After failing to achieve the slightest semblance of success in the two oil price wars it started – the first runs from 2014 to 2016, and the second runs from early March to effectively the end of April this year – one could assume that important lessons may have been learned by the Saudis on the dangers of participating in such wars again. Judging by several statements last week, though, Saudi Arabia has learned nothing and may well start exactly the same kind of oil price war in exactly the same way as it did twice before, and inevitably lose again with exactly the same catastrophic effects on and its colleague OPEC -leden. Particularly in the problem of Saudi Arabia is the collective self-distribution of those at the top of their government over the key figures of the Kingdom regarding its oil industry who support the whole regime. These abuses are apparently not discouraged by any of the senior foreign advisers who make enormous fees and trade profits for their banks from the various foils of Saudi Arabia, mostly oil price wars. It is, in the truest sense of the word, a perfect example of ‘The emperor’s new clothes’although in this case it applies not only to Crown Prince Mohammed bin Salman (MbS), but to all seniors associated with the oil sector of Saudi Arabia. One of the most obvious examples of this is the CEO of the flagship hydrocarbon company Saudi Arabia, Saudi Aramco (Aramco), Amin Nasser, who said last week – astonishing to those who even know a modicum about the global oil markets – that Aramco is ahead with plans to increase its maximum sustained capacity (MSC) to 13 million barrels per day (bpd) from 12.1 million bpd.
Aside from the very pointless significance of this posturing in a world already engulfed in oil as a result of the negative questioning effect of the COVID-19 pandemic and the output hang of the oil price war just ended, this remark was of the third rank of Saudi -Arab oilman (according to MbS, albeit by the worst possible definition, and Minister of Energy, Abdulaziz bin Salman al Saud), is very misleading. As such, it has been flowing into the collective understanding of the oil market since the 2014-2016 oil price war that everything Saudi Arabia says about its oil industry should not be taken for granted without much additional fact checking. Regarding the statement “maximum sustained capacity”, to begin with, this term is one that has been used by Saudi Arabia several times since the first oil price war disaster to cover for two other wild runs related to the real level from their crude oil reserves and up to the real level of their spare capacity.
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Before the war on oil prices in 2014-2016, Saudi Arabia had declared for decades that it had a spare capacity between 2.0-2.5 million bpd. This implied – given the widely accepted (but also erroneous) belief that Saudi Arabia had pumped an average of around 10 million bd per day for many years (it actually averaged just over 8,162 million bd per pump from 1973 to 2020 ) – that it had the potential to increase its production to about 12.5 million bd if needed. Even as the oil price war of 2014-2016 escalated and new heights of economic destruction swept Saudi Arabia and its OPEC counterparts, the Kingdom could on average produce no more than about 10 million bd. Essentially, the Energy Information Administration (EIA) defines spare capacity specifically as production that can be brought online within 30 days and stays for at least 90 days, while even Saudi Arabia has said it needs at least 90 days would be to move rigs to drill new wells and increase production with an additional 2.0-2.5 million bd.
Instead, from that point on, Saudi Arabia began to try to drain this reserve capacity through semantic trickery. Senior Saudis speak of ‘capacity’ and of ‘supply to the market’ instead of ‘output’ or ‘production’ and these two groups of terminology mean very different things. ‘Capacity’ (as its synonym, as far as the Saudis are concerned, ‘supply to the market’) is related to the use of crude oil supplies held in storage at all times, plus the deliveries that can be deducted from contracts and redirected in those stored supplies. It could also mean that oil was purchased clandestinely from other suppliers (particularly Iraq in the last war for oil prices) through brokers in the spot market and subsequently passed on as own oil transportation (or ‘capacity’). Exactly the same semantic trickery was used to cover the actual supply shortages in the aftermath of the September 2019 attacks by the Iranian support Houthis on the Khurais and Abqaiq facilities of Saudi Arabia, with the Minister of Energy talking of ‘capacity’ and later of ‘supply to the market’, which are absolutely not the same thing as actual production at the source. Related: Low prices put the brakes on Peru’s oil ambitions
The reason why Saudi Arabia is trying to hide its real production and also save figures of capacity is that oil is the only real stone of the geopolitical power of the Kingdom since its discovery in the late 1930s and that is also the reason why it lies about its crude oil reserves. Specifically, in early 1989, Saudi Arabia claimed proven oil reserves of 170 billion barrels, but only a year later, and without the discovery of major new oil fields, the official reservation somehow grew by 51.2 percent, to 257 billion fats. Shortly thereafter, it was increased again to just over 266 billion barrels, a level that continued until a slight increase in 2017 to just over 268 billion tons, with, again, no major new oilfield discoveries made, a figure that – depending on who you believe – has increased again. At the same time, as noted, Saudi Arabia extracted an average of 8,162 million bpd from the beginning of 1973 to the beginning of 2020, totaling 2.979 billion tons of crude oil each, or 137.04 billion tons of crude oil from the ground. hell over that time period. Given this tangible and proven production, with no major new field discoveries (and declining production at many of its nuclear oil fields, including Ghawar), it is mathematically very difficult to see how it is possible that Saudi Arabia’s waste reserves are not actually around 120 billion barrels (and that uses the very dubious 257 billion barrels basic figure) and not the stated 268+ billion barrels.
Given the broader public awareness that the key figures on which Saudi Arabia’s remaining geopolitical and economic power is based are essentially nonsense, Aramco’s share price – in the normal circumstances of a well-functioning market – can be considered vulnerable. However, that was the absolute desperation on the part of MbS not to lose personal credibility by allowing the omni-toxic Aramco IPO to fail – at least in Saudi Arabia – that very few of the stock buyers do too much have losses. In order to eventually sell even the 1.5 per cent stake (cut from the originally adjusted 5 per cent), Saudi banks were ‘encouraged’ to offer lend money to retail experts on a 2-to-1 ratio for each riyal they would invest in Saudi Aramco (compared to the average limit of the leverage ratio for loans from 1 to 1). In addition, the IPO’s international advisory banks were there to include all the snails in the offer that remained after the sovereign wealth funds of neighboring states were equally ‘encouraged’ to participate in the offer, as were several seniors. Saudis were afraid of a re-execution of them treatment at the Ritz Carlton in 2017.
Now, in addition to these levies, Aramco has also trusted this small group of investors that it will meet the minimum payout of US $ 75 billion that it was forced to pledge to ensure that it even sold 1.5 percent of the company . Because Aramco’s share price is now indeed linked to MbS’s position at home, Aramco has little choice in the matter, despite the announcement last week that its net profit fell to 73.4 percent in the second quarter of this year. This was entirely, ironically, by the beginning of Saudi Arabia’s yet another oil price war to destroy the American shale sector by crashing prices by producing too much at a time when demand was already being destroyed by the COVID-19 pandemic. Such figures will of course become completely meaningless if Saudi Arabia starts another oil price war in the not too distant future, as is the clear implication of the announcement that it will increase its MSC to 13 million bpd from 12.1 million bd, to the result for Saudi Arabia next time could be the cow end of the al-Saud dynasty in the Kingdom.
By Simon Watkins for Oilprice.com
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