The Rising Influence of Rising Affluence

[DewDiligence]

Saudis See No Reason to Raise Capacity

[To be read in conjunction with the chart in #msg-60337653.]

http://online.wsj.com/article/SB10001424052970203388804576618772847536618.html

›OCTOBER 10, 2011
By SUMMER SAID

DHAHRAN, Saudi Arabia—A senior oil executive said Saudi Arabia is unlikely to proceed with plans to raise its oil output capacity to 15 million barrels a day, as expansion plans in other producing countries such as Iraq and Brazil should be enough to satisfy world markets.

"There is no reason for Saudi Aramco to pursue 15 million barrels [of output capacity]," Saudi Arabian Oil Co. chief executive Khalid Al Falih said in an interview Saturday.

"It is difficult to see [an increase in capacity] because there are too many variables happening," he said. "You've got too many announcements about massive capacity expansions coming out of countries like Brazil, coming out of countries like Iraq. The market demand is addressed by others."

Saudi Arabian Oil Co., better known as Saudi Aramco, is currently producing about 9 million barrels of oil a day, having raised output sharply earlier this year to make up for lost output from Libya. Saudi Aramco's current output capacity stands at 12 million barrels a day, though the kingdom as a whole could produce 12.5 million barrels a day if output from the so-called Neutral Zone shared with Kuwait is taken into account.

In 2008, when oil prices surged to a record $147 per barrel, Saudi Arabian oil minister Ali al-Naimi said the kingdom was examining plans to raise the country's production capacity to 15 million barrels a day in an attempt to reassure markets concerned about long-term security of supply.

With most members of the Organization of Petroleum Exporting Countries producing at full capacity, the amount of Saudi Arabia's unused output is closely watched by oil markets.

Saudi Arabia is the only OPEC state that can significantly raise output in order to offset market disruptions, such as the loss of Libyan output earlier this year and the suspension of Kuwaiti output during the Iraqi invasion of 1990. Two of the strongest periods of oil price increases—from 2003 to 2005 and 2007 to 2008—coincided with OPEC spare capacity falling to historic lows.

Mr. Falih's comments suggest Saudi Arabia is comfortable with is current level of spare capacity.

In recent weeks, oil prices have retreated on fears of a slowdown in the global economy and as Libya has started to restore its oil production following the toppling of Moammar Gadhafi. Meanwhile, Iraq is pushing ahead with plans to raise its export capacity from its southern ports by close to one million barrels a day, and Brazil is developing major offshore oil finds.

"Our objective is not to grow our production for the sake of growing our production," Mr. Falih said, "but to be there for the market if the market needs it, and we are waiting to see what happens on the supply side as well as how demand stabilizes."

Mr. Falih said Saudi Aramco remains committed to the rest of its massive investment program, worth about $125 billion over the next five years, despite the troubles in the global economy. The program involves increasing refining capacity by 50% as well as other upstream and downstream developments.

?"Our planning horizons are in the decades and most of our investments are investments that will do very well at the end of an economic recession so we will pursue them…regardless of what happens in Europe or in the U.S.," he said.

?Saudi Aramco, fully owned by the kingdom of Saudi Arabia, has activities in exploration and production, refining, distribution, shipping and marketing.

In recent years, Saudi Aramco has been plowing billions of dollars into developing its petrochemical industry in a bid to add value to Saudi Arabia's vast hydrocarbon resources and to create jobs for its young and growing population.

Earlier Saturday, Saudi Aramco and Dow Chemical Co. signed a joint-venture shareholders' agreement to build one of the world's largest chemicals plants in the oil-rich kingdom's Eastern Province, on the Persian Gulf coast, at a cost of around $20 billion.

The project, known as Sadara, represents Aramco's second major investment in a large-scale petrochemical complex in the kingdom. It is already involved in a joint venture with Sumitomo Chemical Co. Of Japan in a plant at Rabigh on the Red Sea.

As part of its focus on petrochemicals, Saudi Aramco will pursue future investment opportunities in the sector with China National Petroleum Corp., or CNPC, Mr. Falih said.

Mr. Falih said he was concerned about global economic stability and the ongoing European debt crisis but added that he was confident that Europe's leaders and multilateral organizations would work together to resolve the problems.

?"But if [the European debt crisis] does not get resolved, there is that risk of contagion," he said. "Financial markets are very strongly interconnected."‹