Saudi officials see early supply recovery

Sept. 18, 2019
Saudi Arabia’s oil production will recover faster than initially feared from damage inflicted by unmanned aircraft Sept. 14 to the Abqaiq crude oil processing complex and Khurais oil field, Saudi officials say.

Saudi Arabia’s oil production will recover faster than initially feared from damage inflicted by unmanned aircraft Sept. 14 to the Abqaiq crude oil processing complex and Khurais oil field, Saudi officials say.

The price of Brent crude jumped 30% to nearly $78/bbl on news of the attacks as traders worried about a supply disruption lasting months (OGJ Online, Sept. 16, 2019).

Prince Abdulaziz bin Salman bin Abdulaziz, minister of energy, addressed those fears at a late-night news conference in Jeddah Sept. 16.

He said more than half the 5.7-million b/d of production affected by the disruption had restarted.

Saudi production capacity, he added, will be partly restored to 11 million b/d by the end of September and fully restored to 12 million b/d by the end of November.

After his statement, the price of Brent crude fell $4.47 to $64.55/bbl (OGJ Online, Sept. 18, 2019).

Drawing from strategic storage, Saudi Aramco will fully meet obligations to customers this month, Abdulaziz said. Stocks will be replenished from production capacity becoming available before the end of September.

Saudi Arabia leads the effort under way since January 2017 to buoy crude prices with coordinated supply restraint. Eleven members of the Organization of Petroleum Exporting Countries and 10 nonmembers have production caps.

According to the International Energy Agency, the kingdom’s production in August averaged 9.75 million b/d, below its agreed ceiling of 10.3 million b/d. IEA estimated Saudi production capacity in August at 12.02 million b/d.

Affected production

Of the production disrupted by the aerial assault, 4.5 million b/d was processed at Abqaiq, according to Abdulaziz.

Also affected were 2 bcfd of associated gas, 1.3 bcfd of dry gas, 500 MMcfd of ethane, and about 500,000 b/d of gas liquids.

Abdulaziz said production of dry gas, ethane, and gas liquids will return to their prior levels by the end of this month.

The disruptions did not affect Saudi electricity generation, water desalination, or oil product supplies. Ethane for petrochemical manufacture had begun gradually to recover, Abdulaziz said.

At the press conference, Aramco Pres. and Chief Executive Officer Amin Nasser said production had fully resumed at Khurais field, which has capacity estimated at 1.5 million b/d. He said Abqaiq was processing 2 million b/d of crude.

The facility stabilizes and treats Arab Light and Arab Extra Light crude from giant fields in northeastern Saudi Arabia.

Also at the press conference, Aramco Chairman Yasser bin Othman Al-Rumayyan said the attacks will not delay the initial public offering of shares representing 5% of the company that has been discussed for months. The IPO will be ready in the next 12 months, he said.

Caution urged

Outside Saudi Arabia, analysts urged caution toward the official optimism.

Bjornar Tonhaugen, chief oil market analyst at Rystad Energy, on Sept. 18 warned of “a clear risk of a slower restart of Saudi Arabian oil production.”

Rystad Energy estimates as much as 1.6 million b/d of Arab Light and 350,000 b/d of Arab Extra Light will remain shut in on average during September and October. It expects full restoration of processing capacity toward the end of the year.

“Repairs to the damaged spheroids and stabilization towers involve, to our understanding, access to expertise and spare parts which would take time to procure,” Tonhaugen explained. “Unless repairs happen much quicker than we expect, we estimate that the Abqaiq processing facility will only reach 90% capacity by mid-November. The outage would then be reduced to 500,000 b/d for the month of November at 5.2 million b/d production. For now, we expect production to remain slightly below full capacity for December.”

IEA ‘ready’

The IEA, which manages a program of oil inventories held by members for supply emergencies, said in a Sept. 18 statement it was “ready to take rapid action in the event of any sustained shortfalls.”

It said IEA member countries hold 1.55 billion bbl of oil in emergency stocks in government-controlled agencies, representing 15 days of consumption coverage.

“These can be drawn upon in an emergency collective action and would be more than enough to offset any significant disruption in supplies for an extended period of time,” IEA said.

IEA members also held 2.9 billion bbl of industry stocks in July, providing more than a month of demand coverage.

“These stocks include about 650 million bbl of obligated emergency stocks, which can be made immediately available to the market when governments lower their holding requirements,” IEA said.

Fatih Birol, IEA executive director, said the attacks in Saudi Arabia provide “a reminder that oil security cannot be taken for granted, even at times when markets are well supplied, and that energy security remains an indispensable pillar of the global economy.”

 The attacks

The strikes are believed to have involved cruise missiles and possibly drones targeting stabilization towers and spherical tanks. According to early reports, Abqaiq sustained 17 hits and Khurais as few as two.

Claims of responsibility by Houthi rebels in Yemen have been discounted by Saudi and US officials, who believe the Houthis could not have conducted the sophisticated operation. They openly suspect Iran, the government of which denies involvement.

Saudi Arabia leads a coalition conducting air strikes against the Houthis, who receive support from Tehran in their civil war against the Saudi-backed Yemeni government.

Frequently since early 2015, Houthis have fired mortar rounds, rockets, and missiles at targets in southern Saudi Arabia and at the airport in Riyadh. They also have attacked Saudi ships in the Red Sea.

In addition to the Abqaiq and Khurais attacks, Iran is accused of sabotage and direct attacks earlier this year on Saudi Arabia’s East-West Pipeline, on ships off Fujairah and in the Strait of Hormuz, and against a US drone.