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Is Saudi Arabia running low on oil??

02/25/2004

It is a bit of a shock to read in the NY Times that Saudi Arabia may be running low on oil in the near future, or that it may not be able to meet rising demand. Oil makes the modern industrial world go round. Saudi Arabia holds between a quarter and a third of the world's estimated oil reserves. What Newcastle was to coal in the nineteenth century, Saudi Arabia is to oil in the twentieth century, and more.

The world counts on Saudi reserve pumping capacity to smooth out market ripples in demand now, and the energy industry is also counting on undeveloped Saudi reserves to meet the expected increases in world oil needs in the coming years. Oil from Saudi Arabia and its neighbors around the Persian Gulf is important because there is supposedly a lot of it, and because it is cheap to extract it. It costs about a dollar a barrel to extract oil in the Gulf countries, and perhaps $10 or more to extract it elsewhere. Energy companies have been optimistic that new drilling and pumping techniques and vast unexploited reserves could continue to provide inexpensive oil for many years to come.

A presentation by Matthew Simmons of Simmons and Company, energy investment bankers at a CSIS (Center For Strategic & International Studies) on February 24, makes the case that Saudi Arabian oil may be increasingly hard to come by. He points out that 20% of the world's oil production is concentrated in just 14 oil fields that are 60 years old on average, and that there have been no major petroleum discoveries since the 1960s. Simmons notes that numerous drilling projects have come up dry in the Gulf region.

Oil field exploitation usually runs through a predictable history. Fields reach peak production, and thereafter, production begins to fall rather precipitously and extraction costs rise. Simmons points out that experts have failed in the past to predict such peaking in several fields, including the Russian Siberian fields, Prudhoe Bay in Alaska and the North Sea oil fields, which are now prematurely producing much less than they did at peak capacity. The Saudi "Energy Endowment," according to Simmons, is concentrated in a small area in the south-east, covering about 26,500 square miles, considerably smaller than the state of Virginia for example. Simmons claims that modern extraction techniques may be forcing out oil faster for a time, but prematurely "age" oil fields, because they bypass some of the oil. As an example, horizontal drilling and heavy water driven extraction raised production rapidly in Oman's Yibal field, but it soon fell from 250,000 at its pick to 50,000 barrels per day, handing experts an unpleasant surprise. The "bypassed" oil in fields like Yibal will be much harder, or impossible to extract at future dates.

Simmons notes that Saudi oil production rests mainly on a few fields: the giant Ghawar "King of Kings" field, discovered in 1948-9, Abqaiq and Safaniya, two "queen" fields discovered in 1940 and 1951 respectively, and 6 lesser fields, all discovered prior to 1970. Five fields produced 90% of Saudi oil between 1951 and 2000, all of them discovered before 1967. The Ghawar field alone produces about 5 million barrels a day and has accounted for about 55% of Saudi oil production. These fields maintain high production using water injection techniques, but these techniques have their limitations. According to Simmons, if Aramco's 1975 reserve estimates were accurate, Ghawar should now be 90% depleted.

As Simmons notes, there is not really a firm basis for the accounting methods used in estimating "proven reserves," which used to be called "paper barrels." "Undiscovered reserve estimates" are of course even iffier. In the 80s, the "proven reserve" estimates of OPEC countries were revised upward rather dramatically, partly because of confidence in the extraction ability of new technologies, or perhaps, some believe, for political reasons. This revision created the illusion that the more oil is pumped, the larger the reserves will become, but now reserves are being revised downwards. Shell oil has been unable to meet production targets in Oman, and has cut reserve estimates by 20% as extraction becomes more difficult and water content rises. The same is true of nearby Kuwait.

None of the above means that the world is about to run out of oil. However, if Simmons is right, then it suddenly might become quite expensive to extract oil, so that extraction costs may rise from practically nil to $6 to $8 dollars per barrel. Rising oil prices will make it more economically feasible to extract oil at higher prices, and will provide incentive for continued exploration despite decreasing yields.

Simmons' warnings have been backed by those of other oil-industry analysts including Aramco executives. Two years ago, Sadad al-Husseini, Saudi Aramco's second-ranking executive and its leading geologist, warned at an oil conference in Jakarta that "natural declines in existing capacity are real and must be replaced." But some people note that they aren't being replaced and others claim that quite possibly that they cannot be replaced at all.

Edward O. Price Jr., a former executive of Saudi Aramco and Chevron, and a US government adviser, says he believes that Saudi Arabia can pump up to 12 million barrels a day "for a few years." That is not very good news when you consider that experts are counting on Saudi Arabia to increase its production to meet rising world oil needs.

At the same CSIS conference, Aramco Vice President in charge of exploration Mahmoud Baqi and reservoirs manager Nansen Saleri presented their side of the story. They claimed 90% confidence in proven reserves of 260 billion barrels, half of which are developed and in production, and stated that overall reserves depletion for Aramco Saudi wells is only 28%. They noted that an estimated 87 billion barrels of recoverable oil have yet to be discovered in Saudi Arabia, according to US Geological Survey reports. They predicted confidently that Saudi Arabia would be able to maintain production rates of 15 million barrels a day through 2054.

However, Simmons' argument is not that Saudi Arabia is running out of oil, but rather that there is no way of being confident that Saudi Arabia is not running out of oil, because producers do not reveal much about how they have calculated reserves, because predictions like those of Saleri and Baqri have been proven wrong in the past, independent surveys have not been reliable, and there have not been major oil discoveries in practically for years. Simmons argues for greater transparency on the part of oil producers, better financial management of oil prices to prevent "panics" and development of alternative energy sources "just in case. "

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Original text copyright by the author and MidEastWeb for Coexistence, RA. Posted at MidEastWeb Middle East Web Log at http://www.mideastweb.org/log/archives/00000203.htm where your intelligent and constructive comments are welcome. Distributed by MEW Newslist. Subscribe by e-mail to mew-subscribe@yahoogroups.com. Please forward by email with this notice and link to and cite this article. Other uses by permission.

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Replies: 2 comments

saudi arabia produces 71% of the entire worlds oil

Posted by s @ 02/27/2004 01:54 AM CST

According to the Association for the Study of Peak Oil, the total world demand will be about 82 million barrels of oil per day by 2010 with the Saudi's forecast contribution to this total at about 10 million barrels per day. After this, even with demand increasing, total world production begins to decline at about 2% per year. This would be a loss to depletion of about 1.6 million barrels a day from all other sources minus Saudi Arabia. Even if the Saudis are able to increase production to 15 million barrels a day, this would only stave off the global peak by about 3 years unless Saudi is able to continue increasing production by the world oil depletion rate from that point on indefinitely. Or so it would seem. Am I missing something?

Posted by Tom Pickens @ 03/01/2004 07:08 AM CST


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