Last week Saudi Aramco — the national oil company of Saudi Arabia and the world’s largest oil company — lifted a veil of secrecy around the company’s operations. For the first time in decades, operational details for Saudi Aramco were revealed in a bond offering. (A PDF link of the prospectus is here).
The immediate takeaway — which I covered in the previous article — was that the reported breakeven costs for Saudi Aramco were higher than the numbers that are frequently reported. However, other news stories have focused on an apparent bombshell around production at the Saudi Ghawar oilfield, which is the world’s largest conventional onshore oil field.
Conventional wisdom held that Ghawar has been producing 5 million barrels per day (BPD) of crude oil for decades. The prospectus notes that Ghawar has produced more than half of the Kingdom’s cumulative oil production to date, but it reported that 2018 production was only 3.8 million BPD.
That number resulted in several stories that suggested that Ghawar production has peaked and is falling fast. (For example: The Biggest Saudi Oil Field Is Fading Faster Than Anyone Guessed).
I don’t believe this number alone supports such conclusions. I think it is an example of confirmation bias, which refers to a person’s tendency to interpret information as confirmation of existing beliefs.
There is another possible interpretation. Saudi Arabia has long played the role of the world’s swing producer in the oil markets. They maintain spare production capacity. This has allowed them to raise and lower production according to their views of market demand and agreed-upon OPEC quotas.
So, it is possible that Ghawar is simply not operating at full capacity. Given the information from the prospectus, one can just as easily make this conclusion as to conclude that Ghawar production is in decline. I don’t know which interpretation is correct, but we shouldn’t make hasty conclusions based on limited information.
Notably, the people most likely to accept the interpretation that Ghawar is rapidly declining are the same people who reject Saudi Arabia’s claim — repeated in the prospectus — that its oil and gas reserves are equivalent to 257 billion barrels. Again, unless there is good objective reasoning for rejecting a reserves number while embracing a production number, this may be confirmation bias in action.