[Newsseeker]

...Or, Why the Decline in Saudi Oil Production is Not Voluntary
http://www.theoildrum.com/node/2331

[Pablo2079]

Is it possible that the production spike, prior to the invasion of Iraq, damaged the producing fields?

The rig count stays constant during that increase in production, so it seems that all they could have done was to pump more.

[Leanan]

Matthew Simmons thinks what happened there was the Saudis emptied their tank farms.

IOW...he thinks that spike at the start of the war does not reflect their true production capabilities.

[Pablo2079]

At the time, I didn't think they had THAT much storage..... at least not enough to cause that much of an spike.

[Leanan]

I forget the exact number Simmons says they have. Something like 80 million barrels? That includes storage that they rent in the Carribean and other places. Everyone knew the war was coming, months in advance, so they could certainly have filled up all the tanks in beforehand, if they wanted to.

I don't think Simmons is arguing that the entire spike came from storage, but that enough of it did that their true capacity was masked.

[Twilight]

Great article. Comments are worth a read too. Not everyone thinks the global peak will ever be seen for what it is even long after the event.

It will be interesting to see what Saudi production looks like over 2007, but I doubt it will be the subject of mainstream media attention for quite some time. I would be surprised if the peak oil issue made an impact this decade, people will no doubt blame market volatility or political events for anything likely to happen with supply in the next few years.

[AirlinePilot]

$this->bbcode_second_pass_quote('Twilight', 'I')t will be interesting to see what Saudi production looks like over 2007, but I doubt it will be the subject of mainstream media attention for quite some time. I would be surprised if the peak oil issue made an impact this decade, people will no doubt blame market volatility or political events for anything likely to happen with supply in the next few years.

[Twilight]

The media's obligation to present an opposing view even to unassailable logic in the interests of "balance" means that the coverage up to now, while an improvement on the zero of the past, has still been weak and ineffectual. Few people are aware of the issue. I expect media coverage of peak oil to keep referring to it as a theory, a term which the public foolishly believes to mean an unverified hypothesis. Plus, global warming has pre-booked all the doom and gloom slots, so public officials commissioning or commenting on studies have the green light to portray resource-driven energy availability decline as future carbon emission cuts, by implication something voluntary and not contradictory to future economic growth. I believe this will become the universally adhered to convention as more people add solid numbers to the debate - just convert it to CO2 equivalent for public consumption, then respond.

Such is our generosity and environmental stewardship! We can announce a 25% cut in "carbon emissions" to 2025, promise investment in new technologies to the markets, and energy security remains a loaded term to be mentioned behind closed doors only.

I think you may underestimate institutional resistance to change. Just because facts change, does not mean the discussion moves on, does not mean people are any wiser. Poorer, yes, perhaps very much more so, but not enlightened. The terms of reference of this debate will not be what we understand them to be, not for years yet barring some catastrophe.

[pup55]

I have a few graphs today.

The source of this data is the same sources noted in The Oil Drum article. IEA monthly reports, OPEC monthly reports, and Table Ia of the EIA data per the link.

I have a different set of hypotheses on this issue, just to bring up another plausible scenario, and back it up with some conjectures of my own. Note that in the Oil Drum article, there are plenty of theroies, what ifs, opinions, etc. and they lead to a point of view, and I am not sure that is wrong. I am sure, though, that if you look at the same data in a slightly different way, you come up with more information, and not necessarily the same conclusions.

Here are my theories:

a. Saudi production levels are well thought out, and are the result of a system of triggers/indicators that we do not necessarily know, but are probably deduceable.

b. There is plenty of evidence that the current production cutbacks are the result of the system in (a) therefore not necessarily due to the fact that they "cannot" produce at a given level.

c. Saudi is still the swing producer within OPEC

d. They are not getting much help in controlling the system.

First, a comment about the data. I am glad the Oil Drum guy is ragging on the quality of the data because it is bad, therefore puts an element of doubt into anything that anyone does. Also I think that part of the problem is that this business is so enormous that it is hard to keep track of all that oil, going around the world, being pumped into tanks, etc.

Therefore, unless someone tells me better, I think it is better not to focus too much on the monthly data, because of the noise in the system causing a lot of fluctuation and variation in the data. What I have done below is mainly focused on quarterly averages.

This sort of makes sense to me. Even in Saudi, you cannot just place a phone call and have a huge jump in production just like that, and also once the production ramps up, it takes a long time, at least six weeks, for it to show up in somebody's inventory. Nothing takes a month. Everything takes a couple of months. So, it is much better to see how this data moves over time, when smoothed, rather than worry about the minute gyrations of the monthly data. This keeps you aware of the trends and keeps you from over-reacting.

Secondly, I think it is best to view this as a process control problem. In any process, particularly one that is not very well measured, there is a certain amount of random variation that takes place, and if you turn the dial at the first sign of trouble (which in the OPEC case is to adjust production upward or downward based on some piece of data) you will more often than not blow up the system. So in this case OPEC in general, and Saudi in particular, is acting as a process control mechanism for the process of oil production at a massive level.





Here is a graph that illustrates what I mean. It's the quarterly average of the OECD inventory levels. The OPEC goal, as it were, is to provide good customer service, and to make the system as stable as possible. In the case of OECD inventory, the average inventory over the time period we are talking about is 81.2 days, with a standard deviation of 2.2 days. Note that I am using "number of days usage in inventory" rather than some gross inventory number, to accommodate the fact that overall usage is growing over time, etc. In the world of process control, people use the average plus some number of standard deviations as control limits. When "the value" drifts outside the control limits, somebody turns the knob or something and gets the system back into control.

So on the graph above are the inventory levels, plus a one standard deviation upper and lower control limit. The limits are 84 days or so on the high side, down to 79 on the low side, give or take.

As you can see, when we start the period, back in 2001, the inventory is right at the upper control limit. In fact, the real control limits would have to be derived from what was happening before the 2001 time frame, so these limits are obviously science fictioin, but maybe the "real" ones are something like it. Also in "real" process control, it is customary to use 2 standard deviations or more to determine whether a process is in control, but this is a minor point we can discuss later, if you want.

But the point is, I think Saudi uses this, plus probably some other, control limit system to decide whether to cut back or increase production to achieve inventory stability at about 82 days. In this case, this is exactly what happened. OPEC was in the process of reducing supply during early 2001, and it successfully brought inventories back in line.

In fact, the cutback was too effective. In the period of late 2002 and early 2003, inventories got low enough to touch or exceed the lower control limit, therefore they had to then turn the crank again and get some more oil out the door. This happened, as someone above pointed out, at a time which was also the period right before the Gulf War, so it was convenient politically as well.

If you go through the historical OPEC quotas, by the way, you can see that this is pretty much what happened.

By the way, here is the graph of the "commercial" inventories during the same time frame. This is the total inventory, minus the various nations' SPR's and other government owned storage. This is what I would say is the "real" goal of OPEC, which is to keep inventories nice and stable for its "paying customers", namely the big chemical companies and refiners.

note that these inventories pretty much go in sync, so I would say that if I were setting up a process control system, I could just as easily use either for a control indicator, or maybe some combination of both.




So it is clear what is happening right now, (in my opinion), if you look at the late 2006 time frame, OECD inventories have again exceeded the upper control limit, which we knew, because we follow this all the time, and so all of OPEC, and Saudi in particular, have cut way back to adjust this so that it will get back into the limits.


I am not ready to say that they use this inventory data alone as a way to decide how to regulate production. In fact, I believe they also have at their disposal some forecasting tools that they use to get an idea of whether or not they are going to need to adjust production levels.

Here are some excerpts from various OPEC monthly reports, as indicated below.

The first one below is from the December report. Note that they are predicting a big decline in demand in the second quarter of 2007.

So, if you are OPEC, or Saudi, and it is last fall sometime, you see that the inventories are quite high, and there is a projected low spot coming up in the second quarter, do you still run the wells all out? Certainly not. So this is a key point, to establish "intent", as it were. It is perfectly reasonable, at the time the data was presented last fall, for Saudi to act the way they did. In fact, the cutback happened a long time before that, and in fact, as I will show later, other OPEC members cut back at various amounts during that same time frame.



This is a table from the October 2002 report, which predicts a big increase in demand by the end of 2003 (note that the Gulf War did not officially enter into this). But per the graph above, this is exactly what happened, and by the fall of 2003, inventory levels had indeed gone below the "control limit" if you will, so it was correct, from the point of view at the time, to start to increase production again.



Similarly, this is the forecast made in 2005 for estimated demand in 2006, showing a decrease in demand toward the end of '06, which is what apparently actually happened.





So anyway, what I am saying is that it is perfectly plausible for these guys to use various data sources to decide what to do, and they do a pretty good job considering the chaotic nature of the market, and also erratic production ability of some of their OPEC partners.

This is a table of the last several years, and it is the change in production for Saudi and also for the non-Saudi members of OPEC for the "following quarter", that is, for March, it's the average for March, April and May. I did it this way to illustrate that at a given time, these characters made a decision as to how much more or less to produce, based on the available data, and what the outcome was. We don't have the data for January-March yet, unfortunately.



You can see from this two things; One is, that they made decisions to increase or decrease production that (with the exception of the Gulf War and Venezuela oil strikes) coincided pretty closely to the inventory levels getting either high or low, as suggested above.

More importantly, we can see that Saudi always, ALWAYS, takes on a proportionately larger burden of the cutbacks or increases compared to the rest of OPEC. Saudi has about a 31% market share, so you would suspect that if OPEC decided to cut back or increase production, Saudi would take about 31% of the change, but, on average, Saudi takes on a greatly larger percentage, as indicated by the rightmost column.

So, this is a key point: Here we are in the fall last year, the inventories are getting out of control and they are expecting a really weak second quarter, so it is of course perfectly true to form that Saudi would lead the way in cutting back on production and cut back more than the rest of the members. This is a tendency repeated over and over during this time frame. In some of these cases, Saudi is cutting or increasing production at the same time as the rest of these slackers are going the other way.

A couple more minor points on the issue of OPEC in general. Here is a nice, confusing graph of OPEC production by country by quarter during this time frame. Note that if you use the quarterly data, and scale the graph correctly, it does not look so variable.



In this graph, I have divided OPEC into 5 groups: The first one, labeled FTGS is Iran and Venezuela (FTGS stands for F*** the Great Satan). K and S is Kuwait and Saudi. At the moment, These are your moderate players, and willing to work to stabilize the system. The "Market Builders" are countries like Libya and Algeria and Oman and UAE. These slacker nations never cut back for anyone, they have mainly gone up even during periods that OPEC has needed to cut back. The "Chaos" countries are Iraq and Nigeria. These two crazy nations are subject to sudden unexpected decreases in supply because of their chaotic political situation, but note that generally, these nations have actually been stable for a couple of years. The last one is Indonesia. They are in permanent decline, and have slowly and steadily decreasing production.

But, this graph illustrates an important point: When OPEC cuts back, who actually does the cutting? Kuwait and Saudi, mainly. In the past few months, some other nations like Libya have cut back slightly, but as usual, the bulk of the supply reduction is absorbed by the moderates.



One more side point: A lot was made in the Oil Drum article of the period around June of 2004. This was the period in which OPEC decided to "raise its production quotas", and is represented on the graph by the little spike in production. First of all, it is clear to me that this "production increase" did not affect anyone except Saudi and Kuwait, since they were the only ones who had any spare capacity, and the graph above reflects this. Secondly, the statements made at the time were probably close to true: They were adjusting the "quota system" to reflect reality, and also, this was probably the extent, at the time, of the spare capacity.

But that is not to say that Saudi and Kuwait could not, with some effort, get back to that level at a given moment. We will still need to see another change in pricing regime before this takes place. If OPEC's forecasts are correct, maybe we will not see it in the second quarter, after all, and by then maybe some of the reworks in Saudi will be online, so we may never know.

One other minor point, and that is, if you look at the table above, it seems to suggest that to a great extent, this production increase "worked" to the extent that it reduced the rate of price increase for crude oil from about 25% per year down to about 15% per year. In 2005, of course, the hurricanes hit, and threw the system into turmoil again, but I am not at all sure that price, per se, is an actual control point. You can make the argument that if they control inventory, they are doing their job, and for the most part the price will stay in line with the amount of oil there is on the market, as most assuredly happened during the latter part of 2006.

So, to summarize, going back to the original points:

a. It is entirely plausible that the current cutback by OPEC/Saudi is related to some system of control of the market, based on a set of forecasts or inventory figures, for example, and not necessarily due to some big decline in their oil fields. The production control system they are using could be as simple as the OECD inventories, or some other simple algorithm that indicates how much to produce.

b. We will not know for sure what their actual production capability is until they are called on again to produce at a high level. It is also plausible that they are covering their hineys with draws from their internal inventory system as Simmons suggests. They are pretty adamant about the system not being "at peak" and in fact, in the latest Opec Monthly Report, this was explicitly stated.

c. Not only is Saudi still the swing producer in OPEC, but they are getting hosed by some of the other participants in this so-called cartel, who only toe the line on production when it suits them.

For some reason, they keep the system going anyway.

Others should feel free to comment.

[joewp]

Pup, nice charts and all, but there's one monkey wrench in your analysis, as far as I can see. Saudi production started down in the fourth quarter of '05, as shown in this chart (from EIA data):

link to image

It just seems to me there's really no excuse for their production to start declining when it did (other than plain old depletion). Your analysis re:inventory levels might be true for other OPEC members or what they did in the past, but KSA seems to have started declining for no reason even before your excess inventory time frame. In this chart it even looks like they tried to ramp up in Q306 and could only maintain Q2 production. (Same time as Stuart's Haradh III bump).

I can understand trying to find reasons to support the "Saudis decreased production voluntarily" hypothesis. That they might be in severe decline already is just too early, man. We're not ready for this shit yet! But I keep looking, and I keep seeing that ready or not, it seems to be on our doorstep.

We'll know by September, one way or the other, I guess.

[pup55]

The above forecast was published in September of 2005, which is right about the time that Katrina hit.



Here is the reality-based data of what actually happened, according to the February 2007 Opec Report.

So if you are OPEC, or specifically, Saudi, in the September of 05, the following information is available to you:

There are 84 days of oil in the OECD inventory, as of the June report which is the last data you have, which is at the top of your control limit. Your forecast says a decrease in demand for the second quarter of '06 to about 83 million barrels, which is about 2 mbpd less than you are producing right now. The hurricanes had two effects that you know of: screwed up a lot of the US refinery infrastructure, and sent gas to $3 per gallon. So, what to do?



What they actually did was cut back, and not long after, they actually got some help from Kuwait and Algeria and Iran. Even Chavez pitched in, nice guy that he is. Maybe their algorithm includes some demand destruction because of $3 gas that was happening.

At some point during the spring, they figured out that their forecasts were going to be way off: Their forecast, as of September 2005 was that the 4th quarter of '06 was going to be 86.88 mbpd, the reality, as it turned out, was on the order of 85.01 (according to the February 2007 report). At some point they got wind that there was going to be too much oil (they started to notice inventories exceeding their control limits) and they just went with the flow and backed off of production some more. Maybe it gave their fields a chance to rest, maybe they just quit drawing from their internal inventory buffer system. It's a matter of spectulation.

Note that on a percentage basis, Kuwait cut back nearly as much as Saudi did, from the beginning of 2006 until December, (5.8% vs. 6.9%) and nobody is suggesting they are in depletion (as far as anyone knows).

So, none of us knows for sure what was going through their minds at a given time, but those guys have a hard job: They are looking at a forecast based on unreliable data, and taking unreliable measurements on a huge, chaotic system with variable inputs and variable demand, and they are trying to guess, six months in advance, what the demand will be, so as to tell their production people what to do right now.

But the key question is, what are they going to do in the future. What we do know is that the inventories are getting back under control, so I imagine at some point they will level out at some level they are comfortable at, provided they still can. Another alternative is that they will continue to cut back (either deliberately or not deliberately) and overshoot again like they did in 2002, and there will be a big shortage.

At that point we will know what is up. Anyway I am glad this has turned into a conversation on the data and the tinfoil hat crowd has gone elsewhere.

Here are the two reports: The forecasts are on page 35 or so.

Feb 07 Opec report

September 05 OPEC report

Here's their 2007 demand forecast, which says 85.26 in the fourth quarter, which is actually a little shrinkage from '06. You know what that means.

[Newsseeker]

Saudi Arabia brought HaradahIII on-line and it temporarily increased production while the slide continued. Since there have been reports of over 90% water cuts on parts of Ghawar how realistic is it to assume that the Saudis are facing a decline of 8% (as announced last year) in their existing fields and, perhaps, Ghawar. Bringing new production on-line only is a blip when looked at in the context of an 8% decline. 2007 production has to be watched and my gut instinct is telling me that the cutbacks are not voluntary. If they were then why bring new production on-line?

[sameu]

ok so if the ksa actually did peak
that would mean de facto that the world has peaked, right?
guess Simmons and Defeyes were pretty acurate in that case

let the party begin

[Permanently_Baffled]

$this->bbcode_second_pass_quote('', 'I')f they were then why bring new production on-line?

[Starvid]

In the latest newsletter ASPO believes Saudia Arabia will produce at around current capacity until about 2025.

And actually, so do I.

[Twilight]

$this->bbcode_second_pass_quote('Starvid', 'I')n the latest newsletter ASPO believes Saudia Arabia will produce at around current capacity until about 2025.

[Bas]

$this->bbcode_second_pass_quote('Starvid', 'I')n the latest newsletter ASPO believes Saudia Arabia will produce at around current capacity until about 2025.

And actually, so do I.

[Starvid]

$this->bbcode_second_pass_quote('Twilight', '')$this->bbcode_second_pass_quote('Starvid', 'I')n the latest newsletter ASPO believes Saudia Arabia will produce at around current capacity until about 2025.

[Twilight]

$this->bbcode_second_pass_quote('Bas', 'I') don't know what to believe about Saudi arabia these days.

[AirlinePilot]

I flat out challenge the Iraqi production on that graph. Someone here have the last years production from Iraq? That is one glaring error there and it points out the problem with this whole darn thing. The reality is not found on any graph or chart or some energy companies website.

Its found in the deliveries of crude to refineries around the world, and the inventories which are reported. Even then I doubt we have anything but about 50-60% accurate information concerning any of this. What bothers me is the ground swell of opinion and the undertone that something isnt quite right. When guys like Exxon's Tillerson say things like he has in the last few weeks, it makes the hair on the back of my neck stand up.

We keep merrily operating under some nebulous and likely innacurate assumption oil numbers will remain steady, with growth, for the next twenty or thirty years. Who here actually thinks that is going to happen? If you do, i suggest you check out Albert Bartlett's missives concerning growth and the state of energy worldwide.