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Saudi Arabia Allays Fears of Oil Shortage - 2004-03-10


As the world demand for oil grows inexorably, can supply keep pace? A new US report questioning the long-term viability of Saudi Arabia's oil reserves has compelled the world's largest oil producer, Saudi Aramco, to talk publicly, for the first time ever, about its prospects. Zlatica Hoke reports.

Saudi Arabia has vast oil reserves, both under the land and in the Persian Gulf. Estimates based on current exploration range from 700 to 900 billion barrels. The country's proven reserves, which is the term used for oil that can be extracted with existing technologies at current prices, are about 260 billion barrels -- one quarter of the world's total.

The country's major government-owned oil company Saudi Aramco currently has the capacity of producing 10 million barrels per day. American energy investment banker Matthew Simmons doubts it can sustain that level very much longer.

"Saudi's great giant oil fields are old,” says Mr. Simmons. “These five great fields were discovered between 1940 and 1965. The big five from all reported data that you can dig out have produced about 90 percent and more of all Saudi Arabia's oil."

Saudi Arabia has about 80 natural oil and gas fields with more than 1,000 wells. But analysts say more than half of its oil is contained in a relatively small number of giant fields, including Ghawar, the world's largest onshore oil field and Safaniya, the world's largest offshore oil field. Both began producing oil in the early 1950's.

Matthew Simmons says since then, no fields of comparable size have been discovered, while the global demand keeps growing. Today it requires about 75 million barrels of oil per day and may double in the next few decades.

"New giant oil fields being discovered basically ended in the late 1960's and early 1970-s, but oil demand is still gaining steam," says Mr. Simmons. "The IEA's (International Energy Agency) 2030 outlook basically shows a need for a 120 million barrels of oil per day, and in fact if you really dig into the details, it's actually conservative."

Matthew Simmons says his research shows that some of Saudi Arabia's largest oil fields may have already reached peak production. It is hard to determine the exact status of the reserves because the necessary information is often withheld. And Mr. Simmons notes much of the available information varies or conflicts from one source to the next. In general, he says peaking is usually discovered some time after it has occurred.

"Peaking turns out to be a hard thing for people to get their hands around,” says Mr. Simmons. “Almost all of the major oil and gas companies over the last five to seven years were supposed to aggressively grow their production by five to eight percent per year. There were a lot of worries in 1996-97 as to how on earth would we ever cope with all of this growth."

Instead, says Matthew Simmons, oil production has peaked for more than 50 oil-producing nations, including the United States and Britain. Aramco has been able to keep Saudi oil production high by developing new technologies. But he adds, the technologies could also speed up depletion. Mr. Simmons, who plans to publish his findings in an upcoming book, says reaching a production plateau does not mean the world is running out of oil, as some people think. Still, in his opinion, the "sweep of easy, conventional oil flow must be coming to an end."

Such doubts about Saudi Arabia sustaining its output at current levels and remaining the world's largest producer and exporter of oil have provoked a response from the kingdom. For the first time ever, Saudi Aramco has given a detailed public presentation of the country's oil sector, designed to allay fears of impending decline.

Mahmoud Abdul-Baqi, vice president of exploration at Saudi Aramco, says the company has a policy of maintaining a healthy cushion between its production and its maximum sustained capacity. Currently it produces about 8 million barrels of oil a day against a capacity of ten million or more.

"This cushion served us in the past extremely well and will continue to serve us extremely well in the future," says the Aramco official. Mr. Baqi says Aramco is not only capable of maintaining its capacity, but could increase it to 12 or 15 million barrels a day for at least another half century.

In the past seventy years, Saudi Arabia has produced 99 billion barrels of oil. According to company officials, this is a small percentage of its long-term potential. "Currently we have 700 billion barrels of oil in place,” says Mr. Baqi. “Our studies indicate that if we combine undiscovered resources; this is exploration in new areas plus the growth of oil in place that we have already discovered these two together, we're going to add 200 billion barrels by the year 2025, giving us a total of 900 billion barrels of oil at that time."

Plans are underway to increase the proven reserves; that is, the volume of oil that can be recovered with existing technology.

"We believe that we are looking very conservatively upwards of 150 billion barrels over and above the 260 billion barrels that we carry as proved reserves right now," says Nansen Saleri, an official of the Saudi Aramco Reservoir Management. "That's 60 percent more. And that's the underlying message we want to convey."

Mr. Saleri also says the company policy is to keep production at an even pace: "If you produce things slowly, you expand the life cycle. And when you expand the life cycle, you get the benefits of new technologies -- much better diagnostics, much better way of managing the reservoirs, much better way of navigating against any uncertainties, any surprises. And it has a significant direct business impact."

Mr. Saleri says many oil companies in the world have declined rapidly because they have tried to extract as much oil as possible as quickly as possible. After producing oil for seventy years, Aramco claims to have more than 70 percent of its total reserves intact.

Mr. Saleri says through wise management and careful planning, the company will also help keep oil prices down: "Of course, we may eventually see some rises in costs. That's undeniable. But given the benefits that we are acquiring from the new technologies, we don't believe there would be an abrupt change. The worst case scenario would be a very moderate increase in costs 10 to 15 years down the line."

Oil analysts worldwide have welcomed Aramco's openness. Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington, says the stability of the world oil market depends on Saudi oil.

"There is no substitute for Saudi Oil,” says Mr. Ebel. “We'll always look to Saudi Arabia to help the world meet its growing demand. Saudi oil is so important to the world oil market because if Saudi Arabian oil is lost, than the world oil market is in considerable difficulty."

Mr. Ebel says transparency in oil production helps planning for steady oil supply and prices. That's why Aramco's recent presentation is vital to the global oil industry.

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