02/06/2005
Saudi Arabia: Costs continue to rise on oil expansion plans
Tougher-than-expected technical hurdles and an accelerated schedule are quickly raising costs for Saudi Arabia's ambitious plans to increase its oil production capacity, a Saudi analyst has suggested. The government is now budgeting $15 billion-$18 billion to ramp up its capacity to about 12.6 billion barrels a day by early 2009, according to Nawaf Obaid, managing director of the Saudi Strategic National Security Assessment Project. The earlier estimates had been for a more modest $12 billion-$15 billion budget.
Getting oil out of the Khoreis and Khursaniyah oil fields has proven more challenging and required costlier drilling technology then expected and a speeded up rollout has also raised costs, he said. Bigger spending poses a challenge to Saudi Arabia's regime, which relies on oil for about three quarters of its government revenue.
Rising oil prices have funded two years of budget surplus ending years of deficits, but the government of the world's biggest and most important oil producer is spending more on social welfare programs to fight off mounting unemployment stemming from a population explosion.
Under pressure from big oil consumers such as the US smarting under $50 oil, Saudi Arabia has pledged to ramp up its production to stave off high prices and meet rising demand.
The expansion plans are being funded by the Ministry of Finance, unlike the rest of the operating costs for state-owned Saudi Arabian Oil Company, which continue to come from the company's own budget.
Aramco's plans assume a floor of $35 a barrel for benchmark crude futures traded on the New York Mercantile Exchange, Obaid said. After years of keeping 1.5 million-2 million b/d of idle capacity to buffer any global oil supply disruptions, Aramco has trimmed that back to 1 million-1.5 million b/d, also because of rising costs.
With only Saudi Arabia maintaining spare capacity, some analysts worry a thinning margin could increase oil market volatility. Saudi officials say they are currently pumping 9.5 million b/d, and have capacity of 11 million b/d. They have pledged to bring on stream another four oil fields that could boost production 1.6 million b/d, excluding about 800,000 b/d for replacing declining oil output from other aging fields.
The kingdom is also looking for foreign partners to build four or four or five refineries at a cost of about $2 billion each. The refineries are seen as a way to lock in customers for the kingdom's heavier, harder to refine crude streams. Currently, refiners are turning down offers of extra Arab Heavy oil because it’s difficult to refine into light products such as gasoline and jet fuel. |
