Saudi Arabia will increase crude oil production capacity to 12.5-mil b/d by the end of the decade but meeting future oil demand will be a challenge for the world's producers because OECD production has declined and growth in the former Soviet Union has slowed, a Saudi oil official said on Jan 25. Ahmed A Al-Subaey, general manager of Saudi Petroleum Ltd in Tokyo, Saudi Aramco's Japanese arm, said some of the additional capacity would offset natural decline, while the rest would allow the company to expand maximum sustained capability from 10.5-mil b/d to 12-mil b/d, he told an international industry symposium organized by the Japan Cooperation Center, Petroleum.

"These capacity levels provide us with a cushion of 1.5- to 2-mil b/d spare production capacity, in keeping with Saudi Arabia's commitment to enhance market stability," Subaey said. Saudi Aramco also had an "aggressive exploration program" to expand the kingdom's current crude reserve base of 260-bil bbl, roughly a quarter of the world's proven reserves, Subaey said. He did not give target figures.

Saudi oil minister Ali Naimi has said that further exploration could add another 200-bil to reserves. But in spite of this, meeting future demand will still be a challenge with demand for OPEC oil expected to increase over time because of declines in other producing areas. OPEC's 11 members currently account for roughly 40% of global oil production of some 85-mil b/d. Subaey referred to declines in production from Organization for Economic Cooperation and Development member states, which include leading producers the US, Norway and the UK. He said that once strong growth in the former Soviet Union had slowed due to lack of infrastructure and depletion of existing giant fields.

Call on OPEC oil set to increase

"As a result, the world must look beyond many of the traditional OECD suppliers for the new production needed to meet rising demand, and the call on OPEC production will increase over time," Subaey said. "Maintaining that kind of capacity in reserve isn't cheap, but it does provide a critical safeguard in times of market turmoil or disruptions in supply from other sources, and its value in keeping markets steady has been demonstrated repeatedly over recent years," the Saudi executive said of the kingdom's capacity expansion plans. Global demand in petroleum was growing in "two vastly different sectors," he said. One was the developed economies, where growth in consumption was forecast to be moderate, but which had a substantial base of established demand that must continue to be met. The other category was developing economies like China and India, as well as countries in southeast Asia, which were starting from a relatively small base of demand but where petroleum consumption was set for "strong, rapid and sustained growth" as their economies grow.

At the same time, Subaey said that upstream capacity expansions were "of limited benefit" without corresponding midstream and downstream investments. And it was not just a matter of boosting downstream capacity, but also transforming refinery configurations, to overcome the current "mismatch" between global oil supplies -- which would continue moving towards heavier and sour crudes -- and refineries geared to run lighter, sweet oil. Saudi Aramco, in addition to capacity expansions at several of its refineries, is developing two new export-oriented grassroots refineries, one on the Kingdom's west coast and the other on the eastern seaboard, Subaey said.

Refineries to alleviate bottleneck

The refineries, with a capacity of 400,000 b/d each, would help alleviate the current bottleneck in the refining sector, he said. Aramco was also working in joint venture partnerships in Asia to increase the region's refining capacity, he added. Saudi Aramco has teamed up with ExxonMobil and Chinese state-controlled oil group Sinopec in the $3.6-bil Fujian integrated refining and ethylene joint venture project in China's southern Fujian province. The project will triple the existing Fujian Petrochemical Co's refinery capacity to 240,000 b/d. The expanded capacity will process Saudi Arabia's Extra Light, Light and Medium crudes.

Saudi Aramco is also in talks with Sinopec for a minority share in the latter's 200,000 b/d refinery project development in China's eastern Shandong province. In the Philippines, Aramco and its part-owned refiner Petron are studying jointly setting up an export-oriented refinery. In the Red Sea port of Rabigh, Saudi Aramco is expanding an existing refinery into an integrated refining and petrochemical complex, in association with Japan's Sumitomo Chemical. Aramco's first foray into the petrochemical sector, this project is expected to be ready by 2008 and produce 900,000 mt/year of propylene, 1.15-mil mt/year of ethylene and 700,000 mt/yr of polypropylene among other downstream products.

The Saudi oil giant would continue looking at other opportunities for partnership with Showa Shell and Sumitomo Chemical, he said. Further downstream, the Saudi Aramco's shipping subsidiary Vela International Marine has embarked on a "massive fleet replacement project, building new double-hulled tankers to replace older ships," Subaey said.