The Insightful Trader

Key Saudi Oilfield Continues to Show Signs of Aging

by on Dec.03, 2009, under Editorials

Some largely overlooked news shows that worldwide oil production capacity continues to plateau if not fall. Of course it might be bad form to back up the truck right now on oil stocks, given that oil and stock prices have rebounded so smartly since March. But the long term oil news is bullish.

The news I refer to came out of Saudi Arabia on Friday, November 6. The Saudis all but confirmed the accelerating decline of the Ghawar oil field. With an estimated production capacity of 5.2 million barrels per day (mmb/d), Ghawar accounts for about half the Saudis’ production, give or take, and is the most prolific field ever found. Many experts believe that when Ghawar’s production decline curve accelerates, worldwide oil production, which now runs about 85 mmb/d, will tip into decline as well.

The Saudis expressed their concern, not with an explicit press release, but by concluding a five year, integrated turnkey contract with Halliburton (HAL) to redevelop Ghawar. In other words, Saudi Aramco, which is among the more sophisticated national oil companies (NOCs), felt the need for some outside extra help to keep Ghawar’s oil flowing. The contract calls for HAL to do directional and horizontal oil drilling and to drill 153-185 oil and water injection wells, among other things.

When Ghawar oil production began back in 1951, it might not have been much of an exaggeration to say that all the reservoir managers had to do was stick wells in the ground and enjoy. As time went on, Aramco resorted to enhanced oil recovery (EOR) techniques such as injecting water or other substances into the field to force the oil towards well openings. Aramco also employs other EOR techniques such as horizontal and directional drilling, both of which can be used to angle the well so as to maximize the length of oil well pipe in contact with the “pay zone,” the layer of oil bearing rock.

EOR is standard procedure especially over the later history of many if not most oilfields. It’s natural to pump the easy oil first; as a field matures the rest gets harder to extract. Over time as the oilfield owner pumps out the crude, the pressure which drives oil to the well and up to the surface falls off. In addition, the early, higher quality product of crude oil and natural gas liquids, often gives way to a product increasingly mixed (or “cut”) with water, which must then be separated from the crude before refining takes place. With this background in mind, oil analyst Michael Lynch of GLG Group (h/t, theoildrum.com) has some choice words about the HAL contract.

“The contract makes no mention of Ain Dar, the most mature part of Ghawar…  Ain Dar has been under pressure maintenance by peripheral water injection for over 40 years. Ain Dar began producing salt water in the late 1970s and by 2005 the cut was 42%… Once water became a major problem, many existing vertical wells were converted to short lateral horizontals running along the top 10 feet of the Arab D zone, the main pay [zone for both Ain Dar and other parts of the Ghawar]…Today the entire field still contains a great deal of crude oil but it is much harder to get and the production rates continue to fall off. Halliburton’s mandate will be to deal with the higher and higher water cuts, utilize all known new technology to hold [production] rates as high as possible… It’s a good, long-term contract and a tall order for the company.”

As a side note, the Saudis objected fiercely in 2005, when Matthew Simmons stated in his book, Twilight in the Desert, that Ghawar was in decline and that the Saudis were making strenuous efforts to maintain production. Simmons also highlighted difficult geological problems that the Saudi petroleum engineers faced. The HAL contract would seem to confirm Simmons’s work.

If Ghawar were still in its early phase when oil flowed easily to the surface through highly productive wells, Aramco most likely would not need an EOR program like this. The need for this program is evidence that we may indeed be facing “twilight in the desert,” and that Saudi Arabia’s glory days as a leading oil exporter are winding down. Can “peak oil” be far behind?

Nonetheless, there is reason to be cautious about oil stocks in the short to intermediate term: demand for crude is down. US refineries processed 14.2 mmb/d of crude in October 2009, which is down about 200,000 b/d year on year and down 800,000 b/d from the October 2007 level. No surprise for a weak economy. Furthermore, both Sunoco (SUN) and Valero Energy (VLO) have in fact closed refineries recently. US crude oil inventories sit at about 24 days’ supply, 2 days above the year-earlier level. These numbers don’t indicate tight markets, and I have to wonder if current prices are sustainable.  I just don’t know how far they fall from here, and how long they stay down.

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1 comment for this entry:
  1. Hubberts Peak

    I believe that Hubberts peak is true and that we are now past the point of peak oil. I believe many of the current events have to do with this understanding and it won’t be long before the main stream media and population wake up and understand what is going on. For me and my family, we are preparing for the life after the crash.

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