As Saudi Arabia hosts a key oil summit in Riyadh this weekend, its national oil company, Saudi Aramco, has begun testing new facilities in the Khursaniyah field that are expected to raise the kingdom’s production capacity by about 500,000 barrels a day by early next year.
The extra capacity will cover almost a quarter of next year’s projected rise in demand, estimated by the International Energy Agency (IEA) – the west’s energy watchdog – at 2.1m b/d. For Ali Naimi, the Saudi oil minister, this is proof that fears of an imminent “supply crunch” are inaccurate.
The news also reinforces the message from Opec, the oil producers’ cartel, at its summit, which will attempt to underline the reliability of supply and Opec’s concerns about continued world economic growth.
Fears that runaway demand from developing nations, particularly China, will outstrip supply from Opec in the medium term are helping to propel oil prices towards $100 a barrel.
Those fears were exacerbated last week when the IEA gave warning in its World Energy Outlook that a supply crunch before 2015 was possible.
The IEA said that although investment and new production capacity were expected to increase, it was uncertain whether this would be sufficient to offset both the decline in output at existing fields and the projected rise in demand.
The agency also cast doubt over the willingness and ability of national oil groups to increase installed capacity, forecasting that Opec would need almost to double its production capacity to about 60.6m b/d by 2030.
The chief executives of Total and Conoco, two of the world’s biggest oil companies, have recently expressed concerns that global crude production will never reach 100m b/d.
Without making any specific references on Monday, Mr Naimi criticised “pessimists”, saying they were creating a propitious environment for speculators and hedge funds to invest in the oil market and push prices above what was warranted by market fundamentals. The scepticism was “doing a lot of damage to the stability of the market”.
Saudi Arabia’s expansion plans would allow the country to increase sharply its exports to China, the world’s second-largest oil consumer. Mr Naimi said the kingdom would ship about 360,000 b/d to two new Chinese refineries next year, an increase of 30 per cent from current levels. “Why are people so pessimistic?” he asked. He pointed out that Saudi Arabia had a production capacity of 11.3m b/d but was pumping only about 9m b/d.
“The demand is not there; the customers are not there,” he said, referring to the extra oil.
The IEA forecasts that oil demand will hit 87.6m b/d in the fourth quarter of the year – up 2.1m b/d from the third quarter. Without another Opec increase on top of the 500,000 b/d the cartel agreed last September, the IEA fears that crude oil inventories will suffer a larger-than-usual draw.
In an attempt to reassure consuming countries, however, Mr Naimi said that Saudi Arabia and other Opec members were thinking about the impact of the oil price on future economic growth.
“We are focused on economic growth, particularly of developing countries. We work very hard and consciously to make sure whatever action we take doesn’t dampen economic growth worldwide,” he said.
He said Opec did not fear the impact on oil demand from alternative sources of energy, such as biofuels, for the next 10 years. But he felt that the current attempts to stop using fossil fuels were misguided.
“We are pragmatic,” he said. “The world will continue to need fossil fuels. If it is damaging the environment, let us apply technology to clean it and continue using them.”
Get alerts on Front page when a new story is published