Saudi Arabia – Headed for a Downfall?

Saudi Arabia recently announced that it had halted a $100 billion oil production expansion plan to raise capacity to 15 million barrels a day by 2020. At this point, the country claims to have capacity of 12 million barrels a day. What does this mean for its future? Let’s take a look behind the figures.

Figure 1. Saudi Arabian oil production and exports, from Energy Export Data Browser. Note that oil production is in grey, oil exports are in green, and the black line represents consumption.

The figure shows that Saudi Arabia has not been increasing its production for many years. At the same time, the country’s own oil consumption has been rising rapidly. The combination means that oil exports have already started declining.

Saudi Arabia tells us that its crude oil capacity is 12 million barrels a day. In fact, its crude oil production has not exceeded 10 million barrels a day in recent years, according to EIA data. Perhaps it can produce a bit over the 9.9 million barrels a day it produced in August 2011, but this has not yet been proven.

If we look at recent additions to crude oil capacity, we find this list, according to Jadwa Investments.

Figure 2 - Recent Saudi Oil Expansions, according to Jadwa Investments

While Saudi Arabia claims that these additions have added to total capacity, I think we should question whether this is really true. The amount of the additions on this list would seem to more or less offset a decline rate of 5% or 6% per year, and such a decline should be at least considered as an alternate explanation. It is possible, too, that the explanation is somewhere in between–a small capacity increase, but some of the new production is offsetting decline.

Between now and 2020, we know of relatively little additional crude oil capacity to be brought on line. The only big project that has been announced relates to the Manifa heavy oil field. It is planned to reach a capacity of 900,000 barrels a day in 2014.

In addition, there is a substantial amount of natural gas capacity planned in the 2012 – 2013 timeframe. Jadwa Investments estimates that the new capacity will increase natural gas production by over 70%, relative to 2010 levels. This increase in natural gas production should help hold down the growth in domestic oil consumption.

But the question becomes: What will happen to oil production between now and 2020?  Production from most wells declines with age. Wells that have been producing for a long time, including Ghawar, will at some point start producing less. (In fact, we don’t know if Ghawar is already producing less, and the new production that has been brought on line is covering up the decline.) It seems as though we should start seeing a decline in production in the next few years, if no more production than this is brought on line.

Given these considerations, there would seem to be a fairly high probability that Saudi oil exports will decline more rapidly in the next few years. If this happens, Saudi Arabia will encounter financial problems unless the price of the oil rises very substantially, because of the need to fund its social programs.

Deutche Bank analyst Paul Sankey estimates that Saudi Arabia now needs $92 a barrel to break even fiscally because of greater social spending, up from $60 barrel in 2008. If exports decline in future years as production falls and consumption rises, further escalation in the break-even price can be expected. Once new programs are put in place, it is difficult for a government to remove them.

News releases from Saudi Arabia emphasize the supposedly rosy world oil situation: Saudi production can still rise to 12 million barrels a day, and  there will be plenty of oil from other sources, such as Iraq or a shale oil revolution. Furthermore, the world economy may need less, because of recession.

All of these statements are far from proven. They appear to be crafted to make peak oil look like it is not a problem, and to keep people from asking, “Why would a country whose entire economy revolves around oil, and that supposedly has the world’s largest oil reserves, announce that it is cutting back its plans for expansion? How can it possibly maintain its programs, if it doesn’t keep expanding?”

One thing that strikes me about Saudi Arabia is how extremely oil (or oil and natural gas) dependent it is. According to the CIA World Factbook:

The petroleum sector accounts for roughly 80% of budget revenues, 45% of GDP, and 90% of export earnings. Saudi Arabia is encouraging the growth of the private sector in order to diversify its economy and to employ more Saudi nationals. Diversification efforts are focusing on power generation, telecommunications, natural gas exploration, and petrochemical sectors.

Even the diversification efforts don’t sound all that diversified, with the mention of power generation, natural gas exploration and petrochemicals. Saudi Arabia is the world’s largest producer of desalinated water (24 million cubic meters per day), and until recently 90% of the desalination plants ran on oil or natural gas. Saudi Arabia has subsidized agriculture in the past, but plans to rely entirely on food imports by 2016. Whether a desert country like Saudi Arabia attempts to grow its own food, or depends in imports, it takes a lot of oil to provide food for 26 million people.

The very high level of oil consumption in Saudi Arabia can be seen from this chart comparing Saudi per capita oil production with that of the United States, France, and the World in total. (France is shown as being typical of the European countries.)

Figure 3. Per capita oil consumption for selected countries. Oil consumption is by BP, and includes biofuels and natural gas liquids. Population data used in calculation is from EIA.

As oil production reaches its limits, countries everywhere will have to scale back on consumption, and Saudi Arabia is no exception. It is not clear how soon this drop in consumption will come for Saudi Arabia–at some point there will be a clash between falling oil exports and the revenue available to keep up current government programs,  and oil consumption will have to fall. Saudi Arabia is better set than most countries in terms of reserve funds, but at some point these too will run short, and Saudi Arabia will have to economize.

I expect that the downward transition will be more difficult for Saudi Arabia than for many other countries. There aren’t easy options for backyard gardens or transitioning to a “service economy”. Solar PV and natural gas can help somewhat, but the transportation portion of the economy is still very oil dependent. Interesting times are ahead, unless the Saudi Arabian government can somehow figure out ways around these issues.

This is a post I wrote for the ASPO-USA Newsletter, issued December 5, 2011.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
This entry was posted in Financial Implications, Oil and Its Future and tagged , . Bookmark the permalink.

30 Responses to Saudi Arabia – Headed for a Downfall?

  1. Pingback: Saudi Arabia – Headed for a Downfall? | Bahrain and the al Khalifa regimes War on Humanity | Scoop.it

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  4. Kenneth Slade says:

    If Saudi Arabia today needs oil at $92/ barrel to placate its population, yet 3 years earlier it only required oil to be at $60/barrel – what will it be in another 2-3 years? Saudi Arabia shortly may need oil prices to be at a level that tend to lead to recessions.

    In addition Saudi Arabia may not be seeking to expand production to drive prices higher and also keep some reserves available for when oil production globally begins to decline. Peak export may preceed Peak oil as a strategic advantage when world oil supplies become tighter or plateau.

    Saudi Arabia’s population has grown 20% in the last ten years and 50% of its population is under the age of 25. Unemployment is near 30% for those under the age of 30. The domino effect running through the Middle East is likely to consume the kingdom where the royal family’s excess oil wealth is sooner or later going to grate on a growing welfare dependent population.

    • I think you are probably right. When I write posts for the ASPO-USA newsletter, the word count limit is fairly low, so I wasn’t able to cover some of these issues.

  5. Bill says:

    Google “saudi nuclear” today … mixed into the new openly expressed Saudi desire for nuclear weapons there’s a lot of new chatter about construction of dozens of new nuclear powered generation plants. Given the apparent US abdication of the mid-east in favor of last month’s newly announced cold war with China, the House of Saud, a supposed ally of the US (even though bin Laden and most of the rest of the alleged 9/11 guys carried Saudi passports), is going to be left in charge of the remaining oil security in that area. They have to keep their people air conditioned and lit and nuclear power is the only more-energy-dense-than-oil source of power. They have the cash. The Saudis are going to make an Iranian nuke rollout look like a middle school play.

    • When I googled “saudi nuclear,” it was full of reports that Saudi needs nuclear to counter Iran and Israel. There is also the need for power plants that run on something other than oil or gas, so I can see that there would be a lot of pressure in the direction of adding nuclear power plants.

      Saudi Arabia is busy building new cities. If nothing else, they need electric power.

  6. Ed Pell says:

    My take is their population will increase by a third in 20 years. If oil goes from $90 to $120 and they can maintain export rates they are stable for 20 years. Using natural gas to displace domestic oil should do it. Nuclear is good for long term energy. After 20 years when they no longer consume any oil and exports begin to decline. Then there standard of living will decline. At that point they will have 34 million people living in an area with zero food production. Maintaining control of the rented farm lands in foreign countries will become harder with less oil money to buy arms and soldiers. At some point they loose a major food colony and then the lower classes starve, but not the religious leaders. I estimate some where around 2040.

  7. Jerry McManus says:

    I don’t have a link handy, but I saw a report recently that a Saudi engineer on another project openly scoffed at the mention of Ghawar during an interview. He proclaimed that they “already have a %30 water cut!” as a way of dismissing Ghawar as a serious contender in the future of Saudi oil projects. Not good news, if true.

    I’m also reminded of a recent post describing the advice given by Daniel Ellsberg of the “Pentagon Papers” fame to a newly appointed Henry Kissinger regarding the dramatic change in worldview that can be expected with the award of a high security clearance.

    He cautioned that once you are made aware of secret information known only to a select few, then you can expect to spend a few weeks feeling like a total fool for thinking that you ever knew what you were talking about.

    I suspect that whatever reason the Saudis have for not investing billions in their oil project, only a handful of people in the world will ever know the truth, and they are not talking.

    • One thing that seems strange about the announcement now is the fact that 2011 is a very good year for the Saudis, both in terms of average oil price and amount of exports. So unless they are really terribly generous with their social programs, they should have enough money this year just from cash flow (not to mention savings). But for some reason they felt now was the time to make the announcement.

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  9. Bob Waldrop says:

    The link in the first paragraph which presumably is the footnote about the claim that the Saudi’s are cancelling a plan to increase production to 15 million barrels today doesn’t say anything about that. it discusses pulling back some recent production increases, and the spin is that this is to protect the price of oil. But the article doesn’t say anything about abandoning plans to expand the capacity to 15 mbd in 2020. I am asking because I am wondering if you accidentally linked the wrong article and I’d like to see the footnote on the cancellation.

    • There were several different articles that I was looking at, and some of them were behind pay walls. Each seemed to tell a piece of the story. This is an article from the Financial Times called, Saudi Arabia halts $100bn oil expansion programme. I believe it is behind a pay wall. There is an article from the Wall Street Journal called, Saudis See No Reason to Raise Oil Output Capacity. It says:

      A senior oil executive said Saudi Arabia is unlikely to proceed with plans to raise its oil output capacity to 15 million barrels a day, as expansion plans in other producing countries such as Iraq and Brazil should be enough to satisfy world markets.

      “There is no reason for Saudi Aramco to pursue 15 million barrels [of output capacity],” Saudi Arabian Oil Co. chief executive Khalid Al Falih said in an interview Saturday.

      “It is difficult to see [an increase in capacity] because there are too many variables happening,” he said. “You’ve got too many announcements about massive capacity expansions coming out of countries like Brazil, coming out of countries like Iraq. The market demand is addressed by others.”

      • Kenneth Slade says:

        http://www.msnbc.msn.com/id/45567634/ns/business-motley_fool/

        Two weeks ago, while America focused on the failure of the supercommittee, you likely missed a hugely important but little reported event. The CEO of Saudi Arabia’s state oil company announced it was stopping a $100 billion expansion program of its oil production capacity in an effort to keep supply tight.

        • I was surprised at how little the event was reported in the news. Even the peak oil sites didn’t say a lot about it.

          • step back says:

            Maybe Archdruid Greer has the right take today on the big picture view of this move by KSA and other recent moves (i.e. shale oil plays) by others:
            This is what PO looks like:

            http://thearchdruidreport.blogspot.com/2011/12/what-peak-oil-looks-like.html

            Is this Saudi announcement sort of reminiscent on the global scale for what the mostly unnoticed announcement by the Texas Railroad Commission meant back in the 70’s for US lower 48 domestic production (the Commission announced it was no longer controlling the production market, signaling that domestic PO had arrived)?

            • I really like JMG’s post–thanks for point it out. I think that he is right about this is what peak oil looks like. I might say though, that this is the beginning of what peak oil looks like. I am afraid that things will get very much worse.

              I think you may be right about comparing the Saudi announcement to that of the Texas Railroad commission. Thanks for mentioning the parallel!

            • Kenneth Slade says:

              I thought the description of Peak Oil was pretty accurate. Good article.

            • VyseLegend says:

              I have to double Gail’s reaction to the JMG blog. While its true that right now – the beginning – of peak oil is a slow unhinging of what makes modernity itself, I also think that once the truth hits home that exponential growth is most likely an impossibility, at least in the near term, the unraveling in the ultra-leveraged markets could be exponential as well.

      • Bob Waldrop says:

        Thanks for the footnotes! I don’t mind paywall issues, I just like to have footnotes when I send info to runningonempty2@yahoogroups.com and my blog.

  10. kiwichick says:

    spin,spin,spin

  11. Owen says:

    Raw Data.

    Saudi Arabia population: 27 million

    Number of foreign workers: 9 million, or 33%

    The foreign workers remit $7.1 billion/quarter ($28 billion/yr) out of the country. That’s 17% of surplus. Remittances have a double whammy economically, though. They are not only a % of government spending, but it is spending that has zero stimulating result. It’s Greek-like, where their 400K barrels/day burn is money that drains out of the country.

    The Saudis want this to to reduce by moving locals into the workforce and sending foreigners home, but this is undercut by the generous unemployment payments being paid, and about to be increased, for citizens as part of the calming actions taken to counter uprisings.

    • That is a good point. I understand that it is not just the oil and gas industries that hire foreigners. There are also foreign cab drivers and other service providers. I remember reading an article saying that at one time these were mostly from other Middle Eastern countries; increasingly they are from Asian countries where wages are lower. Also, the Asians don’t usually bring their families along–they just send checks home.

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  16. Katrina was example of USA being helped over regional oil shortage by the EU. They said they probably could not do it again. It seems readily apparent to an observer stepping back and looking at North Korea, Middle East rumblings (best case no shooting) and simple demand growth, America had best re-orient transport policy to greater rail emphasis. It is taken for granted the rail component is a fall-back, but in reality, the rails try to maintain capacity very close to traffic expectations. Like the rest of us, rail executives are not going to expand plant until the traffic is there for sure. Unfortunately, an energy emergency cuts the rug out from under ability to effect rail capacity expansion just as trucking is impacted.

    Somehow, out of the normal,l deliberate pattern of rail capacity increase, we must go forward with all due haste rebuild of dormant rail branch lines, and store serviceable freight equipment otherwise slated for scrap. New mains capacity, extensions, and container handling at more points enroute is part of the picture to enable distribution levels in a trucking crisis brought on by diesel shortage. It seems reformed US Army/Guard rail logistics units must be brought forward to prioritize and rebuild agricultural traffic rail branches, and selected rail lines new or rebuilt to maintain essential manufacturing flows. Much of America’s resource movement, victuals, and manufacturing output operates on trucking alone, but is near former rail branch footprint.

    Strategic threat assessment of threatened & likely Islamic activities to force endowment resource export restrictions suggest problems at Suez, Hormuz and Bab-El-Mandeb oil chokepoints. Other threats to conventional oil flow ad nauseum are simmering around the planet. NAFTA nations must proceed with railway matrix enhancement in a deliberate program, and with all due haste.

    • As you said, rail executives are not about to move forward with a major expansion unless it is clearly needed.

      The government has gotten itself into such a financial bind that it has a hard time funding any new programs. I agree that enhancing train freight capabilities would make more sense than, say, working on carbon capture and storage (which seems to me to be nothing other than a clear dead end). But it is hard to get the government to take a stand on something like rail transport, since to do so, they would have to admit a problem with oil supply.

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