Why The Saudis Are Lying About Their Oil Production
“I used to think the Saudis thought all of us were idiots..but recently it’s occurred to me that they genuinely don’t know anything about the oil industry"
Saudi Arabia’s comments about its hydrocarbons industry have long been regarded by industry experts as being as believable as China’s comments about its economic growth: that is, not at all. Saudi Arabia’s skill in lying is definitely improving, though, from the outright transparent lies about its level of oil reserves, spare capacity, and why the omni-toxic Aramco should nonetheless be valued at US$2 trillion.
Its latest lies – along the lines of ‘everything is fine after the attacks and we will be back to full production really quickly’ – are relatively nuanced. “The Saudi statements may not contain any direct falsehoods as such but nor are they entirely being fulsome with the truth,” Richard Mallinson, senior energy analyst for Energy Aspects, in London, told OilPrice.com last week.
The stage was set for the Saudis’ latest lying extravaganza with the aerial attacks on its massive Abqaiq oil processing facility and Khurais oil field launched, according to various sources, by Houthi ‘rebels’ in Yemen or by Iranian operatives in Yemen or in Iran. The effect of the combined attack on Abqaiq and Khurais caused the temporary suspension of 5.7 million barrels per day (bpd). This equates to well over half of Saudi Arabia’s actual crude oil production capacity, not the capacity figure that Saudi has plucked out of nowhere for geopolitical power purposes in recent years, and resulted in the biggest rise in oil prices in a single day ever.
Once the hedge funds, who had handily positioned themselves long some days before the attacks, had taken their profits, and younger traders remembered that the U.S. can release vast amounts of oil at the drop of a hat from its Strategic Petroleum Reserve to keep the price of oil – and, crucially ahead of an election year, the highly correlated and politically enormously sensitive gasoline pump price in the U.S. down – oil prices came down again, obviously.
A number of interesting things happened from the Saudi Arabian side as the prices went up and then went back down again. The first of these, as OilPrice.com was informed repeatedly by senior oil traders throughout the day, was the lack of real understanding that senior Saudi officials seem to have on how the oil market works or any details of Saudi’s own oil industry.
“I used to think the Saudis thought all of us [oil traders] were idiots, with all the rubbish they used to come out with and thought we’d believe, but recently it’s occurred to me that they genuinely don’t know anything about the oil industry, so they don’t understand that other people actually do know what they’re talking about and this has also been one of the reasons for the constant delaying of the Aramco sale, by the way,” one senior oil trader based in Asia told OilPrice.com.
The Aramco sale to one side for another time (although OilPrice.com has exclusively previously highlighted all of the lies pertaining to it), one particularly striking comment came from Saudi Arabia’s new oil minister, Prince Abdulaziz bin Salman, just after the attacks. He stated that the Kingdom plans to restore its production capacity to 11 million bpd by the end of September and recover its full capacity of 12 million bpd two months later.
“It was extremely telling that he spoke of ‘capacity’ and later of ‘supply to the market’, as these are terms that Saudi tends to use in order to avoid talking about actual production, as capacity and supply are not the same thing at all as actual production at the wellheads,” said Energy Aspects’ Mallinson. “What Saudi is trying to do by not revealing the true picture is to protect its reputation as a reliable oil supplier, especially to its target clientele in Asia, so we have to take all of these comments with a hefty pinch of salt,” he added.
So hefty a pinch of salt as to be mountainous in the case of its capacity and corollary spare capacity figures. The country has stated for decades that it has a spare capacity of between 2.0-2.5 million bpd, implying – given actual production during virtually all of this time averaging less than 10 million bpd – total production capacity of 12.0-12.5 million bpd. This level, though, or anywhere near it, has never been even remotely tested, with the highest production ever recorded being just over 11 million bpd in November last year.
This is despite the all-out oil price war that Saudi started in 2014 against U.S. shale producers to try to destroy the industry through low prices caused by flooding the markets with oil. “If the Saudis had anything near 12 million barrels per day capacity, that would have been the time to pump it but all it managed was just under 10 [million bpd] with 10.5 [million bpd] managed for just one month over that two-year period [2014-2016 before Saudi reversed it strategy],”
Additionally, the EIA defines spare capacity specifically as production that can be brought online within 30 days and sustained for at least 90 days, whilst even Saudi Arabia has said that it would need at least 90 days to move rigs to drill new wells and raise production to the mythical 12 million bpd or 12.5 million bpd level. Many serious oil market players now do not believe that the Saudis have anywhere near 2 million bpd of spare capacity, as it would imply production of 12 million bpd plus. Instead, many now believe that the Saudis have sustainable spare capacity of no more than around 0.5-1.0 million bpd.
Whatever Saudi’s actual capacity, there is absolutely no way that it can have made any accurate assessment of how long it would take to get back to any particular capacity level either – another lie. “Engineers we have spoken to have said that following an incident like this it would take several weeks just to assess the damage, never mind to begin doing anything about it, rather than the few days that the Saudis have taken and then announced the actual timeline – and a very short timeline at that – to bring back various stages of capacity,” said Energy Aspects’ Mallinson.
“Instead, what the Saudis will do to keep exports up is draw down supplies to its domestic industry and reduce the amounts it is sending to domestic refineries – one big refinery, SASREF, is conveniently bringing forward its planned maintenance for later in the year to now – and we hear very mixed reports which of the other refineries are operating at regular rates,” he added. “But some buyers are already being warned of delays, some are being offered swaps with other grades and so on,” he underlined.
Specifically, a number of customers of Saudi’s Arab Light and Arab Extra Light grades – the grades most affected by the recent attacks – have been offered Saudi’s Arab Medium or Arab Heavy as substitute grades OilPrice.com understands from oil trading sources. This even applies to Saudi’s number one target country, China. A number of refineries have been told by Aramco that their rolling orders for Arab Extra Light crude cannot be supplied for the time being but can be switched for either Arab Medium or Arab Heavy, depending on the set-up of the refinery. Others, looking for their usual monthly supply of Arab Light have been told that this will be switched to Arab Heavy as a substitute for September loading at least.
The other measure that Saudi is taking – which it has vehemently denied but OilPrice.com can confirm from various oil trading sources and from sources in the Iraq Oil Ministry – is looking to buy Iraq oil grades, which are close to the key export grades that Saudi ships to various destinations, including Asia. “Aramco Trading Company has been aggressively checking prices and lot sizes for Iraqi crude with various [oil] trading houses since the attacks and are looking are shorter-term potentially rolling contracts,” one trading source told OilPrice.com last week.
“A number of the Iraqi grades are close in specifications to their Saudi counterparts, and part of this activity by Saudi to fill customer supply quotas for these grades is to make sure that the demand we are still seeing for such Iranian grades from Asia, but mainly China, is not boosted to make up for the shortfall from Saudi.,” a senior source who works closely with Iraq’s Oil Ministry told OilPrice.com.
The supreme irony, of course – as OilPrice.com has repeatedly underlined, and as many in the oil markets now know, although apparently not the Saudis – is that a cornerstone strategy used by Iran to circumvent current U.S. sanctions against it (as was also the case in the previous period of sanctions) is to rebrand its oil into Iraqi oil, which is extremely easily done, both at the massive and porous border between the two or via various pipeline and shipping routes.
It may well be, then, that Saudi Arabia ends up boosting the bank accounts of the very people that it thinks was behind the attacks on its own oil infrastructure, the Islamic Revolutionary Guards Corps – a staunch and active supporter of Yemen’s Houthis – through its various oil-industry associated businesses by buying Iranian oil, albeit with the stickers changed on the barrels.