Living On The Edge - OPEC's Spare Capacity, Global Demand And What NYMEX Believes - Energy Bulletin

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In late September of 2005, Reuters ran the story Saudi Arabia finds no takers for additional oil. At the time, most Gulf of Mexico production was shut-in from the hurricanes and the oil price had surpassed $70/barrel for the first time. The world was in a panic. Here are some excerpts—

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It is now almost exactly two years later. Oil is trading at $80.90 a barrel (at this moment) and the U.S. Department of Energy believes that Saudi surplus capacity was only 1.90 million barrels per day in the 2nd quarter of 2007. The EIA gives a lower preliminary estimate of 2.17 million b/d for OPEC as a whole in the 3rd quarter. But let us take al-Naimi at this word, at least about there being "no-takers" for his oil back in 2005. Why were there no buyers for Saudi Arabia's oil? The glass-is-more-than-half-full optimists writing reports at Petroleum Intelligence Weekly provide a clue.

The quality of OPEC spare capacity clearly matters, as was seen at the end of 2004, when Saudi Arabia had to dip into its heavy offshore and Manifa fields to meet rapidly growing Asian demand. Sweet-sour differentials ballooned as a result...
The most plausible hypothesis is—and always has been—that Saudi Arabia could not sell any more oil to the market in the fall of 2005 because there was no more demand for its heavier sour (sulfur-laden) crude—the market was saturated. The Kingdom has cut production 1 million barrels per day since then, with almost all of the decrease consisting of this same "dirty" crude formerly bound for Asian markets (Bloomberg, March 12, 2007). What else has changed? Other than 300,000 light, sweet barrels per day from Haradh III extension—the Saudis are quite proud of it—put on-stream in early 2006, there have been no capacity increases. The Saudi Aramco 2006 annual report also admits that production in the Kingdom fell off 1.7% in that year (0.153 million barrels per day).

It is uncertain exactly how much of Saudi Arabia's current production for sale is light, sweet oil as opposed to their Arab Heavy and Arab Medium sour grades with API gravity values below 30°. According to the IEA's World Energy Outlook 2005, Saudi Arabia's capacity was 10.352 million barrels per day in 2004—The Oil Drum provided a breakdown at the time. Of this capacity, 23% came from the heavier, sour fields Safaniyah, Manifa, Zuluf and Marjan. Adding in Haradh, Saudi Arabia has about 8 million barrels of light, sweet crude production capacity. In all likelihood, any rise in the Kingdom's production will consist almost entirely of low quality crude along with marginal amounts of light, sweet oil. Although there are signs of change in Asian refining to expand processing of sour crudes, the downstream market has not changed appreciably since 2005. The only reasonable conclusion is that Saudi Arabia's demonstrated capacity of 9.60 million b/d is also their effective capacity (give or take a hundred thousand barrels or so), at least as far as the downstream market is concerned. Their surplus capacity is therefore about 1 million barrels. Any assumed capacity beyond that—the EIA estimates 0.90 million b/d—does not affect the world oil balance.


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http://www.energybulletin.net/34917.html