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What does a company making $250 billion a year do for an encore?

The Octopus

Christopher Helman11.24.08, 12:00 AM EST

The nerve center of Saudi Aramco is tucked in a windowless, high-security room in the center of its massive headquarters compound in Dhahran. To get there you pass through three checkpoints manned by armed guards, as well as a handful of X-ray machines and electronic turnstiles. Called the Operations Coordination Center, it features a curved wall 12 feet high and 240 feet long covered with a digital screen of 200 million pixels. Maps and schematics depict the real-time volumes of crude oil and natural gas wending their way from Aramco’s 102 fields through 48 gas-oil separators and 11,000 miles of pipelines into 7 refineries and chemical plants, 19 tank farms and 3 terminals feeding a dozen waiting supertankers.

Around the clock two dozen engineers monitor this movement of 9.4 million barrels of crude oil a day. Each of them has spent upwards of 15 years in the field, so when he sees something on the big screen, he can see in his mind’s eye the miles of gleaming stainless steel traversing the burning desert sands under a dusty sky. Numbers on the screens go up and down, but not much really changes as long as operations are running smoothly–except for one thing. At the top of the screen in the middle of the curved wall is a live quote of the market price for a basket of Saudi crude oil. The box that said $146 in July now says $67.

Aramco is not panicking–not yet anyway. At this price the world’s biggest oil company is still wildly profitable. Indeed 18 months ago $70 a barrel seemed an improbably high price for crude oil. Amid the year’s ups and downs, 2008 will mark a record for global oil demand, at 87 million barrels a day. While U.S. oil demand is off 5.5% in the past year to its lowest level since 2002, China’s is up 6.5%.

What price is too low? Ibrahim Al-Muhanna, adviser to the Saudi oil minister, is cagey on the subject. “The right price is that which brings good money to the producers and does not hurt the global economy, especially that of the developing countries,” he hedges. “We say that always, and we mean it.” Oil analysts reckon the dividing line is $49–below which the Saudis would have to start relying on deficit spending to keep their economy chugging along.

But why, with prices dropping and a steep worldwide recession looming, would Aramco go all out on the most ambitious expansion plan in its 75-year history? Over the next five years it will invest $129 billion to boost its oil production capacity to 12 million barrels a day, build new refineries and petrochemical plants and pursue a high-tech exploration and production program. Executives promise that within 20 years this will increase the kingdom’s proved recoverable reserves from today’s 260 billion barrels to 450 billion barrels or more. “These are concrete targets to which we are going to be held accountable and of which we are confident,” says Abdullah Al-Naim, vice president of petroleum engineering for Aramco.

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That confidence springs from cash, mountains of it, and know-how. The 100% state-owned Aramco manages all its own projects and invests in the latest technology. It’s easily the most profitable company on the planet: This year, after amortization of capital expenses, it should net upwards of $250 billion on $300 billion in revenue. With government budgets set for $45 oil, Saudi Arabia will likely end 2008 with a $150 billion surplus. It has $400 billion in foreign assets. That puts it squarely in fat city–at a time when oil-tethered economies in Venezuela, Iran and Russia are in precarious shape.

Saudi Arabia’s ambitions reach well beyond oil. The largest economic power in the region (Iran is a distant second), it is seeking to expand and diversify its economy with $600 billion worth of projects over the next 12 years aimed at doubling power generation, including the building of nuclear power plants, petrochemical plants and plastics factories. Six new so-called economic cities are to spring forth from the desert to provide millions of white-collar jobs to the 50% of the population now under the age of 20.

Cutting output, as OPEC agreed to do on Oct. 24 in a vain effort to firm up sinking crude prices (so many countries cheat), is relatively easy. Much tougher is the ability to increase production quickly, and here the Saudis have taken the lead. In June, as the price was shooting past $130 a barrel, King Abdullah bin Abdulaziz Al Saud summoned international oil officials to Jidda and decreed his intention to pop the oil-price bubble, ordering Aramco to increase output from 9.45 million barrels a day to 9.7 million, adding, “We are ready to meet any additional [demand] in the future.” This represented a complete reversal of policy: In January and April the king turned down an appeal by President Bush to accelerate production.

Over the last few years King Abdullah has been throwing around his political heft–and cash–to check Iran’s influence in the Middle East. In Iraq, historically a counterweight to Iran, the Saudis (like the U.S.) have paid armed Sunni groups to quit the violence, turn against al Qaeda and join the political process. The kingdom has hosted quiet negotiations between Afghanistan and the Taliban. In Syria the Saudis are encouraging President Bashar al-Assad to rein in the influence of Iran’s proxy Hezbollah. “The Saudis are not unhappy to see lower oil prices squeezing Iran,” says George Friedman, chief executive of the Austin, Tex. intelligence outfit Stratfor. “They just don’t want prices to get low enough that it forces Iran to do something crazy.”

Or anything to jeopardize Aramco’s supply–as Saudi Arabia once feared from Saddam Hussein after he invaded Kuwait in 1990. Periodically warnings about so-called peak oil rear up, as they did three years ago when Aramco’s cushion of standby supply tightened to only 1 million barrels a day. Gadflies like Houston investment banker Matthew Simmons seized on the vanishing supply cushion, insisting in his bestseller Twilight in the Desert that Saudi output would soon crest, triggering a crisis that would drive oil prices to the moon and bring on a global depression.

That didn’t sit well with the Saudis. Determined to dismiss the concerns, they are investing $65 billion to bring online 2.5 million barrels a day of new capacity from giant fields that were partially developed or untouched. “I am putting on fresh reserves, so what peak are you talking about?” asks Amin Al-Nasser, Aramco’s senior vice president of exploration and production. “We are bringing 50 billion barrels of new proved reserves on stream.” That, he boasts, represents a total larger than what the world’s largest oil companies own–combined.

Start with Khurais, a field with 27 billion barrels of estimated reserves, which will be able to produce 1.2 million barrels a day next year. At a cost of $12 billion, Khurais is Aramco’s biggest oilfield ever brought online all at once (Ghawar, the largest in the world, discovered in 1949, was done in stages). It features two pipelines that carry 1 million barrels a day of seawater to be injected into the field to maintain pressures that force up the oil. There’s Shaybah, with 18 billion in estimated reserves, where output is rising from 500,000 barrels a day to 750,000. Hit by delays in building a natural gas processing plant, the Khursaniyah field was supposed to start producing 500,000 barrels of oil and 1 billion cubic feet per day of natural gas but should be ready to go in 2009. Another monster is offshore Manifa, with 18 billion barrels of less desirable heavier oil, which will give up 900,000 barrels a day starting in 2011. Aramco says that by 2012 it will boost natural gas production by 40% to 13.2 billion cubic feet a day with the startup of the offshore Karan field.

“We go really slow and soft,” says Al-Naim, the engineering chief. “Ghawar we treat as you would a young woman.” Every Aramco well is fitted with an adjustable steel choke that restricts a standard 3-inch-diameter well bore down to a quarter-inch or less. Slowing the well reduces the amount of water that is produced alongside the oil, and a gentler flow protects the reservoir from damage.

Aramco’s oldest operating well, Ain Dar 1, was drilled in 1948. This single well in the Ghawar complex has produced 152 million barrels from its original casing. The well’s free-flow rate is now 8,000 barrels a day, but Aramco restricts it to 2,500. It insists that rumors of Ghawar’s demise are premature. The field has given up some 45 billion of at least 100 billion barrels of original oil in place (only Aramco knows for sure, and it’s not telling), yet still easily produces 5 million barrels a day; its overall water cut has declined in recent years to only 28%. Says Nasser, “If I needed more production I could go to Ghawar and boost it to 10 million barrels a day.”

The world’s publicly traded oil companies do not have this luxury. Shareholders want a quick return. In places like Venezuela and Russia, an international oil company wants to extract what it can as quickly as possible because there’s no telling when it might get the boot. Aramco says the depletion rate of its fields is on the order of 2% a year. Compare that with the average 6% in the rest of the world.

The chokes on its wells give Aramco the unique ability to increase output at a moment’s notice. This year, as Saudi Arabia decided to add 500,000 bpd of output, Aramco didn’t bring entire fields online. All it did was open some spigots wider. It was as easy as a few mouse clicks.


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