Taking a breather: Saudi Oil Minister Ali al-Naimi says the country will slow plans to expand oil production capacity till projections of future demand become clearer
Saudi Arabia plans capacity growth ‘pause’
Top oil exporter Saudi Arabia has no plans to expand capacity further as long-term oil demand forecasts fall and alternative fuel supplies rise, Saudi Oil Minister Ali al-Naimi has said.
Saudi Arabia, the holder of the world's largest oil reserves sees no need to go beyond its 2009 capacity target of 12.5 million barrels per day "at least up to 2020", Al-Naimi told oil industry newsletter Petroleum Argus, Reuters reported.
Long-term future energy demand forecasts have fallen sharply, he said in the interview given to the weekly on 11 April, casting doubt on the need for more Saudi oil.
Demand forecasts have fallen as low as 106 million bpd in 2030, down from previous estimates as high as 130 million bpd. The world currently consumes around 86 million bpd.
"The projection of demand is on the decrease," Naimi said. "The projection of alternative fuels is on the rise. Therefore, it behoves us to pause, instead of expending unnecessary funds on expanding capacity that will probably not be needed," he said. "We will watch what happens in the coming years. It is a pragmatic position."
Saudi Arabia has spent tens of billions of dollars on projects to meet growing world demand and maintain spare production capacity of 1.5 million to 2 million bpd to deal with any unexpected outages in global supply. The kingdom has previously said it could take output capacity of 15 million bpd.
The kingdom is the only oil producer with substantial spare capacity that can be brought online quickly.
"We are idling at around 9 million bpd and we will reach capacity of 12.5 million bpd by 2009," Naimi said. "That is substantial spare capacity. As far as I know, all the latest projections, at least up to 2020, do not require anything higher than that."
A Saudi oil official said earlier this month that output stood at around 9 million bpd. Current capacity is around 11.3 million bpd.
Naimi said the oil market did not need more oil and crude inventories were "fairly high".
"Today there is no reason to jump up and down and say 'we will supply more crude' - because that request from consuming countries is probably politically driven rather than a fundamental requirement," he said.
UK Prime Minister Gordon Brown this week said he wanted to see collective action to persuade Opec to boost output and bring down prices. US President George W. Bush has also repeatedly urged Opec to supply more oil. But boosting Saudi oil output would destabilise the market, Naimi said.
"We would be flooding the market," he said. "The market cannot handle it, there is no demand."
The price of oil was divorced from oil market fundamentals, Naimi said. Oil has become a hedge for investors, like gold, against the falling value of currencies, he added.
"That is the reason for the pressure on the price of oil," he said.
US crude hit a record of $117 a barrel on Friday.
Rising costs for materials, construction and oil service contracting has pushed up the cost of adding new oil output capacity in Saudi Arabia to between $5000 and $8000 per barrel, Naimi said.
Capacity additions at the Shaybah oilfield, where state oil company Saudi Aramco is adding 250,000 bpd to current capacity, cost around $5000 per barrel he said. At the giant Ghawar field, additional capacity costs were around $2000 per barrel.
The highest depletion rates at Saudi oilfields were around 2% to 3% per year, Naimi said. Reservoir management and drilling prevented higher decline, he added. Decline rates at existing wells were around 6% to 8% per year.
The only capacity addition that Saudi Arabia has detailed beyond 2009 is the 900,000 bpd Manifa field, which is to replace decline at other fields, Naimi said.
"Manifa is really a 'maintain potential' facility,” Naimi said. “It does not add to our spare capacity."