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Volume 14, Number 6June/July 1963

In This Issue

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Profile Of A Decision

Before Aramco decides to develop a new oil field in Saudi Arabia, scores of questions must be asked—and answered.

In the life span of an oil field in Saudi Arabia there are usually four major phases: exploration; wildcatting and delineation; production and development; and, when necessary, pressure maintenance.

This story is an account of the complex—and costly—events that take place from the time a new oil field is discovered to the moment the field goes onstream as a component of world oil production.

The events to be recounted here would have little meaning, however, were they left to stand simply as an isolated, though ingenious, exercise in engineering and economic analysis. They require a backdrop against which their larger significance can be plainly seen.

The first phase in the life of a Saudi Arab oil field is, of course, the search by the Arabian American Oil Company above and below ground for geological features that indicate the possible presence of oil.

The next phase begins with the decision to drill the first well, known as a wildcat, on the prospective structure. If the wildcat turns up oil in commercial quantity, it is thereafter called a discovery well in a new field. This shift of phraseology reflects the progress from risk to routine that, hopefully, characterizes the development of an oil field.

After the discovery well has been completed, other wells are drilled to delineate, or define, the limits of the field. Subsurface logs, recordings of measurements of various physical properties of the formations encountered in drilling the wells, are used extensively in this delineation. In addition, the crude oil from the field and rock that makes up the reservoir are analyzed. The reservoir pressure is determined, and preliminary predictions of the field's pressure-production behavior are made.

A target date for commencing the daily production of crude oil must then be set. Once this date is established, oil handling facilities are designed, fabricated and installed, and additional production wells are drilled. The field is then ready for continuous, round-the-clock production and for further development.

Finally, at some future date the reservoir pressure (the force that drives the oil to the surface) may decline to the point where gas or water injection techniques will be needed to maintain production.

Each phase in the life of an oil field in Saudi Arabia begins with a decision by Aramco management. Each of these decisions commits the company to spend a very large sum of money, often many millions of dollars. There is an overriding factor that links, and governs, these decisions: the economics of world petroleum with its endless permutations in supply and demand.

The distant but profound effect of changing market conditions, for example, in the Far East or in Western Europe, is reflected in the time lag between the discovery of a new field in Saudi Arabia and the beginning of daily production from that field. There may be only a short lag to allow facilities to be built, or the gap may be three, five, or six years, as in the case of various Arabian fields.

This variation in the production timetable is obviously not a matter of technical problems alone. To put a very complex matter in the simplest possible terms, there is a right time to bring in an oil field. And, to continue this simplified thought, the right time is when the market demands the particular type of crude oil the field produces, and in a volume that will consume the field's production. Any other time is the wrong time. There is more than abundant opportunity to make wrong decisions.

The decision to bring in an oil field is complicated by many factors, for the market is not nearly as simple as may have just been suggested. Actually, an elaborate structure of competition rises above t!he classic underpinning of supply and demand.

Today, competition in the free world oil markets by private companies, nations and even blocs of nations tends to become increasingly severe. For example, Russia has introduced into the market a complicated barter system under which "profit" is merely a component of political strategy. Operating from the home base of a controlled economy in which each element is the servant of political expediency, Russia is free to apply extraordinary competitive pressures abroad. She can, in effect, sell her oil at below "cost" and still show a profit on the complicated balance sheet of national economic planning.

In such fashion, competition in the free-world petroleum markets grows more and more rigorous. One consequence for private companies is that any decision to risk millions of dollars for oil field development is now exceedingly involved.

Against this backdrop of world petroleum economics, Aramco in 1957 decided to drill a wildcat well — Manifa No. 1—in the Persian Gulf off Manifa Bay, a natural shallow water harbor about 120 miles northwest of Dhahran. During the following year, Manifa No. 1 became the discovery well of the Manifa field.

Manifa was the second oil field discovered by Aramco in Saudi Arab coastal waters. It has attracted widespread interest among oilmen because Aramco's first offshore discovery, Safaniya, has turned out to be the world's largest underwater field. Safaniya was discovered in 1951 and went into production in 1957, the same year the wildcat was started at Manifa.

The preliminary delineation of Manifa was completed in 1960, and further drilling was temporarily suspended while petroleum engineers proceeded with detailed reservoir studies. Other engineering and economic studies were undertaken to answer many questions such as: Is there a demand for Manifa crude? If not, will there be in the future? What would be the ideal rate of production at Manifa? How many years could the field produce at a given rate before gas or water injection might be needed? How much would it cost to bring in Manifa? Where would it fit in Aramco's long-range growth plans? Can Manifa be tied into any existing facilities, such as pipelines, gas-oil separator plants and crude oil stabilizers?

So far in this account Manifa has been considered apart from other Aramco oil field projects. Actually, its development was a "choice among prospects." Other fields in other areas of the Aramco concession were also competing for management's favorable decisions and for the large funds those decisions would require. In the diligent exercise of its responsibilities under the concession agreements, the company had already run a costly risk in wildcatting offshore at Manifa. Despite the increasing precision of geophysical instruments, it still takes a drill bit to find oil, and every wildcat project is guided, at least in part, by human judgment, as well as by science. Also, Aramco had learned several years earlier, when it discovered and developed Safaniya, that an offshore field can cost up to three times as much to get into operation as an onshore field. Thus, Manifa needed to make a compelling claim for the millions of dollars it would need to get into production.

Manifa produces a sour crude, so called because it contains hydrogen sulfide, a poisonous, highly corrosive gas which must be removed in a stabilizer before the oil can be pumped into the hold of a tanker.

By the end of 1960, the year drilling was suspended at Manifa, Aramco was already exporting three types of crude oil: Safaniya Grade, a sweet crude (one that contains no hydrogen sulfide), produced in the Safaniya field; Khursaniyah Grade, a sour crude produced from the Khursaniyah field; and Arabian Crude, another sour crude with properties different from the Khursaniyah Grade, and coming from the rest of Aramco's fields. The three types vary in their physical and chemical properties and in product yield. Their range gives Saudi Arabia a unique position and a relative, competitive advantage among the petroleum-exporting nations.

Manifa zone crude proved to be similar to one of the export grades, the crude from Khursaniyah. Both are sour and both yield a high proportion of fuel oil when refined. However, it so happened that in 1958, the year Manifa was discovered, a market had yet to be established for this type of crude. This lack of demand weighed heavily in Aramco's 1960 decision to suspend further drilling operations at Manifa.

In the oil business, though, the market picture is constantly shifting; ups and downs of supply and demand fluctuate continuously. Today's market data, like today's headline, are past history tomorrow morning. One of the reasons Aramco decided to defer placing Manifa on production was that Khursaniyah, which also produces a sour crude with a high fuel oil yield, was being brought into production. This happenstance was to have a significant influence on the future of Manifa. It meant, for one thing, that the oil economists could foresee a rise in future fuel oil consumption.

Further, the fact that the crude from the two fields, Khursaniyah and Manifa, could be mixed and shipped through the same pipeline without damage to either favorably weighted Manifa's economics. Manifa could make efficient use of the existing pipeline from Khursaniyah to Aramco's marine terminal at Ras Tanura.

The rising demand for Khursaniyah crude, a trend foreseen by oil economists in 1960, has indeed come about, but at a greater rate of increase than had been predicted. As the demand curved upward, Aramco had to choose between expanding production from Khursaniyah or bringing in another field, such as Manifa, with the same type of crude. In order to expand production from Khursaniyah, Aramco would have had to build additional facilities. And there were other factors requiring study before a decision could be made.

When oilmen who are daily involved in the mathematics of oil field engineering and economics start to point out the many factors that go into decision-making, the nonexpert feels, justifiably, that the world will end long before all the possibilities of a given situation can be explored. The outsider seizes a few terms to help serve him as guideposts of understanding.

There is, for example, a right-cost logic that governs the evolution of an oil field. It seems a simple enough term. However, it embraces in its implications a number of elements: the field itself, the field's facilities, Aramco's projections for all the fields in Saudi Arabia and market trends for three, five, and even ten years. Every possible set of variables, or at least a mathematically significant number of them, must be studied.

Fortunately, high-speed computers make it possible to complete a lifetime of hand calculations in a single day. An oil field can thus be "produced" on paper under a number of different sets of conditions. Rates of production, for example, can be altered. Demand figures can be changed. Reservoir pressures can be reduced at different rates. And a range of production costs can be explored.

Out of this succession of computations a moment comes when the per-barrel cost of placing a field on production fits into the framework of right-cost logic. This means that the per-barrel development cost of a given field, at a given rate of production, at a given time is in balance with the cash register realities of the market. The time has then come for Aramco management to risk the necessary funds.

At the time Aramco management had to decide about how to meet the demand for more Khursaniyah crude, the engineering and economic studies of Manifa made the advantages of placing the field in production increasingly apparent. Continuing studies showed that Manifa's cost data were beginning to fit within the limits dictated by right-cost logic.

Further, Manifa was becoming a more attractive development choice for another reason. The reservoir pressure at Khursaniyah had dropped faster than anticipated in the preliminary predictions of the pressure-production behavior of the field. Since these preliminary predictions are based on a very limited amount of information (one of the reasons why there is a large element of risk in the development of an oil field), it is not unusual for the actual performance of a given field to be different from that predicted in the preliminary estimates.

A more rapid than anticipated pressure decline in Khursaniyah meant two things. The target year for expensive gas or water injection would have to be moved forward. And, the long-range economics of Khursaniyah would have to be adjusted to take into account the capitalization of pressure maintenance at an earlier date than had been predicted. In dollars-and-cents terms, the per-barrel cost of producing Khursaniyah over its life span had risen—and so had Manifa's opportunity.

The decision was made by Aramco management to bring Manifa into production. It was decided that facilities should be designed to handle up to 125,000 barrels of production a day. The company announced its decision in July 1962. It also announced that the new installations will be ready on January 1, 1964, to start the first barrel of oil flowing to Aramco's marine terminal for shipment abroad.

The decision to produce Manifa committed Aramco to an investment of $13 million.

This article appeared on pages 18-21 of the June/July 1963 print edition of Saudi Aramco World.


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