Saudi Arabia global oil exports to wane post-2010

Saudi Arabia’s long-standing status as a swing producer of crude oil could be drawing to a close according to the head of national oil company Saudi Aramco.

Global oil exports from Saudi Arabia, the world's largest oil producer alongside Russia, will start to wane in the coming years as domestic demand surges and spare capacity drops, warned Khalid al-Falih, chief executive officer of Saudi Aramco in a speech published on the company's website.

Domestic energy demand is expected to increase by almost 250%, from about 3.4 million barrels per day (b/d) in 2009 to about 8.3 million b/d by 2028, which will eventually affect the country's ability to export oil, he said.

"Along with China and India, we do expect Saudi Arabia to be one of the largest sources of global oil demand," says Amrita Sen, oil analyst at Barclays Capital. "And given Saudi's importance in the oil market as the swing producer, in the longer term, this can impact their ability to control the market at the margin. However, this is unlikely to have a significant impact this year, given the substantial spare capacity it is sitting on, though that buffer could get eroded sooner rather than later in the coming few years."

Saudi Arabia maintains the world's largest crude oil production capacity, estimated by the US Energy Information Administration (EIA) to be around 11 million b/d, as of mid-year 2009. The country contains approximately 264 billion barrels of proven oil reserves, including 2.5 billion barrels in the Saudi Kuwaiti shared Neutral Zone, amounting to around one-fifth of proven, conventional world oil reserves, says the Oil and Gas Journal.

If Saudi Arabia does not improve its energy efficiency, availability of oil for export could fall by as much as 3 million b/d by 2028, al-Fahih added.

However, opinion remains mixed as to whether global supply will be affected, in the short or longer term. Although it is certain Middle East energy consumption will grow, some think Saudi Arabia's exports will reach a limit and start declining well before domestic consumption will have such a pronounced effect.

"I think this is very long term and I doubt much will change in the near future," says Andrey Kryuchenkov, analyst and strategist for the commodities team at investment house VTB Capital. "I think they are just talking their economy and oil prices up. The original statement came from Saudi Aramco, which needs further investments to cope with growing demand and need for extra capacity. The alleged capacity is around 12.5 million b/d, but the more likely number is just below 12 million b/d at the moment. 2028 is a very, very far-fetched forecast, as they are simply adjusting the current rate of change in consumption."

VTB Capital says that, although Saudi Arabia knows it is running out of oil, Saudi Aramco is already part of one of the most "remarkable" developments of 2009, after admitting it has started exploration in the Red Sea and not the Persian Gulf.

"Saudi Arabia is running out of oil and Ghawar field will exhaust itself in the end," says Kryuchenkov. "It has been producing oil since 1948, which is unprecedented for any field and still accounts for around 55–60% of exports. The decline will accelerate from here and I think these are more immediate concerns than its consumption growing. As a rule of thumb in the oil industry, Saudi Arabia is seen as the following: a 5% decline in production and a 2% rise in consumption is approximately 15% decline in net oil exports. However, this is not the case just yet."

A quarterly oil price outlook feature will appear in the June issue of Energy Risk. Separately, an in-depth article on China's oil outlook is out now in the April issue of Energy Risk and online at www.energyrisk.com or www.risk.net.