The devil is in the production details of Saudi Arabia

Yesterday we have heard announcements by Ali-Naimi, the oil minister of Saudi Arabia, regarding future production capacity increments. We are to believe that Saudi Arabia will produce 12.5 million barrels per day at the end of 2009 and a potential 15 million barrels per day in the coming decade. How should such announcements be valued? Is this achievable? What is meant with production capacity? What type of liquids is Saudi Arabia referring to when talking about oil? In this post I attempt to answer these questions.


Setting the analytical scene – production capacity vs production and crude oil versus all liquids

When Saudi Arabia announces production targets it isn’t using a clear cut definition of oil. Saudi Arabia produces two groups of hydrocarbons: crude oil and natural gas liquids. Natural Gas Liquids (NGL) are a group of hydrocarbons that fall between natural gas and oil – which consist amongst others of ethane (C2H6), propane (C3H8) and butane (C4H10).

The important difference is that crude oil can be refined into gasoline, diesel and kerosene while NGL’s cannot. These are mainly used as feedstock for the chemical industry. Therefore when Saudi Arabia increases crude oil it can influence oil markets heavily, but if it increases NGL’s the impact is much smaller. Point one to watch for is therefore whether production announcements refer to crude oil or to all liquids.

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