x Abu Dhabi, UAEMonday 24 July 2017

Future of oil is sustainable growth

Despite record oil prices many Gulf oil producers are not tripping over themselves to bring extra barrels to market.

A delicate balance: In order for maximum oil to move from rig to refinery to station to pump, officials have to determine how quickly the crude can be extracted from the ground.
A delicate balance: In order for maximum oil to move from rig to refinery to station to pump, officials have to determine how quickly the crude can be extracted from the ground.

It may come as a bit of a surprise that in a time of record oil prices many Gulf oil producers are not tripping over themselves to bring extra barrels to market. After all, the big international firms such as ExxonMobil and Royal Dutch Shell are scouring the globe for prospective drilling targets, marginal and mature fields in the West are being restarted and companies are looking at exploiting costly and challenging reserves such as tar sands and shale oil.

But companies such as Saudi Aramco, Qatar Petroleum and the Abu Dhabi National Oil Company (Adnoc) have their sights on a different set of goals. The key for them is determining a level of output that is sustainable for the long term, says Musabbeh Helal al Kaabi, the manager of Adnoc's exploration division. "We're trying to fulfil the growing international demand for oil, but taking into account our need to produce oil in the most efficient way to secure those resources for many generations to come," Mr Kaabi said. "We have not shied away from our commitment to supply additional oil to the market."

The Government, like other Gulf oil exporters, is under serious pressure from its largest customers in the West to pump more oil, with the hope of bringing down record prices. But Abu Dhabi has not rushed to expand its capacity, despite holding the world's fifth-largest oil reserves, equivalent to 7.9 per cent of the planet's total. Adnoc has long said it was aiming to increase its production capacity from about 2.7 to 3.5 million barrels per day (bpd), but on several occasions the deadline for that expansion has been pushed back. In 2004, WAM, the state news agency, reported that the country would expand capacity within two years. In 2006, officials said they were still aiming for 3.5 million bpd, but now the deadline is 2011.

Industry analysts say a cautious approach to reservoir management is only part of the explanation. Investment in Abu Dhabi oil has also been constrained by the looming expiry of the 75-year concessions under which Adnoc and its partners operate. In Saudi Arabia, Aramco has embarked on the biggest capital expenditure programme in its 75-year history. But instead of squeezing more from its existing portfolio of producing fields, the company is tapping a new range of giant reservoirs in the next five years to increase capacity to 12.5 million bpd.

Aramco will not develop an oilfield unless it will have a plateau production rate for at least three decades, officials say. "Our strategy calls for a soft landing of production rates, such that you maximise the recovery and enhance the sustainability of plateau production," said Amin Nasser, the senior vice president of exploration and production at Saudi Aramco. Big oilfields act like giant pistons. Water is pumped in at the bottom, and the oil is forced through tiny pores in the rock to the producing well. If the wells draw the oil too quickly, water breaks into the oil, isolating behind it huge bubbles of oil that will probably never be recovered.

So the key is to produce at a rate slow enough to maximise the recovery of oil. In Saudi Arabia, officials say they will not bother to develop a discovery unless it can support a production plateau for 30 years. On average, Saudi Aramco likes to produce at an annual depletion rate of about two per cent. Abu Dhabi has a similar geology to its southern neighbour, and a similar conservative approach to its resources.

"We have the option to increase production to very high levels, but that would compromise the plateau and the decline would come quicker than anticipated," Mr Kaabi said. At an energy conference in Madrid last week, the energy minister of Qatar, Abdullah al Attiyah, emphasised that oil production levels were a sovereign decision that should take into account global demand, but also geological realities.

"Sometimes I have to think carefully in terms of reservoir management. I do not want to damage all the reservoirs. We produce to satisfy the whole world, but not at the cost of our reserves," he said. The Gulf's oil industry is led by national oil companies that have a more diverse array of objectives than BP or Chevron, for example, which have to cover massive capital costs and impress shareholders with big profits. Adnoc, for example, determines its output by the long-term needs of the federal budget, balanced against what is best for the health of the fields.

Abu Dhabi has enough proven oil reserves to pump at current levels for almost a century. Officials are motivated to limit output, in part by examples from history when producers exploited their resources too quickly, destroying the integrity of their assets and leaving billions of barrels in the ground. The classic example is Spindletop, a small hill which was the first significant oil discovery in Texas and gushed 75,000 barrels per day out of a single well in 1901. The oil strike ignited a rush, and pretty soon 214 wells were clustered right up against one another.

The pressure wheezed from the many holes in the reservoir, leading production from the promising find to fall to almost nothing within less than two years. Experts often point to Oman's fields as a more recent, though much less extreme, example. With the help of sophisticated enhanced recovery techniques, the country rapidly boosted production to close to one million bpd in 2001. In the years afterward, however, output tumbled. Last month, the International Energy Agency estimated that Oman produced 720,000 bpd.

While high oil prices have not prompted Adnoc to change its long-term philosophy of resource conservation, they have encouraged it to adopt new tactics. The company had previously focused on the country's largest finds, and passed over what Mr Kaabi called "marginal" fields - those containing less than roughly 100 million barrels of oil, or the equivalent volume in gas. High prices, however, have encouraged the exploration division to revisit those assets.

"Historically, Adnoc looked for the big reservoirs," he said. "Any field that did not meet a volume target would not be drilled. "With current prices and the current shortage of gas in the country, of course we will develop them." The immediate future is not without its challenges. Like every company in the sector, Adnoc has felt the pressure of higher costs and a shortage of equipment, like drilling rigs.

"It's a challenge, Adnoc is in a position like any other company," he said. "We need to find a balance between escalating cost and projected activities on our side. "We are not concerned that our projects will be delayed." Time is on Adnoc's side. As much of the world clamours for more oil to fix the problem in the short term, Mr Kaabi's focus is on the horizon. "If there's pressure from the international community to increase production, it is a short-term solution," he said. "If you produce above your capability, you make the problem worse, because production would peak and then decline relatively quickly - that would produce a worse problem in the future."

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