling Saudi oil output and what its causes might be. The debate centers around whether this fall is intentional, that is, whether the Saudis are taking wells out of production, or whether it reflects a decline in the productivity of Saudi oil fields. If the latter, it’s a confirmation of the “Peak Oil” hypothesis, which says we are about to reach the point where we have lifted roughly half of the world’s oil supplies. Once the peak has been surpassed, production falls and the price of extraction increases. Not a pretty scenario.

This story doesn’t address the first possibility, why the Saudis might be cutting production voluntarily, but we have some clues from the events of the last week. The Saudis issued a sharp rebuke to the US, calling the invasion of Iraq an “illegal foreign occupation.” The Saudis are said to be posturing to gain leverage among other Arabs, but we wonder. Today, in a story published in the Financial Times, Prince Alwaleed criticized the US for its “obsession” with 9/11 and sensitivity over Arab ownership of US assets, which forced Dubai Ports to divest the US operations of UK ports company P&O.

Together, these comments may indicate an increased Saudi inclination to push harder, and more openly, for its own interests. And having tighter oil supplies gives the kingdom considerably more leverage. In short, neither scenario is attractive.

To Econbrowser:

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….

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.
Two cross sections of a reservoir simulation of the northern portion of the ‘Ain Dar region of Ghawar at various years. Color represents volumetric water saturation in the rock pores. Source: Oil Drum

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 Euan Mearns, 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?

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