Saudi Aramco: A New Seven Sister Seeks More Growth

From Forbes, an interesting look at Saudi Aramco plans for aggressive expansion and continued growth.  As the article notes:

“…But why, with prices dropping and a steep worldwide recession looming, would Aramco go all out on the most ambitious expansion plan in its 75-year history? Over the next five years it will invest $129 billion to boost its oil production capacity to 12 million barrels a day, build new refineries and petrochemical plants and pursue a high-tech exploration and production program. Executives promise that within 20 years this will increase the kingdom’s proved recoverable reserves from today’s 260 billion barrels to 450 billion barrels or more. “These are concrete targets to which we are going to be held accountable and of which we are confident,” says Abdullah Al-Naim, vice president of petroleum engineering for Aramco.

That confidence springs from cash, mountains of it, and know-how. The 100% state-owned Aramco manages all its own projects and invests in the latest technology. It’s easily the most profitable company on the planet: This year, after amortization of capital expenses, it should net upwards of $250 billion on $300 billion in revenue. With government budgets set for $45 oil, Saudi Arabia will likely end 2008 with a $150 billion surplus. It has $400 billion in foreign assets. That puts it squarely in fat city–at a time when oil-tethered economies in Venezuela, Iran and Russia are in precarious shape.

Saudi Arabia’s ambitions reach well beyond oil. The largest economic power in the region (Iran is a distant second), it is seeking to expand and diversify its economy with $600 billion worth of projects over the next 12 years aimed at doubling power generation, including the building of nuclear power plants, petrochemical plants and plastics factories. Six new so-called economic cities are to spring forth from the desert to provide millions of white-collar jobs to the 50% of the population now under the age of 20.

Cutting output, as OPEC agreed to do on Oct. 24 in a vain effort to firm up sinking crude prices (so many countries cheat), is relatively easy. Much tougher is the ability to increase production quickly, and here the Saudis have taken the lead. In June, as the price was shooting past $130 a barrel, King Abdullah bin Abdulaziz Al Saud summoned international oil officials to Jidda and decreed his intention to pop the oil-price bubble, ordering Aramco to increase output from 9.45 million barrels a day to 9.7 million, adding, “We are ready to meet any additional [demand] in the future.” This represented a complete reversal of policy: In January and April the king turned down an appeal by President Bush to accelerate production.

Over the last few years King Abdullah has been throwing around his political heft–and cash–to check Iran’s influence in the Middle East. In Iraq, historically a counterweight to Iran, the Saudis (like the U.S.) have paid armed Sunni groups to quit the violence, turn against al Qaeda and join the political process. The kingdom has hosted quiet negotiations between Afghanistan and the Taliban. In Syria the Saudis are encouraging President Bashar al-Assad to rein in the influence of Iran’s proxy Hezbollah. “The Saudis are not unhappy to see lower oil prices squeezing Iran,” says George Friedman, chief executive of the Austin, Tex. intelligence outfit Stratfor. “They just don’t want prices to get low enough that it forces Iran to do something crazy.”

Or anything to jeopardize Aramco’s supply–as Saudi Arabia once feared from Saddam Hussein after he invaded Kuwait in 1990. Periodically warnings about so-called peak oil rear up, as they did three years ago when Aramco’s cushion of standby supply tightened to only 1 million barrels a day. Gadflies like Houston investment banker Matthew Simmons seized on the vanishing supply cushion, insisting in his bestseller Twilight in the Desert that Saudi output would soon crest, triggering a crisis that would drive oil prices to the moon and bring on a global depression.

That didn’t sit well with the Saudis. Determined to dismiss the concerns, they are investing $65 billion to bring online 2.5 million barrels a day of new capacity from giant fields that were partially developed or untouched. “I am putting on fresh reserves, so what peak are you talking about?” asks Amin Al-Nasser, Aramco’s senior vice president of exploration and production. “We are bringing 50 billion barrels of new proved reserves on stream.” That, he boasts, represents a total larger than what the world’s largest oil companies own–combined.

Start with Khurais, a field with 27 billion barrels of estimated reserves, which will be able to produce 1.2 million barrels a day next year. At a cost of $12 billion, Khurais is Aramco’s biggest oilfield ever brought online all at once (Ghawar, the largest in the world, discovered in 1949, was done in stages). It features two pipelines that carry 1 million barrels a day of seawater to be injected into the field to maintain pressures that force up the oil. There’s Shaybah, with 18 billion in estimated reserves, where output is rising from 500,000 barrels a day to 750,000. Hit by delays in building a natural gas processing plant, the Khursaniyah field was supposed to start producing 500,000 barrels of oil and 1 billion cubic feet per day of natural gas but should be ready to go in 2009. Another monster is offshore Manifa, with 18 billion barrels of less desirable heavier oil, which will give up 900,000 barrels a day starting in 2011. Aramco says that by 2012 it will boost natural gas production by 40% to 13.2 billion cubic feet a day with the startup of the offshore Karan field.

“We go really slow and soft,” says Al-Naim, the engineering chief. “Ghawar we treat as you would a young woman.” Every Aramco well is fitted with an adjustable steel choke that restricts a standard 3-inch-diameter well bore down to a quarter-inch or less. Slowing the well reduces the amount of water that is produced alongside the oil, and a gentler flow protects the reservoir from damage.

Aramco’s oldest operating well, Ain Dar 1, was drilled in 1948. This single well in the Ghawar complex has produced 152 million barrels from its original casing. The well’s free-flow rate is now 8,000 barrels a day, but Aramco restricts it to 2,500. It insists that rumors of Ghawar’s demise are premature. The field has given up some 45 billion of at least 100 billion barrels of original oil in place (only Aramco knows for sure, and it’s not telling), yet still easily produces 5 million barrels a day; its overall water cut has declined in recent years to only 28%. Says Nasser, “If I needed more production I could go to Ghawar and boost it to 10 million barrels a day.”

The world’s publicly traded oil companies do not have this luxury. Shareholders want a quick return. In places like Venezuela and Russia, an international oil company wants to extract what it can as quickly as possible because there’s no telling when it might get the boot. Aramco says the depletion rate of its fields is on the order of 2% a year. Compare that with the average 6% in the rest of the world.

The chokes on its wells give Aramco the unique ability to increase output at a moment’s notice. This year, as Saudi Arabia decided to add 500,000 bpd of output, Aramco didn’t bring entire fields online. All it did was open some spigots wider. It was as easy as a few mouse clicks.

Even in the teeth of plunging oil prices, Aramco is pushing ahead on an even more energetic set of exploration efforts to expand its total base of proved, probable and possible reserves from 700 billion to 900 billion barrels. From within that base Aramco intends to increase its proved reserves, those recoverable with existing technology, from 260 billion barrels to 450-billion-plus by 2020. In the meantime it will have pulled out 50 billion.

There are many known oilfields that Aramco simply hasn’t bothered to develop because they weren’t needed. There also remain vast stretches of Saudi Arabia that have never felt the vibrations of seismic tests, let alone the drill bit. For several years a joint venture between Aramco and Royal Dutch Shell has been drilling test wells in Rub-Al-Khali, or the Empty Quarter, in the southwest. No big finds announced yet, but Nasser is convinced they will yield something. Aramco also has exploration ventures with Lukoil, Eni and Sinopec.

Long before Aramco decides to bring a field online it builds a computer simulation model. Software synthesizes data from seismic tests and downhole sensors that measure temperature, pressure, porosity, viscosity and the percentage breakdown of oil, water and natural gas in the reservoir. Aramco has the world’s most complex oilfield simulation software. Built in-house, it generates 3-d models and even animations of how oil, gas and water are flowing through Ghawar–the better to determine where to drill new water-injection wells to sweep out any stubborn pockets of oil.

The program has crunched data on as many as 258 million cells. Each cell represents a subterranean chunk of the 174-by-16-mile field, which has oil-bearing zones 400 feet thick. The goal is a 1-billion-cell simulator that can handle 25 terabytes of memory. By contrast, Chevron’s recent simulation of Kuwait’s giant Burgan field was only 1.6 million cells.

Getting more data won’t be a problem. Aramco drills some wells solely to install high-tech sensor gear deep in a rock formation. Passive seismic sensors, for example, use vibrations from tiny earthquakes to track how much oil or water is nearby. Such sensors, developed by service companies Schlumberger and Weatherford, are increasingly used by big oil companies.

Aramco researchers lead the industry in work on a new generation of microscopic sensors that they call resbots, short for reservoir robots. Less than 500 nanometers in size, they will be injected by the thousands inside wells, where they’ll squeeze through pore spaces in the oil-bearing rocks, take readings, then be sucked up through a production well and filtered out.

Simulations enable engineers to perform a cost-benefit analysis on every well. By determining the net present value of the marginal barrel that a well will produce, Aramco decides which chokes to open or tighten and where the most efficient expansions will be. Historically the cheapest oil production has come from Ghawar. Its costs are a secret but are believed to be less than $5 a barrel, including depreciation and operations. Khurais will likely cost upwards of $10 per barrel because of its technical challenges and the impact of higher-price steel, concrete and labor.

In the Haradh-III subsection of Ghawar, brought online in 2006, Aramco used only 32 wells to achieve 300,000 barrels a day of capacity. In the past it would have taken 280 conventional vertical wells to achieve the same rate–at double the required investment. What’s so different? The oil industry’s earliest oil wells were like straight drinking straws stabbed blindly into a reservoir. Today’s so-called smart wells are like tree roots, sending out multiple branches from a single wellhead and insinuating themselves horizontally into layers of oil-bearing rock. Known as laterals, these roots are outfitted with sensors, each with its own choke, located deep underground. That way, when an individual lateral starts taking in too much water, Aramco can shut it off while continuing to produce from other reservoirs.

Because each choke requires a separate hydraulic control cable and power supply snaking up through the well to the surface, the number of laterals per well has so far been limited to four. Any more and you have too many control lines blocking the oil flow. Other big oil companies like Royal Dutch Shell have been actively developing such smart well systems, but Aramco’s engineers are pushing further. They intend to eliminate any physical link from the surface to the laterals. A wireless control system will replace the hydraulic line, and instead of getting power from the surface, each lateral will have a battery that recharges from a weak electrical current generated by the energy of fluid flowing into the well. The first downhole tests of this technology will happen next year. If it works, it would be an industry first, and the number of laterals could be nearly unlimited.

With such advances, Aramco’s goal is to increase from 50% to 70% the fraction of an oil pool that can be economically brought to the surface. The 68-year-old Abqaiq field has given up an estimated 75% of its original oil in place. Ghawar is less than half-depleted but still going strong with help from water injection. If Aramco manages to boost reserves (expansively defined) to 900 billion barrels and its average take to 70%, that would more than double proved reserves to 600 billion barrels.

And what if consumers tire of petroleum? That hasn’t happened yet, but the world is full of countries importing oil but vowing to stop the habit by investing in renewable energy or conservation. “If you look at a lot of the statements from the oil-consuming countries, they say we don’t want to buy oil from Saudi Arabia or the Middle East, or we are going to reduce our use of oil–I have to take it seriously,” says Al-Muhanna, of the oil ministry. No surprise that King Abdullah’s first state visits upon taking the throne in 2005 were to China and India, not the U.S.

To pick up the slack, the kingdom can look to one of its fastest growing customers–itself. Saudi Arabia consumes 2.3 million barrels a day of its own oil, up 50% since 2000. “The rate of domestic energy consumption is outstripping the rate of production growth,” says Thomas W. Lippman, a member of the Council on Foreign Relations who spent three decades covering the Middle East for the Washington Post. “For electricity, they’re mostly burning gas, which they would rather export and which is vital to conserve if they are determined to be petrochemical giants.”

To feed its nonoil industrial development the kingdom hopes to turn to nuclear power, which could absorb much of a $120 billion plan for doubling power generation to 60 gigawatts by 2020. They announced as much in 2006, partly in response to Iran’s professed interest–believed by no one–in peaceful uses of atom splitting. On May 16 Secretary of State Condoleezza Rice signed a memorandum with Foreign Minister Saud Al Faisal pledging U.S. support for civilian nuclear projects and requiring the Saudis to buy the fuel rods on the international market–and Congress to okay the transfer of components. That same day Al-Naimi, the oil minister, announced the Saudis would increase output from 9.2 million barrels a day to 9.45 million. Coincidence? “I do not see any connection,” says a State Department spokesman. “But I’m not saying there was none.” Whatever the case, it’s one more reason for confidence at the world’s most powerful company.

This entry was posted on Thursday, November 13th, 2008 at 12:02 pm and is filed under Saudi Arabia, Saudi Aramco.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.