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   Saudi Arabia has halted the $100bn expansion of its oil production capacity after reaching a target of 12m barrels a day as the kingdom believes that new oil sources will meet raising demand.

      Khalid al-Falih, chief executive of state-owned Saudi Aramco, said on Monday that pressure on Riyadh to raise its output capacity had "substantially reduced", the clearest indication yet that the world's top oil producer is not pushing ahead with an assumed expansion plan to 15m b/d by the end of 2020.  

     The comments put a cap at least temporarily on a $100bn expansion program that started in the early 2000s when Saudi was able to produce about 8.5m b/d. The halt comes in spite of tightness in the oil market due to ongoing production disruptions in Libya, Syria and Yemen.

     Oil prices reached a two-year high of more than $125 a barrel this year after the civil war broke in Libya but since then the cost of Brent, the global benchmark, has fallen back to $105 a barrel due to the impact of the financial crisis.

     The oil market closely watchesSaudi Arabia's expansion programme because the country holds most of the global spare production capacity that acts as a cushion in case of a production disruption. Riyadh boosted its oil output to 10m b/d earlier this year, the highest in 30 years, to compensate for the loss of production in Libya.  

     "There was pressure on the kingdom and Saudi Aramco to raise production [capacity]. That pressure, I think, has been substantially reduced," Mr Al-Falih said, adding that the debate on energy policy had been "turned upside down" recently by growing oil and natural gas supplies.  

      The International Energy Agency has over the last decade steadily cut its projection for Saudi Arabia oil production. Earlier this month, the watchdog said on its flagship World Energy Outlook that the kingdom would need to produce 12.6m b/d by 2030, compared with an estimate for the same year of 18m b/d published in 2005.  

     The Paris-based IEA estimates that Iraq would be now the biggest contributor to global oil supply growth between 2010 and 2035, adding more than 5m b/d. Saudi Arabia would be still the second largest contributor, but closely followed by global biofuel production, and oil supplies from Brazil, Canada and Kazakhstan.  

      Mr Falih said that Saudi Aramco was shifting its spending priorities from oil production into natural gas, refining and the chemicals business. "The downstream [refining] is increasingly growing in scale to equal, and sometimes eclipse, the level of spending we are doing in upstream [oil production]," he said.  

      But Amrita Sen, an oil analyst at Barclays Capital in London, noted, however, that the decision not to expand further comes at a time of pressing budgetary needs. "The current focus of Saudi is on domestic social spending on the back of Arab Spring," she said.

      King Abdullah of Saudi Arabia announced earlier this year hand-outs and boost to public spending at a total cost of $129bn in an effort to buy social peace.

(www.ordons.com - November 24,  2011) 

     ExxonMobil Corp. has signed a production-sharing contract with the Kurdistan Regional Authority for 6 blocks in the semiautonomous region in northern Iraq. "We have informed the central government of this contract," said KRG Minister of Natural Resources Ashti Hawrami. "It is a matter of law for us to do so," Hawrami told OGJ.

    "The KRG has for the last few months been in discussions with a number of major oil companies," said Michael Howard, an advisor to Hawrami. "This resulted in the agreement with ExxonMobil to explore in 6 blocks."

    Howard said KRG is "excited" to have ExxonMobil under contract, adding that it is a major step forward in plans developed by KRG over several years that are aimed at "getting the industry going."  

     Full details of the agreement between the KRG and ExxonMobil have yet to emerge, but officials are optimistic over its portent for the future. "We initially started working with small, dynamic independents, then moved to midsized firms, and now there's ExxonMobil-our first...supermajor," said Howard.

     KRG officials expect the new contract to accelerate the process of signing on other international oil companies, with the names of several leading IOC's mentioned. But KRG's main aim is to spur production.

    "We have reserves estimated at 45-50 billion bbl of oil, and we have invited a large number of international oil companies to develop our oil and gas," said KRG Prime Minister Barham Salih. "At the moment we are producing about 175,000 b/d, but we will reach 1 million b/d by 2015," Salih told delegates at the Atlantic Council's Black Sea Energy and Economic Conference in Istanbul.

   In signing the agreement with KRG, ExxonMobil has risked the displeasure of Iraq's central government, which has long sought to dissuade IOC's from working with KRG.

    Indeed, Iraq's Deputy Prime Minister for Energy Hussein Al-Shahristani has said that ExxonMobil will be dealt with in the same way as other companies investing in Kurdistan without federal government approval.

      "The Iraqi government will deal with any company that breaks its laws in the same way that it has dealt with similar companies in the past," said al-Shahristani.

     Previously, Baghdad has blacklisted IOCs that signed contracts with KRG, so that they cannot work in the rest of the country or purchase crude oil.

     That treatment was spelled out to the US firm in the form of three letters that warned of "dire consequences" should it proceed to sign up for acreage with KRG.

      "All three letters were clear...the signing of any contract with the KRG without the approval and the knowledge of the Iraqi central government and the oil ministry will be considered illegal," said an oil ministry spokesman.  "ExxonMobil could face disqualification and the termination of its contract," the spokesman said.

      In January 2010, ExxonMobil's Iraq unit signed a service contract with Iraq's ministry of oil to redevelop and expand the West Qurna-1 field in southern Iraq. ExxonMobil is the lead contractor with 60%, Iraq's state-owned Oil Exploration Co. holds 25%, and Royal Dutch Shell PLC has 15%.

      ExxonMobil is also leading a consortium of IOCs active in the south in the development of a $4 billion water injection facility for use on the West Qurna-1, West Qurna-2, Zubair, and Rumaila fields.

      ExxonMobil "appears to be gambling its West Qurna-1 project against the upstream potential in Kurdistan," one observer told OGJ, adding that the US firm "could gain access to reserves under [PSCs] in contrast to its tight technical service contract in the south."

    Tony Hayward, the former chief executive of BP PLC, who recently emerged at the helm of Genel Energy, a Kurdistan-focused player, told OGJ that the ExxonMobil agreement would "ultimately...hasten progress towards compromise" between Baghdad and KRG.

     That may be, but other IOCs will probably adopt a wait-and-see attitude before running any risks with Baghdad-especially if they have much to lose.

     "ExxonMobil has little to lose with its service contract in the south and much to gain with its PSC in the north," said another industry observer, adding that, "Things are different for Shell, which just signed a $17 billion gas deal with Baghdad."

     Still, there can be little doubt that all eyes will be on Baghdad in the days and weeks to come.

(www.ordons.com - November 24, 2011)