Guest correction by David Middleton
One of the comments (H/T to RicDre) on my post about Arctic oil exploration cited this article from Bloomberg/MSN Money…
The biggest Saudi oil field is fading faster than anyone guessed
Javier Blas 11 hrs ago
It was a state secret and the source of a kingdom’s riches. It was so important that U.S. military planners once debated how to seize it by force. For oil traders, it was a source of endless speculation.
Now the market finally knows: Ghawar in Saudi Arabia, the world’s largest conventional oil field, can produce a lot less than almost anyone believed.
When Saudi Aramco on Monday published its first ever profit figures since its nationalization nearly 40 years ago, it also lifted the veil of secrecy around its mega oil fields. The company’s bond prospectus revealed that Ghawar is able to pump a maximum of 3.8 million barrels a day — well below the more than 5 million that had become conventional wisdom in the market.
“As Saudi’s largest field, a surprisingly low production capacity figure from Ghawar is the stand-out of the report,” said Virendra Chauhan, head of upstream at consultant Energy Aspects Ltd. in Singapore.
[…]More mistakes at MSN Money
My first thought was that 3.8 million bbl/d (barrels per day) was a reasonable number. It had long been assumed that Ghawar was producing around 5 million bbl/d. An Aramco presentation on water cut management showed the production a little over 5 million bbl/d in 2004. Prior to Aramco’s decision to move toward an IPO (initial public offering), they were very secretive regarding production and reserve details. In order to be listed on major stock exchanges, Aramco has had to open their books up to independent auditors. The recent independent audit by DeGolyer & McNaughton actually boosted Aramco’s proved reserves. There are nearly 100 oil fields in Saudi Arabia, including several giants besides Ghawar. It just happens to be the biggest.
With about half of Ghawar’s EUR (estimated ultimate recovery) having already been produced, the field should be in decline. It will produce for another 40 years or so, but the rate should slowly decline over time. The Bloomberg/MSN Money article claims that Aramco’s 2019 bond prospectus shows the maximum production rate to be 3.8 million bbl/d. If so, it’s now producing at a slightly lower rate than the entire Permian Basin and would reflect a 2% decline rate, less than half of the typical 5.7% decline rate for mature oil fields. This shouldn’t surprise anyone. Even if the article was accurate, it would fall into the No Schist Sherlock category.
However, it turns out that the Bloomberg/MSN Money article was not even wrong.
[T]here is fairly little in this prospectus to give us a sense of Aramco’s coming production numbers in a week, a month, a year, or ten years. Nevertheless, an article was published on Tuesday claiming that Aramco’s supergiant oilfield Ghawar is “fading faster than anyone guessed,” and it helped move oil prices higher.
The article incorrectly asserts that capacity at Ghawar field has dropped, though we do not know this to be true. Ghawar has long been the largest and most productive oilfield in the world, and the article accurately states that it produced 5 mbpd as recently as 15 years ago. It is the most famous oilfield and it is seen as a staple of oil production in the industry, so any news that it is getting old and declining sparks fear of “peak oil” among traders.
In truth, the Aramco bond prospectus provides little information about Ghawar’s current or future production. The only information it does provide is in the form of something called the “MSC.” This term is refers to the capacity that Aramco is required by law to be able to access within a three-month timeframe.
The Saudi Hydrocarbons Law sets the total Saudi MSC at 12 million bpd. In other words, Aramco must be able to ramp up production from whatever level it is producing to 12 million bpd in just three months time, and Aramco must be able to hold the 12 mbpd level for one year. In accordance with this requirement, Aramco breaks down that production by field. So, if for some reason it becomes necessary for Aramco to increase production to 12 million bpd, Ghawar field’s responsibility is to produce 3.8 million bpd.Investing.com
Being curious and knowing a little bit about the oil & gas industry, I downloaded Aramco’s nearly 500-page prospectus and did a little research (about 5 minutes’ worth)…
The Company maintains MSC in accordance with the requirements of the Hydrocarbons Law. MSC refers to the average maximum number of barrels per day of crude oil that can be produced for one year during any future planning period, after taking into account all planned capital expenditures and maintenance, repair and operating costs, and after being given three months to make operational adjustments. As at 31 December 2018, the Company’s MSC was 12.0 million barrels of crude oil per day. The spare capacity afforded by maintaining MSC enables the Company to increase its crude oil production above planned level rapidly in response to changes in global crude oil supply and demand. The Company also uses this spare capacity as an alternative supply option in case of unplanned production outages at any field and to maintain its production levels during routine field maintenance. The Company generated revenues by utilising the spare capacity provided by MSC of SAR 133.0 billion ($35.5 billion) from 2013 to 2018.Saudi Aramco
From the Aramco prospectus (p. 88):
“Liquids” refers to proved reserves of crude oil, natural gas condensate and natural gas liquids. “Combined” refers to proved reserves of liquids plus natural gas. “MSC” refers to the maximum sustained production rate “during any future planning period.” It does not refer to the current maximum production rate. Ghawar could be producing much less or much more than 3.8 mmbpd. The MSC rate is more of a minimum rather than a maximum. Aramco is basically guaranteeing that Ghawar’s maximum sustained production rate will be at least 3.8 mmbpd for the foreseeable future (“any future planning period”).
The really funny thing is that Wikipedia has already incorporated the Bloomberg/MSN Money mistake…
Note to Wikipedia, Bloomberg and MSN Money…