Saudi Arabia’s oil output nearing its capacity limit

Saudi Arabia’s oil output nearing its capacity limit

DUBAI / RIYADH - Reuters
Saudi Arabia’s oil output nearing its capacity limit

Workers look at journalists during a media tour of the Khurais oilfield, about 160 kilometers from Riyadh, in this photo. Professionals say the country’s oil output is at the limits. REUTERS photo

Top oil exporter Saudi Arabia is nearing its comfortable operational production limits and may struggle to do much to make up for shortages that arise from new sanctions imposed on Iran by the West, Gulf-based sources said.

The kingdom, now pumping just under record rates of 10 million barrels per day, has poured billions of dollars into its vast oil fields, which on paper should ensure it has the ability to ramp up to 12.5 million bpd.

Long-standing oil policy by Riyadh, the heavyweight in the Organization of the Petroleum Exporting Countries (OPEC), sets aside some 1.5 million bpd as protective spare capacity.

But industry sources said pumping anywhere near the declared production capacity might involve extracting heavy crudes the market might not want. It would also be difficult to sustain higher rates for lengthy periods.

“There is very little unused capacity in the Gulf,” said an oil official in the region. “Saudi Arabia could comfortably manage an extra 500,000 barrels a day or so and, if pushed, could go up to 11 million (barrels a day).”

A steady rate beyond 10 million bpd would offer immediate relief to world oil markets, but it would take the kingdom’s production to untested levels. Saudi officials are confident, however, of achieving higher flows.

“Saudi Arabia can easily make 1 million to 1.5 million (barrels per day) available,” a Saudi source said about output beyond current volumes.

Since June of last year, Saudi Arabia and its Gulf allies Kuwait and the United Arab Emirates have been cranking oil out after failing to convince Iran and other OPEC members to agree a coordinated increase to cover the supply disruption from Libya’s civil war.

The trio has kept up the higher pace, despite the return of Libyan crude, to supply rising demand from Asia and in effort to bring oil prices below $100 a barrel to help nurture global economic growth. Increased deliveries have left Kuwait and the United Arab Emirates producing nearly flat out. That will make it a stretch to fill a sizeable gap left by any punitive cuts in Iran’s oil exports of about 2.5 million bpd.

After spending huge amounts on fortifying their production, the Gulf countries are now reluctant to push output to the very brink and leave them bereft of a supply cushion.

China looking around

The United States and its allies in Europe and elsewhere are trying to put pressure on Iran to curb its nuclear program, worried that Tehran is attempting to develop its own atom bomb.
Iranian oil officials said shipments from the Islamic Republic are continuing as normal. There are, however, reports that some traditional buyers of Iranian crude, such as China, may be looking elsewhere. This may be part of a negotiating ploy over contract renewals.

The European Union has brought forward a ministerial meeting that is likely to match new U.S. measures to tighten the financial screws on Tehran. At stake are roughly 500,000 bpd of Iranian exports to EU members.

The U.S. has long embargoed Iranian crude, but the new sanctions target institutions that deal with Iran’s central bank.

Asia’s big consumers of Iran’s oil - Japan, China and India - are already taking precautions. Tokyo has asked Saudi Arabia and the UAE to help it to plug any gap. And China’s Premier Wen Jiabao is set to visit Saudi, the UAE and Qatar amid signs that Beijing wants to expand its options.

Despite the diplomatic efforts, there have been no hard requests from buyers. “So far, there are no extra orders (from buyers) that would require Saudi to increase production,” a Gulf industry source told Reuters. He repeated Riyadh’s vow to meet any extra demand.

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