The 500,000-b/d light crude Khursaniyah field has been confirmed by Saudi AramcoSaudi Aramco to be onstream, without further specification of whether its production supplied the bulk of July's production increase.

Global Insight Perspective
Significance The Khursaniyah field represents the largest single increment in Saudi production capacity coming onstream in years and lifts the Kingdom's overall production capacity to around 11.8 million b/d.

Implications Having originally been delayed since December 2007 because of global material shortages suffered in the construction of its associated gas-processing plant, early testing of the field began some months ago. The perceived failure of Saudi Arabia to react to rapid crude price increases in the first and second quarters of this year, not increasing production until July, did, however, raise the suspicion that early Khursaniyah production was used when the increases finally came.

Outlook Having brought the field onstream, Saudi AramcoSaudi Aramco's light crude production capacity has been significantly boosted and eventual future production cuts are more likely to affect its heavy oil production. If it should be revealed that Khursaniyah was used for the bulk of the recently added export volumes, Saudi Arabia's critics would continue to spread scepticism over whether its swing production capacity is real or not.

Taps are On
The Khursaniyah field "is operational and producing crude", a Saudi AramcoSaudi Aramco source confirmed to Reuters, adding that "its production rates are dependent on [the company's] monthly production targets for each facility". The 500,000-b/d light crude field is the single largest field to be brought onstream in the Kingdom for in many years, and will do a lot to alleviate fears of shortages of light oil similar to those prevailing in the world markets during much of the first half this year. Its oil is not only easier to refine into high-value products such as gasoline (petrol), but is also possible to run in most of the world's refineries--such as, for instance, many of China's ageing small plants--while the heavier crudes, of which the Kingdom also has large reserves, can only be run in a smaller number of relatively advanced facilities worldwide.

The Khursaniyah field development project has, however, suffered heavy delays and was initially scheduled to come onstream in December 2007. Problems with the construction of the associated gas treatment plant--in particular, shortages of material--were the main reason for the project slippage, demonstrating that Saudi AramcoSaudi Aramco, despite its outstanding track record, was not immune to the global shortages within the oil and gas construction industry and among its suppliers. Saudi Arabia's no-flare policy made it impossible to commence oil production despite the fact that oil production facilities were apparently in place on time, as that would have resulted in a need to burn off associated gas.

Crutch or Cushion?
According to the original schedule, the field was planned to reach full production in late January or early February, giving it a relatively short ramp-up period. While the delay was confirmed and the target date was moved first to mid-April and then to August, Saudi Arabia found itself under heavy international pressure to increase production in order to contain the spiralling crude price. Having officially maintained that its actual production capacity was 11.3 million b/d, while production was maintained at a level of 9.2 million b/d, the Kingdom's ability to deliver came further into question, especially from a growing doubt in the West over the veracity of the Gulf states' reserve statistics and the Saudi capability to sustainably increase production above its level of output at the time.

When Saudi Arabia finally agreed to unilaterally increase production to prevent the price of oil rising further, its pledge--in two tranches--of an additional total 500,000 b/d of light oil in July seemed to coincide with a possible early ramp-up of delayed Khursaniyah production, something upon which the Kingdom's critics rapidly seized. With some reports having said that early test production flowed from Khursaniyah as early as April, Saudi AramcoSaudi Aramco could well have been pushing for the last part of construction so as to bring production onstream in July. AramcoAramco's reason for not publicly proclaiming that Khursaniyah was onstream would have been, according to this theory, what its critics were claiming--that Saudi Arabia had been unable to react to the rising world market price earlier, because it was virtually producing at full capacity, with its "spare cushion" in effect non-existent. Claiming that the July increment came from other fields would, in this scenario, have allowed Saudi AramcoSaudi Aramco to keep up the appearance of still sitting on spare capacity, which is so important for its world market role as a swing producer, for its OPEC stature and--ultimately--for its international political standing. By not acting more transparently in this and other issues, Saudi AramcoSaudi Aramco has not been able to dispel this suspicion and yesterday's confirmation, saying only that the field is already producing, has not erased the question mark either.

Outlook and Implications
Saudi AramcoSaudi Aramco could have done more to dispel the worst conspiracy theories about its actual sustainable output capacity. On the other hand, by commenting on them, some of the worst would also gain a certain credibility, which is one of the reasons the company lets these issues pass. Another reason is that a certain level of uncertainty ultimately works in Saudi Arabia's favour in its role as a kind of global oil market-maker.

Before the most questioning of theories are believed, however, one should bear in mind several other--and natural--constraints that have plagued Saudi Arabia particularly in recent months. With the long-held plan being that Khursaniyah would come onstream in December 2007, Saudi AramcoSaudi Aramco quite naturally saw an opportunity to execute some scheduled maintenance shut-ins elsewhere, which had proved impossible to do otherwise because of the tight market, particularly for light oil, over much of the past year. As Khursaniyah slipped behind schedule, however, the global shortages made the shifting of these now-scheduled maintenance projects impossible, with Saudi Arabia actually probably suffering a reduced light oil output capacity during the first half of the year, which it could not officially acknowledge without putting further upward pressure on the oil price.

Saudi Arabia's spare light oil production capacity is likely to have been limited, especially compared with how much more heavy oil production the Kingdom could switch on. However, the absolute tightness in the market might have been caused more by the temporary maintenance operations, which would have been covered had Khursaniyah not been delayed. Nevertheless, the Kingdom's place in the focus of world crude markets has made it necessary to tightly manage the information emanating from the country about its capacities. The final confirmation that Khursaniyah now is onstream, together with the general easing in what was until recently a very tight oil market, is now likely to further soothe fears of temporary shortages significantly. (By Global Insight)

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For more information, please contact:
Samuel Ciszuk
Middle East energy
Tel: 44 20 7452 5076

© Press Release 2008