Global Insight Perspective | |
Significance | Dammam's redevelopment was estimated to cost some US$1.2 billion—or at least US$24,000 per barrel of capacity—due to the need for development work in populated areas of the country, as well as the use of enhanced oil recovery (EOR) on maturing reservoirs. |
Implications | The move reflects a wider cost evaluation exercise within Aramco, already resulting in postponements in refining-sector awards and the renegotiation of the heavy oil Manifa contract as the pressure to perform is lifted by falling oil prices and subdued global demand. |
Outlook | With a US$90-billion spending drive in progress to 2012 and downward pressure on raw materials prices, if not engineering procurement and construction (EPC) costs, there is plenty still to review on Saudi hydrocarbon spending. Unlikely to be touched, though, are the major pledged upstream increments to meet targets of 12 million b/d capacity through 2012, and investment in natural gas developments essential for domestic industry and power generation. |
Cost Escalation
Saudi Aramco has announced plans to halt redevelopment plans for the Dammam oilfield, which would have yielded some 50,000 b/d of additional crude supply, in addition to a valuable 100 mmcf/d of gas to be utilised in the domestic system.
Unpalatable costs have been cited as the reason for the cancellation. Latest estimates suggest a price tag equivalent to some US$24,000 per barrel of capacity—for an onshore development—due to the location of the field under populated areas and the need for enhanced oil recovery (EOR) techniques (see Saudi Arabia: 17 October 2008: Saudi Aramco Prepares Study for US$1.2-bil. Boost to Dammam Field Capacity).
The move follows a number of other recalibrations of new upstream and downstream capacity investment by the state oil company, included in which is the renegotiation of the heavy oil Manifa project, which was awarded to contractor Snamprogetti at the peak of the cost cycle, taking its estimated costs from US$10 billion to US$20 billion. While the 900,000-b/d Manifa increment is still on the project slate, aimed at compensating for decline rather than increasing net capacity, the renegotiations could see that project pushed backwards in order to bring down costs (see Saudi Arabia: 24 November 2008: Snamprogetti's Manifa Contract Under Price Renegotiation, Not Cancellation with Saudi Aramco). The Karan gas field development tender could also be subject to delays after the revision of its scope in late October, putting up capacity to 1.8 bcf/d from 1.5 bcf/d, as the Kingdom struggles to relieve constraints in domestic gas availability (see Saudi Arabia: 24 October 2008: New Karan Field Scope Increases Delay on Saudi Arabia's Bid Submissions Further).
The other major developments to have been hit by the review have been in the Kingdom's refining programme. Tenders for the tie-in between Saudi Aramco and Conoco Phillips at Yanbu' are now officially delayed for six months, in order to make the most of falling material costs, even if engineering procurement and construction (EPC) contractor costs remain high (see Saudi Arabia: 7 November 2008: Saudi Aramco Reviews Long-Term Plans; Puts Refining Project with ConocoPhillips on Hold). Total's Jubail refinery has also extended bid deadlines to February, while the fate of the Jizan refinery remains unclear.
Outlook and Implications
In the run-up to the July 2008 highs, Saudi Arabia proved willing to make a number of upward revisions to costs in order to get projects completed on schedule and restore its credibility as a reliable and far-seeing supplier of first resort, following almost universal criticism in the constrained environment of 2004–05. That has seen cost escalation absorbed in a number of developments—particularly upstream oil, where Khursaniyah and Khurais were particularly affected.
However, the turn of the market since July resulting in a 60%-plus fall in oil prices, in tandem with falling materials costs, has provided some "wiggle room" for the market leader, with less pressure to deliver on schedule and more opportunities to take a closer look at a changing market. While it is still targeting capacity of 12 million b/d (or 12.5 million b/d with production from the Partitioned Neutral Zone, PNZ) for the end of 2009, it is the maintenance of these levels to 2012 that is apparently being allowed to slip, not least because the market leader will have an estimated 4 million b/d of spare capacity by the end of 2009 if it maintains its current OPEC quota of nearly 8.5 million b/d, far and away above its own ambitions for spare capacity. In this context, the loss of Dammam from the project slate is relatively small: a reflection of the wholesale reverse in market sentiment since this time last year, when any shift in Saudi pledges would have been treated with alarm, rather than with understanding of its reluctance to invest in new capacity that will immediately become spare.