Useable Saudi Oil Output Capacity Up.

One fairly good news is that Saudi Aramco has raised its immediately useable crude oil production capacity to 10.8m b/d. This has come as the kingdom rushes to bring fields online to meet expectations of continued demand growth. Sustained production, defined as the ability to pump at that level for more than three months, rose from 10.6m b/d in January, said Nawaf Obaid, head of the Saudi National Security Assessment Project, an independent consultancy which works closely with the Saudi government on security and oil issues.

Saudi Aramco is pumping about 9.5m b/d and has offered to boost supplies to refiners. But the extra crude is undesirable sulphur-rich Arab Heavy. Provided there will be takers, Saudi Aramco can temporarily surge output to 11.2m b/d, Obaid said. But another Saudi source told APS this week surge output could go as far up as 11.3m b/d, though the volume of sour grades ranging from Arab Medium to Heavy would be so big that Heavy's price differential below WTI for US-bound shipments could exceed $15/b during the peak American driving season this summer.

Saudi oil output peaked at 10.4m b/d in December 1978. Saudi Aramco's programme aims to bring on stream at least 2.5m b/d of new crude oil production capacity by 2009 for a sustainable total of 12.5m b/d and a temporary surge of 13.8m b/d. The good news is that most of the additional capacity will involve lighter and less sour grades.

Saudi Aramco has slashed the official selling prices of its US-bound crudes by $1.55 to $2/b for cargoes loading in May. Arab Heavy saw the biggest fall. The price of Arab Medium was cut by $1.80/b and Arab Light by $1.55/b versus April contract levels. Traders had expected sharper cuts given the ample supply of alternative barrels in the refinery-rich US Gulf Coast. Saudi Aramco prices its US-bound crudes at a discount to WTI which soared to $59/b recently. The FOB May discounts to WTI for cargoes delivered ex-ship into the Louisiana Offshore Oil Port (LOOP) are as follows: (US $/barrel): Arab Light -6.60, up from -5.05 in April; Arab Medium -9.25, up from -7.45 in April; and Arab Heavy -12.35, up from -10.35 in April.

For Asia, the May premium to the sweet Arab Super Light was raised 45 cents to $7.20/b above the Oman/Dubai price average. Arab Extra Light was raised 50 cents to Oman/Dubai +$3.90/b. European buyers lifting at Ras Tanura in May will have a $1.20 cut to Arab Light prices which were down to BWAVE -$2.45/b. Other grades were reduced by up to $1.90. European Sidi Kerir buyers of Extra Light in May were cut by 90 cents while Arab Light was down $1.55/b. The European cuts reversed large price hikes which shocked lifters last month but dealers said the May prices were still too high compared with European sour benchmark Urals. A European refiner was quoted as saying of Saudi Aramco: "They made a big mistake lifting prices in April. I don't think these cuts now are sufficient".

The Saudi move, announced on April 5, proved that discounts for lower-quality grades across world markets will deepen further. This added pressure on rival suppliers from Russia, North Africa and the Middle East also to widen price differentials, threatening a repeat of last year's glut of lower-quality crudes, as exporters acted to maximise sales and improve margins for buyers. At the end of its March 16 ministerial meeting in Isfahan, OPEC said it expected to keep raising production through the year to prepare for an expected demand surge in the fourth quarter. As most of the group's spare capacity is in production of heavy/sour crude oils, widening quality differentials are inevitable as the group steadily raises output.

Heavy/sour supply is a mismatch for refinery demand for light/sweet crudes needed to make gasoline and diesel for world motorists going on summer vacation. In 2004, low-quality grades plunged to record discounts against light/sweet markers as OPEC pumped more crude than it had done in 25 years in an effort to meet surging Chinese and US demand. Refiners simply did not have enough high-tech conversion capacity to process the flood of medium and heavy/sour crudes hitting the market. For a while the Tapis light/sweet crude recently rose above $60/b.

Some lightening in Saudi supplies late last year briefly helped narrow quality differentials, as Saudi Aramco expanded output of Arab Light by 800,000 b/d when it began production from its Qatif and Abu Saafa oilfields. The tendency for the quality differentials to widen will only be reversed when refiners upgrade plants to process heavier crudes, or new refineries are built to handle increasing heavy crude supplies.

Saudi Aramco is to build a 400,000 b/d heavy conversion export refinery in Yanbu' to turn Arab Heavy into sweet fuels for markets on both sides of Suez. This was disclosed by Khalid Al-Bu'ainain, the NOC's vice president for refining at a recent energy conference in Dubai. The plant, to cost $4-5 bn, should be a JV with one or more international partners. He said: "We are talking across the globe to all refiners", adding that the deal should be finalised "within a year or so". Yanbu', on the Red Sea, is strategically located and the new refinery could supply the US East Coast with high-quality gasoline, low-sulphur diesel to Europe and naphtha to East Asia. India's Hindustan Petroleum Corp. Ltd. (HPCL) has held "preliminary talks" for a stake in the refinery, HPCL Chairman M.B. Lal was quoted as saying on April 5. HPCL has also offered Saudi Aramco a stake in its Vishakhapatnam refinery which will double capacity to 300,000 b/d in three years. Lal visited Saudi Arabia with India's Petroleum Minister Mani Shankar Aiyar late last month.

Saudi Aramco has two JV export refineries: a 320,000 b/d Sasref plant at Jubail with Shell, and a 400,000 b/d Samref complex at Yanbu' with ExxonMobil. The kingdom is to invest billions in its refining system, which can process 2.1m b/d of crude. Its refineries can handle 450,000 b/d of heavy crude, although the system is running at less than 100,000 b/d of shch grades, Al-Bu'ainain said. Spending for expansion and upgrading plants in the next five years is $1.5-2 bn. Saudi Aramco is considering revamping its Ras Tanura refinery at $4-5 bn and adding a petrochemical complex. Saudi Aramco and Sumitomo Chemical Co. are investing $6-7 bn to upgrade the Rabigh refinery and build a petrochemical plant by 2008. Saudi Aramco is in talks with the state-owned Indian Oil Corp. (IOC) for a stake in IOC's 180,000 b/d Paradip refinery, which is likely to be built by 2010.

Addressing the 7th annual meeting of graduates of MIT's Saudi branch on April 5, Saudi Petroleum and Mineral Resources Minister Ali Al-Naimi said the kingdom might raise its recoverable crude oil reserves by 200 bn to 461 bn barrels either through new finds or by increasing what it produces from existing fields. "These huge reserves enable the kingdom to remain a major oil producer for between 70-100 years, even if it raises its output capacity to 15m b/d...during the next 15 years", Naimi said. He said Saudi Arabia had raised its gas output capacity from 3,000 MCF/day to 7,000 MCF/d.

Naimi said Saudi Arabia had offered to build two large oil refineries in the US. "Yet until today our American friends have not responded to our offer", he said, adding: "The kingdom is considering investment in building refineries in India, China and other countries". No refinery has been built in the US since 1976.