Recovery Analysis on the Ghawar Oil Field - Serkan Şahin

The attack on Saudi Arabia’s Abqaiq Oil Processing Plant on October 14th, 2019, served as a wake-up service for the entire oil market. Nearly 70% of all production of Sadi Arabia, the world’s swing oil producer, OPEC’s big brother, and the redesigner of the oil market with “netback price” model, stopped for 48 hours after the attack.

More importantly, the vulnerability of the security level of the world’s largest oil plant, which was thought to be extremely robust in terms of security, made everyone uneasy. Abqaiq, the most fragile point of production in Saudi Arabia, has faced such an accurate attack, and the fact that those who made the attack could escape without even seeing a response showed us how much of an oil supply could be a daily life issue as much as none of us could realize before.

The primary importance of the Abqaiq plant is the fact that is that it is processing a large amount of Ghawar production, world’s largest conventional oil field and that Ghawar oil cannot be exported unless processed here. Although there is no official data for Ghawar’s current production, Bilkent University Energy Policy Research Center estimates that it produces around 4.2-4.4 million barrels per day (mmbpd) as of the beginning of October 2019. We may have a better idea to understand the impact of the attack, considering that production has dropped to zero for 48 hours immediately after the Abqaiq attack.

Putting Ghawar back into full production and re-commissioning the Abqaiq plant will be a much more complex and more protracted process than one might think. According to our calculations, the total number of producing wells in Ghawar was around 1,500 before the attack. It is technically not possible to re-commence all of these wells simultaneously. This technical distress is the outcome of both limitations of logistics and thermodynamics. While it is possible to overcome logistical constraints with the power of Aramco, it is not that easy concerning thermodynamic constraints.

Ghawar is an old field, and in fact, it is so big that it is in production in the form of five giant field development projects. It is impossible to develop Ghawar as a single field. That is why we have been hearing complaints that in some parts of Ghawar there has been a significant increase in water production from crude oil for several years due to aging and the difficulty of controlling due to the enormity of the project. These complaints bring some beliefs that the cost of production at some points is much higher than the Saudi Arabia averages and that even in some regions production has come to a halt.

The discontinuation of production in the field after the last attack probably caused considerable damage to the pressure balance of the reservoir. Therefore, if these wells are rushed into production, some wells will no longer be able to produce oil again, causing irreversible conditions in the future production volume and costs. Therefore, the strategy that Aramco will follow is vital.

It has been said that while Ghawar will not be producing at full level, the oil needed will be met by stocks and demand to be cut by local refineries. In this case, two more problems will arise. The first problem is the possibility of an increase in prices due to the necessity of replacing the stocks, that Aramco is currently using to recover its declining export capacity, will downforce either export capacity or production capacity. The second problem is the cut in supply of products due to reduced refinery production will put pressure on the product’s market and, hence, on crude oil prices indirectly. Either way, it will surely have an impact on crude oil prices and supply-related risk premiums in the medium and long term. At the moment, we do not feel pressures on prices on the demand side due to the maintenance season at Asian refineries, but we would start to feel it from mid-October.

According to our calculations, it will take 3-6 months for the damage in Abqaiq to be fully repaired and the plant to be operational again at full capacity. According to Aramco’s statements, we realize that the production of approximately 3.5 mmbpd will be provided by the use of stocks and cut in local refineries. Assuming that the total local refinery processing capacity is 2.9 mmbpd and that these refineries will be kept at a production capacity of close to 50%, we expect a contribution of 2 mmbpd from stocks. In this case, for a 90-180 day disruption, a stored oil of between 180 and 360 million barrels (mmbbl) must be marketed. Assuming that most of the production cut is from Ghawar, we assume that 80% of Arabian Light crude oil, which is produced from Ghawar field, will be supplied from stocks.

With this account, even if it takes a year to replace stocks - where the pricing impact in the physical market is high in the future, Aramco will require an additional 1 mmbpd production increase. Forcing the Ghawar reservoir, which has been damaged by this recent attack, to further for this additional production capacity will have a negative impact on Saudi Arabia’s total output and export capacity in the medium and long term.

As we tried to analyze here, the Abqaiq attack was low initially, but intense in the following days. Understanding the implications of this attack is crucial for understanding the oil markets for the next two years. The outcome of the upcoming OPEC+ meeting will be in parallel with the impacts of this attack. Within the economic competition of the countries in the region, this attack has probably become a blow that is almost impossible to repair for Saudi Arabia; we will monitor this attack and its effects for a longer time.

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