Tuesday, Apr 22, 2008

(From THE WALL STREET JOURNAL)

 
   By Neil King Jr. 

Next year, if all goes well, Saudi Arabia will turn the spigots on the largest oil field to come online anywhere in the world since the late 1970s.

The Khurais complex, sprawling across a swath of red dunes and rocky plains half the size of Connecticut, is expected to add 1.2 million barrels a day to an oil market caught between growing demand and a paucity of significant new discoveries. The twin forces have led to historically high prices for crude oil, which settled at a record $117.48 on Monday.

But the project also illustrates a darker point: Even in Saudi Arabia, home to more than a quarter of the world's known recoverable reserves, the age of cheap and easily pumped oil is over.

To tap Khurais, Saudi Arabian Oil Co.Saudi Arabian Oil Co., known as AramcoAramco, has embarked on the most complex earth- and water-moving project in its history. It is spending up to $15 billion on a vast network of pipes, oil-treatment facilities, deep horizontal wells and water-injection systems that it calls "one of the largest industrial projects being executed in the world today."

Moreover, with the project, AramcoAramco is dipping into one of its last big basins of oil. After Khurais, Saudi Arabia will have only one known mega-field left to fully develop, the even more challenging Manifa field, offshore in the Persian Gulf. Much of the kingdom's reserves beyond these lie either in aging fields or smaller pockets.

"Khurais and Manifa are the last two giants in Saudi Arabia," says Sadad al-Husseini, a former AramcoAramco vice president for oil exploration. "Sure, we will discover dozens of other smaller fields, but after these, we are chasing after smaller and smaller fish."

The Khurais project is at the heart of an all-out effort by Saudi Arabia to keep abreast of natural declines in older fields while trying to preserve its status as the oil world's lone safety valve. To do that, AramcoAramco is scrambling to boost its overall production capacity, currently just over 11 million barrels a day, to 12.5 million.

Saudi officials said a few years ago that they could push production to 15 million barrels a day if necessary and sustain that for decades. But for some time they've been indicating they would level out at about 12.5 million barrels of capacity. Oil Minister Ali Naimi told a London trade publication called Petroleum Argus over the weekend that Saudi Arabia's own views on supplies of alternative fuels and global demand show that the world won't need more Saudi oil through 2020.

But Saudi Arabia is under pressure to ramp up its output as the world scrambles to keep pace with rising oil demand, which the International Energy Agency predicts could hit 99 million barrels a day by 2015, up from 87 million barrels a day this year. With output declining or flat in Mexico, Venezuela, the North Sea and Russia, all eyes are on the Saudis to fill much of the gap, even as oil demand soars within Saudi Arabia itself.

Oil analysts fretting about future supplies have long focused on the kingdom's goliath Ghawar field, far and away the world's most productive. Since its discovery in 1948, Ghawar has provided the bulk of Saudi oil. Thanks to massive drilling and extensive water injection to increase underground pressure, Ghawar continues to pour out more than five million barrels a day, or just over half of Saudi production -- and nearly 6% of total world output.

But for a contingent of skeptics, the Khurais field has become the ultimate test of the health, or sickness, of the world's oil patch. Skepticism runs deep in oil quarters over whether Saudi Arabia can overcome a slew of challenges, both geological and economic, to turn the Khurais field into what Saudi officials hope will become the fourth most productive oil field in the world, after Ghawar and fields in Kuwait and Mexico.

"This is the big one," says Matthew Simmons, a Houston energy investment banker whose 2005 book "Twilight in the Desert" challenged AramcoAramco's petroleum prowess. "If Khurais falls short of its advance billing, then Saudi Arabia is going to struggle to fulfill its promises."

AramcoAramco geologists discovered the field, about 60 miles west of Ghawar, in 1957. AramcoAramco put Khurais into limited production for a short while in 1959 and then mothballed it. Brought back on stream after oil prices skyrocketed in the early 1970s, the field hit a brief peak of about 150,000 barrels a day in 1981 before AramcoAramco shut it down again.

"It was mainly token production, enough to help power the city of Riyadh and keep the king's palace cool," says Jack Zagar, a petroleum-reservoir engineer who worked on Khurais for AramcoAramco in the late 1970s.

Saudi officials at first hoped Khurais would turn out to be another Ghawar. Years of assessment proved otherwise. The field, AramcoAramco geologists found, had very little natural pressure, a key to getting oil out of the ground. Its oil-bearing rock is deep underground and much tougher to tap than Ghawar's.

"It turned out," AramcoAramco said in a recent statement, "that the reservoir at Khurais was much smaller and not as high quality as Ghawar." Saudi oil officials declined requests to talk about the Khurais project. This account of the project is based on interviews with former AramcoAramco officials as well as AramcoAramco public statements.

Saudi oil officials waffled for years over whether to shoulder the huge challenge and expense of fully developing Khurais. Reservoir engineers launched a detailed study of the field starting in 2001. Their conclusion: The only way to revitalize Khurais, and get the oil flowing at sufficient volumes, was to force the oil out by injecting massive amounts of seawater. Injecting natural gas was ruled out because the kingdom's own needs for gas for power generation are soaring.

The need for water injection raised a slew of complications. The Khurais complex, which includes the smaller satellite fields of Abu Jifan and Mazalij to the south, lies far from most of the kingdom's oil infrastructure. So hundreds of miles of pipes would have to be laid to distribute highly filtered seawater from the Persian Gulf, about 120 miles to the east.

A massive water-injection program would require AramcoAramco to ring the complex with more than 100 injection wells. And AramcoAramco would have to master the field's complex geology -- all 2,700 square miles of it -- not only to know where to drill but also to make sure the water injection didn't flood the oil wells.

"We knew that Khurais was a very problematic, very challenging field," says Nansen Saleri, AramcoAramco's head of reservoir management at the time, who left in September and now has his own firm in Houston. "The trick was to understand Khurais down to its smallest detail."

To do that, AramcoAramco seismologists spent 20 months shooting 2.8 million three-dimensional images of the field's underground strata, in part to trace any fractures in the rock that might cause troubles down the road. It was AramcoAramco's most ambitious underground mapping program ever. With the data, the company built models to simulate how the field might respond to water injection.

In 2005, with oil demand and prices climbing, AramcoAramco decided to charge ahead on the Khurais project. It hired Halliburton Co.Halliburton Co. to drill the wells. Canada's SNC Lavalin Group Inc.SNC Lavalin Group Inc. and Italy's SaipemSaipem, a unit of Eni SpA, were brought in to handle the water-injection work. New Jersey-based Foster Wheeler Ltd.Foster Wheeler Ltd. took over as project manager. Dozens of other companies were hired to lay the pipe and build what amounted to a small oil city in the middle of the desert. The total estimated cost at the time was $6 billion.

For Mr. Saleri, the Khurais project has become a symbol of all the technological leaps AramcoAramco has made over the past decade or so. "This will be the biggest smart field the world has ever seen," he says.

HalliburtonHalliburton is drilling more than 300 wells that snake down for over a mile and then branch horizontally into the rock. Each can be guided electronically to within a couple of feet of where the oil lies, using a technology known as geosteering. To flush the oil out, HalliburtonHalliburton is drilling 125 water-injection wells and installing dozens of electric submersible pumps.

Mr. Saleri says he also insisted that dozens of observation wells be drilled, so that sophisticated sensors could monitor what was happening below ground. Once the field is operational, reservoir engineers will be able to track it second by second from AramcoAramco's huge command center in Dhahran, about 150 miles to the northeast.

But all this wizardry also underscores Khurais's many quirks and foibles. To counter the field's lack of internal pressure, AramcoAramco plans to inject 2.4 million barrels of seawater a day into its underground structures, around two barrels of water for every barrel of oil it hopes to extract. By comparison, AramcoAramco first put the mighty Ghawar under limited water injection in the 1960s before turning to large-scale seawater injection in the late 1970s.

It's tricky to get such a huge water-injection system just right, says Bruno Stegner, a former AramcoAramco senior reservoir engineer. The water has to be filtered down to extremely tiny particles to avoid plugging the pores of the rock it's supposed to flow through. The main challenge, Mr. Stegner says, will be sustaining sufficient water pressure to push oil to the producing wells through two miles or more of Khurais's tough rock layers, far less porous than Ghawar's.

Many experts are surprised that AramcoAramco is using submersible pumps in a field that is still young, measured by its years of actual production. AramcoAramco began installing similar pumps to boost production at its huge offshore Safaniyah field in 2005, but only after the field had been pumping oil for decades.

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"The big Middle East fields used to go on for 30 or 40 years without blinking," says Chris Skrebowski, a former AramcoAramco oil analyst who now works for the London-based Energy Institute. Khurais's geology is different. "If Ghawar is like a big wet sponge, then Khurais is like one of those hardened sponges that are very hard to wring out," he says. Mr. Saleri, who ran the Khurais revitalization project until last summer, acknowledges that AramcoAramco engineers face plenty of challenges when they begin water injection next year. "When you're injecting water into the periphery" of a field, he says, "if you hit fissures in the rock and aren't managing it well, you can have water flow in and kill a well. And a dead well doesn't flow."

Mr. Saleri says the strategy is to coax as much oil as possible from Khurais over the longest possible period. AramcoAramco now boasts some of the highest recovery rates of any oil company. In the U.S. and elsewhere, companies typically manage to extract less than 40% of the oil from a field. AramcoAramco claims to have recovered more than 74% of the crude within its longest-producing field at Abqaiq, which went online in 1940.

"If you do things right from Day One, there's no reason to expect AramcoAramco won't get the same from Khurais," Mr. Saleri says.

That's a big if. AramcoAramco has suffered lately from soaring costs and increasing project delays. Through most of the 1990s, it cost AramcoAramco around $4,000 to add one barrel of daily production capacity. A huge project called Shaybah, finished in 1997, required AramcoAramco to run roads and pipelines deep into the country's forbidding Empty Quarter and cost around $2 billion. For that, AramcoAramco got 500,000 barrels a day in oil-production capacity.

Some experts estimate that it now costs the company closer to $16,000 to add one additional barrel of daily production capacity. Several big projects are running behind schedule because of a shortage of steel and manpower. A project called Khursaniyah was meant to bring on 500,000 barrels of daily capacity by the end of last year, but Saudi officials now say it may not hit that target until the end of the year.

Some doubt that Khurais will reach the promised 1.2 million barrels a day of oil production or be able to sustain that level if it does. Mr. Husseini, the former AramcoAramco head of oil exploration, who retired five years ago, says he doesn't doubt the company can extract that much at least briefly. "The question," he says, "is how long you can sustain it and at what price."

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