Kate Mackenzie Saudi Arabia’s real energy problem(s)

An interesting report from Saudi Arabia: the country’s king reportedly said at the weekend that he had ordered oil exploration cease in order to keep reserves for future generations.

From Dow Jones, quoting the Saudi Press Agency:

RIYADH (Zawya Dow Jones)–Saudi Arabia’s King Abdullah has ordered a halt to oil exploration operations to save the hydrocarbon wealth in the world’s top crude exporting nation for future generations, the official Saudi Press Agency, or SPA, reported late Saturday.

“I was heading a cabinet meeting and told them to pray to God the Almighty to give it a long life,” King Abdullah told Saudi scholars studying in Washington, according to SPA.

“I told them that I have ordered a halt to all oil explorations so part of this wealth is left for our sons and successors God willing,” he said.

However, the King’s comments perhaps shouldn’t be taken too literally; oil ministry official told Dow Jones it was not an outright ban as such, “but rather meant future exploration activities should be carried out wisely”.

Moreover, with the world’s biggest easily-accessible reserves of oil, searching for more isn’t Saudi Arabia’s big focus focus right now. Saudi oil minister Ali al-Naimi said in June that the country wouldn’t need to increase its oil production capacity until 2020. The country now reports it has 4.4m b/d of spare capacity – more than double the ‘cushion’ that it officially targets.

Upstream reported in May that Saudi Arabia is exploring for hydrocarbons in the Red Sea, and has recorded 22,000km of seismic data there, among challenging geography including 2km-plus water depths, high temperatures and a layer of salt. It has also commissioned exploration around the Manifa oil field in the Persian Gulf.

But the overall focus is on gas, not oil, because of the Kingdom’s domestic electricity supply problem. It heavily subsidises both fuel and electricity use, and consequently consumption is growing too fast for domestic gas supply to keep up with. Platts reported last month that Saudi Arabia diverts about 877,000 b/d – or 11 per cent of its current oil output – to its own domestic electricity supplies.

In fact the King’s ban story somewhat reminiscent of a warning by Saudi Aramco chief Khalid al-Falih warning in April that it may have to take another 3m b/d off the markets by 2028 if domestic efficiency was not improved.

Whether it will really come to that is anyone’s guess. As we wrote then, al-Falih was simply extrapolating current consumption trends, and one analyst suggested it was a case of Saudi Arabia talking its own book.

In the longer term, however, it may be Saudi Arabia’s extensive reliance on its oil reserves that is the bigger concern. The King’s comments suggest he fears that could be the case. But whether it affects the Kingdom’s oil-based, big-spending approach to its own economy remains to be seen.

Related links:

Saudi Arabia struggling with gas needs - FT Energy Source
Saudi Arabia’s oil exports warning - FT Energy Source
The cost of fossil fuel subsidies – $557bn – FT Energy Source