“At that time, while the conjunction of declining production and rising rig counts was striking, I wasn’t ready to draw firm conclusions on the data through August-October (depending on agency). Recently, Jim Hamilton raised the same questions:
The first possibility is that the Saudis could still pump 10 mbd or more today if they wanted to, but they are cutting back production and exploring like mad because they put an extremely high value on having 2-3 mbd of excess capacity. If so, the recent price behavior suggests that the reason they would seek such capacity is not because they want to stabilize the price, but because it puts them in an incredibly powerful negotiating position. For example, the ability at any time to flood the market could be used at an opportune moment to undercut expensive alternatives such as oil sands that require an oil price over $50.
The second and more natural interpretation is even more disturbing: the mighty Ghawar oil field is already in decline, and the Saudis don’t want anyone to know.
Overall, I feel this data is clear enough that I’m willing to go out on a limb and conclude the following:
- Saudi Arabian oil production is now in decline.
- The decline rate during the first year is very high (8%), akin to decline rates in other places developed with modern horizontal drilling techniques such as the North Sea.
- Declines are rather unlikely to be arrested, and may well accelerate.
- Matt Simmons appears to be right in Twilight in the Desert, but the warning did not come until after declines had actually begun.”