IEA downgrades Saudi’s output capacit

The latest monthly report of the International Energy Agency contained the usual update on oil supply and demand numbers, but it also revealed a striking fact: the maximum production capacity of Saudi Arabia is lower than we thought.

In its February report released last week, the Paris-based watchdog reduced its estimate of the kingdom’s maximum output to 11.88m barrels a day, a notch below the previous assumption of 12m b/d, which the IEA used in its January report.

Saudi Aramco, the country’s oil company, puts its maximum output at 12.5m b/d.

The IEA’s downgrade, even if arguably small, matters for two reasons.

First, Saudi Arabia holds virtually all the spare production capacity of the global oil industry. As such, the kingdom would be the only cushion in the event of a supply disruption involving a large producer such as Iran. A lower figure for the maximum production capacity also assumes a smaller cushion.

Second, the IEA has lowered its estimate of Saudi Arabia’s maximum production capacity only on rare occasions over the past 15 years.

In the past ten years, the IEA has steadily raised its estimate of Saudi Arabia’s maximum production capacity from 10.5m b/d to 11m b/d as the country brought new oilfields on stream in an expansion programme of more than $100bn.

The revision of the Saudi numbers comes weeks after Ali Naimi, the country’s oil minister, offered the most detailed overview of the kingdom’s potential. Mr Naimi told CNN in an interview that Saudi Arabia could “easily get up to 11.4m, 11.8m b/d almost immediately, in a few days … all we need is to turn valves.”

Mr Naimi added that Riyadh could pump another 700,000 b/d to reach 12.5m b/d, but it would need 90 days to achieve the target. Because the IEA bases its estimates on maximum output on a narrow definition of “capacity levels [that] can be reached within 30 days and sustained for 90 days” it does not count those 700,000 b/d.

The revision of the IEA numbers follows Mr Naimi’s comments, but Diane Munro, senior Opec analyst at the IEA, says that the reduction is the result of the agency’s internal model that looks at the natural decline in the kingdom’s oilfields output. That rate alone, running at roughly 11 per cent per year, accounts for the reduction in the maximum output estimate.

The natural decline of Saudi Arabia’s oilfields has been masked over the past few years by the extensive expansion programme of the kingdom. But the last significant oilfields were added in 2010 with the 1.7m b/d expansion projects of Khurais and Khursaniyah. The next new big oilfields would not come on stream until 2013, when Saudi Aramco anticipates reaching maximum production on its 900,000 b/d Manifa oilfield.

Yet, Ms Munro says that the Saudi’s estimate could be raised as the kingdom is boosting spending in order to slow down the natural decline of its fields. “We are reviewing our estimate of Saudi’s natural depletion as Saudi Aramco appears to be bringing in more rigs and that should help to stem the natural decline,” she says.

FT