Oil markets are erratic — once again. Markets are in volatile state, hovering around mid-70s. New peaks are being feared, at least in the shorter run. And all this is very exciting and interesting for people involved intimately with the industry.
And as the bull run continues, investment in oil search within major OPEC members is also at the highest level in two decades. OPEC says a total of 336 oil rigs — the best estimate of drilling activity at a given time — were in operation within its member countries last year, an increase of 11.5 percent since 2005.
This rig count was the highest since the peak recorded by the OPEC in 1982, when the oil price hit an all time high, in today’s value, of about $90 a barrel. The current level of activity within OPEC was thus all the more interesting and indeed perplexing, too, in the backdrop of the IEA warning of an “oil supply crunch” looming over the next five years as global economic growth accelerates, crude consumption rises and output falls.
An estimate of the hectic activity in Saudi Arabia could be gauged form the fact that Saudi Arabia drilled 382 new wells last year, the highest number for any year since 1980. The number of rigs in operation in the Kingdom was reported to be around 120 by the end of last year.
The Kingdom is currently investing billions of dollars to boost its production capacity to 12.5 million barrels a day by 2009, up about 11 percent from current levels. 10 major projects are under execution within the Kingdom.
The ongoing work in Khurais is believed to be the largest development in Saudi Aramco’s history. Khurais is thought to contain 23 billion barrels of oil reserves, most of it is light, sweet crude that’s easy to refine. The adjacent Abu Jifan and Mazalif fields hold an estimated 4 billion barrels.
The project required 310 horizontal wells to access all of the reservoirs, but together the fields should produce an extra 1.2 million barrels of oil per day by 2009.
The Kingdom is reportedly endeavoring to make wells reach more extensively than ever into oil bearing formations through Extreme Reservoir Contact (ERC) wells. This technology entails a quantum leap forward in multilateral drilling.
According to a recent report, other OPEC members have also embarked upon significant expansion plans to increase their capacity, so as to ensure regular and secure oil supplies.
In the medium term, over 100 projects with an estimated cost of some $120 billion are being undertaken by OPEC member countries (excluding Iraq). These projects are in addition to all energy infrastructure projects, such as pipelines, export terminals and downstream expansion.
As a result of all these projects, the OPEC crude capacity is projected to reach 39.7 million barrels per day by 2010, from the current 35.7 million bpd. Excluding Iraq, the OPEC capacity is projected to increase to around 36.9 mbd by 2010 from 31.7 mbd in 2005.
Talking to Dow Jones newswires a couple of months back, OPEC Secretary General Abdalla Salem el-Badri said OPEC members had earmarked $130 billion for undertaking capacity expansions. This would add 6.7 million barrels a day to its overall capacity, he added. Indeed in the current market scenario, with bulls holding the sway, investments being undertaken by the OPEC to increase their current capacities could go a long way in soothing the frayed nerves in the market.
However, one has to concede that this level of investment has only been feasible in view of the firm global oil prices and the consequent record capital inflows to the producers. Things are interrelated. The OPEC posted nominal record revenue of nearly $650 billion last year on high crude prices and increased oil production, its report said.
However, in view of the ongoing and constant rhetoric in the market of finding alternatives to crude oil so as to lessen dependence on the Middle Eastern oil, Saudi Arabia and other producers are being forced to look at their expansion programs closely once again. Capacity expansion is a costly affair, especially when undertaken in an era of galloping project costs. In the light of the ongoing rhetoric, some of those projects may become practically unfeasible and may make investors shy to get into a risky venture.
The Kingdom has already indicated that after completing its current wave of capacity expansions, it will have a look at the market situation before undertaking any further expansion.
