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Saudi Oil Output Nearing Capacity Limit

Source: Reuters 1/11/2012, Location: Middle East

Top oil exporter Saudi Arabia is nearing its comfortable operational production limits and may struggle to do much to make up for shortages that arise from new sanctions imposed on Iran by the West, Gulf-based sources said. The kingdom, now pumping just under record rates of 10 million barrels per day, has poured billions of dollars into its vast oil fields, which on paper should ensure it has the ability to ramp up to 12.5 million bpd.

Long-standing oil policy by Riyadh, the heavyweight in the Organization of the Petroleum Exporting Countries (OPEC), sets aside some 1.5 million bpd as protective spare capacity.

But industry sources said pumping anywhere near the declared production capacity might involve extracting heavy crudes the market might not want. It would also be difficult to sustain higher rates for lengthy periods.

"There is very little unused capacity in the Gulf," said oil official in the region. "Saudi Arabia could comfortably manage an extra 500,000 barrels a day or so and, if pushed, could go up to 11 million (barrels a day)."

A steady rate beyond 10 million bpd would offer immediate relief to world oil markets, but it would take the kingdom's production to untested levels.

Saudi officials are confident, however, of achieving higher flows.

"Saudi Arabia can easily make 1 million to 1.5 million (barrels per day) available," a Saudi source said about output beyond current volumes.

Since June of last year, Saudi Arabia and its Gulf allies Kuwait and the United Arab Emirates have been cranking oil out after failing to convince Iran and other OPEC members to agree a coordinated increase to cover the supply disruption from Libya's civil war.

The trio has kept up the higher pace, despite the return of Libyan crude, to supply rising demand from Asia and in effort to bring oil prices below $100 a barrel to help nurture global economic growth. Increased deliveries have left Kuwait and the United Arab Emirates producing nearly flat out.

That will make it a stretch to fill a sizeable gap left by any punitive cuts in Iran's oil exports of about 2.5 million bpd. After spending huge amounts on fortifying their production, the Gulf countries are now reluctant to push output to the very brink and leave them bereft of a supply cushion.

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