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On supply disruptions and satellite imagery

Last month’s attack on Saudi Arabia’s oil infrastructure was one of the biggest oil supply disruptions ever recorded but the market took it in stride. It was also the first global disruption since greater transparency has been brought to the energy markets by new technologies of satellite imaging and unconventional data, and this new dimension had certainly something to do with the market’s surprising equanimity.

The knee-jerk spike in price that immediately followed the September 14 strikes on Abqaiq and Khurais was as short-lived as it was steep, and the market ended the month pretty much where it had begun. State oil company Saudi Aramco and the Saudi oil ministry’s effective management of the crisis was certainly the main reason for the mildness of the price response, but unconventional data were at the very least a contributing factor that provided independent validation of the company’s messaging, helped assess the scope of the disruption in quasi realtime and assisted with the market’s rebalancing.

Kayrros contributed to the transparency in several ways, including high-resolution optical imagery of the Abqaiq crude processing center, daily multi-orbital radar measurements of oil in floating-roof tanks to track inventory effects, heat and emission detection at the units and oilfields feeding into Abqaiq, and more. Optical imagery alone is usually less than optimal to track inventories but thanks to the Kingdom’s clear skies proved effective to assess damages and track repair crews at Abqaiq’s units, including its 11 spheroids and 18 stabilizer columns as well as the steam plants and pump stations. Single-orbit radar measurements are normally the preferred way of measuring inventory changes but in this case Kayrros relied on multiple constellations to increase the frequency of revisits and was able to filter out the noise in the data through customized algorithms.

Aramco was able to quickly calm the markets with a benign prognosis followed by regular and equally reassuring updates

Devastating as the attack’s initial impact may have been, Aramco was able to quickly calm the markets with a benign prognosis followed by regular and equally reassuring updates. Quasi-realtime satellite monitoring of the Abqaiq center and Abqaiq and Khurais oilfields provided stakeholders with reasons to believe in Aramco’s self-assessment. Three days after the strikes knocked out 5.7 MMb/d of supply, Oil Minister Prince Abdulaziz bin Salman was able to announce a return to 11 MMb/d capacity by the end of September and to a full 12 MMb/d by November.

Satellite imaging confirmed that of the five compression units hit by the strikes, three had resumed operations by September 25, as had an amine sweetening unit. The next day, Kayrros observed all damaged spheroids but one had been patched, in line with a return to 90% of pre-attack production levels. By end-month, the first crude build since the attack was measured in the Kingdom. Successive satellite orbits had watched flaring at the fields, truck and nighttime crew movements while realtime production-related measurements provided objective third-party validation of Aramco’s claims to be on the mend, thereby helping build confidence in a corporate narrative that some might otherwise have been tempted to dismiss as selfserving.

Equally important was the market’s prompt rebalancing, led by Aramco’s diligent efforts to rejig oil shipments and maintain its reputation as reliable supplier. Here too, satellite imaging and global inventory measurements provided a level of market transparency absent in previous supply disruptions. Aramco wasted no time in rearranging its export schedules, drawing down inventories and diverting crude from its domestic refineries to minimize delays and soften the impact on its customers.

Its trading experience, honed in product markets for the last few years and more recently in crude markets, came in handy as the company looked for alternative supplies to meet domestic needs. Satellite imagery processing provided visibility on Aramco crude stocks as well as those of crude importers and other producers of potential substitutes for Arab Light and Arab Extra Light, the two crude grades impacted by the Abqaiq outage. This unprecedented level of transparency dispelled any uncertainty as to the availability of bridge supplies pending the completion of repairs.

On the demand side of the equation, worries about the broader economy may have helped douse the brief rally, even as US producer hedging also helped cap price increases. End-user demand has dramatically weakened in recent months. Kayrros machine learning forecasts of short-term demand in 10 of the world’s top economies sees further slowdown ahead, in line with deteriorating economic indicators and worries about the US-China trade war. US tight oil companies were also quick to greet the brief rally with a fresh round of producer hedging.

The story is not over just yet, however — there is still a lot that can go wrong, warranting continued close market monitoring. Repairs at Abqaiq as of early October were still ongoing, and whether patches made to the damaged spheroids will prove long-lasting or are just a temporary fix remains to be seen. Declines at mature Saudi fields may however be a blessing in disguise by providing the flexibility to idle units sequentially for further repairs without impacting overall processing rates. The capacity of a given oil processing facility is rarely perfectly matched with available field production as normal decline and new project sanctions advance.

Natural decline at some of Saudi Arabia’s mature fields is believed to have created substantial spare capacity at Abqaiq, above and beyond the initial design. Each of the spheroids, including eight older units initially designed to process crude from Ghawar and Abqaiq and three newer ones added to handle supply from Shaybah, is believed to have a capacity of roughly 1 MMb/d. The Abqaiq field is believed to have peaked around 800,000 b/d — 1 MMb/d and may be down to about 300,000 b/d. Ghawar, the world’s largest field, might have peaked around 5.5 million b/d, according to sources familiar with the country’s oil sector. Decline in its northern section was only partly offset by development of the southernmost sections. Shaybah’s capacity is around 1 MMb/d. Overall, this seems to provide enough spare capacity for one or maybe even two spheroids to be out of service without hindering the plant’s ability to produce at full oilfield capacity. At the same time, satellite imagery also confirmed that some of the drone and/or missile strikes were quite superficial so that the damaged parts of the spheroids could be quickly patched.

While Aramco did a great job of bringing the units back on line in short order, considerable uncertainty remains, making the transparency of new data technologies all the more valuable. While production seems back to normal, whether Aramco will manage to maintain discrete Arab Light, Extra Light, Medium and Heavy streams or may have to comingle some of its output for a while remains unclear. As of early October, Kayrros data indicated that Arab Light and Extra Light would likely be comingled for now. Meanwhile, there isn’t much an oil company can do to resolve underlying geopolitical tensions in the Gulf and security issues in the Kingdom.

Furthermore, new regulations governing sulfur emissions from ships that are due to take effect in January could soon give the market another jolt — and lingering effects of the Abqaiq attack on Saudi crude quality could cause ripple effects on the supply of compliant low-sulfur bunker fuels, at least at the margin. From worldwide changes in environmental regulations to the apparent unraveling of the post-World War II international order, the oil market is in for big changes. Given this heightened level of uncertainty, the lack of price response so far seems remarkable. This time around, the combination of Aramco’s efficient crisis management, increased market transparency and lesser damages than initially feared had a mutually reinforcing, stabilizing effect. In future, new data technologies will continue to help the market adjust to unforeseen changes but cannot always be counted on to merely validate third-party assessments. In the next installment of the Energy Digest, we will see how satellite data on well completions in the Permian and other tight oil plays actually undermine official US reports of a recent drop in the inventory of drilled and uncompleted wells (DUCs).

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