Arabia sees record oil and gas drilling as rest of world slumps _ dailytimes

LONDON: A record number of rigs are drilling for oil and gas on the Arabian peninsula even as drilling in the rest of the world tumbles in response to low prices. There were almost 290 rigs active in Saudi Arabia and the neighbouring states of Kuwait, the United Arab Emirates and Oman in March, according to oilfield services company Baker Hughes.

The rig count has increased by 50 since oil prices started to fall in mid-2014 and has almost doubled over the last five years. As a result, the Arabian peninsula now accounts for nearly 30 percent of all active rigs outside North America, up from less than 18 percent when the slump began.

Saudi Arabia alone had 127 operating rigs in March, with 67 targeting primarily oil-bearing formations and 60 hunting for gas. Some analysts suggest the drilling uptick is part of Saudi Arabia’s strategy of defending or even increasing its oil market share.

There have even been suggestions the kingdom is reviving its previously abandoned plan to raise capacity from 12.5 million to 15.0 million barrels per day.

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 gas for power generation.

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

Ten 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, Simmons argued the Saudis were overstating the remaining recoverable reserves and would struggle to maintain let alone increase their output in future. As oil prices surged between 2004 and 2008, Simmons’ book provided powerful ammunition for analysts convinced global oil supplies were peaking.

Subsequent events proved Simmons wrong, as Saudi Arabia increased oil and gas production to record levels and appeared to have no difficulty sustaining them. Simmons also missed the advent of the shale revolution in North America which added significantly to global reserves and production.

However, even if concerns about reserves have receded, there is still persistent 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 even clear if the Saudis themselves have accurate data on reserves and spare capacity. Saudi Aramco declares it has 267 billion barrels of remaining recoverable oil reserves, a figure which has remained unchanged since 1988/89.

Since then, the kingdom has produced 92 billion barrels 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 1960s 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 oil 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-privatisation 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 billion barrels.

The reality is that we have no idea how much oil the country could eventually 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 1938, Abqaiq in 1940, Qatif in 1945, Ghawar in 1948, Safaniya in 1951, Khursaniya in 1956, Khurais and Manifa in 1957, Berri in 1964, Zuluf in 1965, Jana, Karan and Marjan in 1967, and Shaybah in 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.