By Steven Mufson
Washington Post Staff Writer
Saturday, November 17, 2007
SHAYBAH, Saudi Arabia -- For a decade, Hussain al-Obaid has been working in the soft red dunes that stretch across the vast desert known as Rub al-Khali, or the Empty Quarter. In summer, temperatures climb as high as 130 degrees and sandstorm winds gust up to 80 mph, though on a mild fall evening the stars shine and the air is mild.
A graduate of the University of Oklahoma at Tulsa, Obaid is the engineering superintendent of a project that pumps half a million barrels of crude oil a day from beneath the sand and delivers it through a 400-mile pipeline. The oil is some of the world's purest, highest-quality crude, easily refined into gasoline.
To complete the project, construction crews built a road across the desert and moved 100 million cubic feet of sand to make way for an airplane runway.
Next year, Saudi Aramco, the state oil company, plans to boost production by 250,000 barrels a day, one step in an effort to expand the kingdom's oil-production capacity to 12.5 million barrels a day from the 11.3 million barrels. The new production is part of a strategy that could ease market tension and is designed to preserve Saudi Arabia's ability to produce 1.5 million to 2 million barrels a day more than its actual output in the face of rising world oil demand, said a senior Saudi Oil Ministry official who spoke on condition of anonymity.
"Tell me of any other country that's made commitments this broad on its own," Prince Abdulaziz bin Salman, the deputy minister of petroleum and natural resources, said during preparations for this weekend's summit of the Organization of the Petroleum Exporting Countries in Riyadh, the Saudi capital. "We are the only country with a policy of maintaining excess capacity."
The expansion plan is a reminder of just how vast Saudi oil reserves are and how little exploration is needed to maintain output. Last year, according to Saudi Aramco's annual report, the state-owned oil firm drilled just 13 exploration wells. In the United States, oil companies drilled 4,005 exploration wells, according to the Energy Information Administration.
This field, Shaybah, was discovered in 1968. Thirty years later, technological advances that permit oil rigs to drill horizontally as well as vertically enabled Saudi Aramco to start exploiting the field by putting the rigs on stable salt flats and drilling under 500-foot dunes rather than through them. The kingdom is considering adding more production later.
It isn't only the size of the Shaybah expansion that matters. It's the oil's extremely high quality. Most of the spare oil production capacity in Saudi Arabia is much thicker, lower-quality crude with high sulfur content, which relatively few of the world's refineries can handle. Although most of the new Saudi production that will be brought in over the next year is high-quality oil, later production increments will be forced to tap the kingdom's heavier crude reserves, Saudi Aramco said.
To increase the market for those crude grades, Saudi Arabia is building or expanding refineries so that they will be able to process Arab heavy as well as Arab light crude oils. Saudi Aramco is a partner with Shell Oil in a $7 billion expansion and upgrade of a refinery in Port Arthur, Tex. It has signed agreements with ConocoPhillips and Total to build 400,000-barrel export refineries in the Saudi towns of Yanbu and Jubail. It is also a partner with Exxon Mobil and Fujian Petrochemical in tripling the capacity and upgrading a refinery in China's Fujian province.
Saudi Aramco is expanding its refining by nearly 50 percent, with almost all the new capacity capable of processing heavy, sour crude.
In the meantime, demand for the low-quality crude is limited. Last week, even as crude prices rose, Saudi Arabia increased the discount on lower-quality oil by more than $4 a barrel. (It had reduced the discount earlier in the year.) Some refiners in the central United States were paying a premium over the New York Mercantile Exchange price to ensure delivery of the high-quality West Texas intermediate grade they needed. "The explanation is that there is a shortage of light, sweet crude, not crude," said Philip K. Verleger Jr., an oil consultant in Aspen, Colo.
This week, Saudi Oil Minister Ali al-Naimi reiterated pledges that Saudi Arabia would eventually deliver 1 million barrels of oil a day to China and keep the world well supplied.
Some analysts said that could be difficult because many of Saudi Arabia's oil fields are old and in decline. The rate of natural decline in Saudi fields was slightly faster than anticipated this year, according to a Saudi strategist who spoke on condition of anonymity because he is not authorized to speak publicly on the subject. From 2005 to 2009, output from existing Saudi fields is expected to decline by 800,000 barrels a day. But Saudi Arabia's output capacity is about the same as it was 30 years ago.
If the amount of oil the Saudis can produce is open to question, the cost of production is not. Naimi estimated that it costs Saudi Arabia about $2 to produce a barrel of oil. Developing new fields is also cheap, he said, running about a quarter or less of exploration and development costs elsewhere. Asked whether Saudi Arabia would be interested in investing in Canadian tar sands, which require more than $40 per barrel in investment, Naimi said there would be no point.
Sitting in the twilight looking out over the complex that houses 740 workers in Shaybah, Obaid said the prospects still seem immense. The oil wells are within 10 miles of the base here, but unexplored dunes of the massive Empty Quarter stretch much further. Obaid said, "We have huge areas still."