Saudi Arabia: An Oil Bust?

The reserves mystery continues into the present in the form of the miraculously undiminishing resource base. For the past 17 years, Saudi Aramco's reported proven reserves have stayed at approximately 260 billion barrels — while more than 46 billion barrels of oil were produced from this base.

Yet, few oil analysts ever questioned the integrity of the 260 billion number, let alone asked why the number had remained static for so long.

Instead, self-styled insiders would often whisper they had seen confidential data or had been secretly told that Saudi Arabia's peak proven reserves were much greater than was being reported.

Amazingly, many highly educated oil analysts then assumed this "whisper" was valid information. Saudi Aramco considers its current method for estimating proven reserves to be conservative.

According to recently retired senior Saudi Aramco technicians, the company relies heavily on computer simulation modeling.
All the reserves calculations for new discoveries and non-producing oilfields rely simply on volumetric recovery factors.

This technique often assumes that these untested, non-producing fields will perform similarly to the producing fields that have been on-stream for years.

It seems anything but conservative, however, to assume that an untested field, even in Saudi Arabia, would deliver performance of the superlative kind seen at Abqaiq, Berri, Safaniyah, and the 'Ain Dar, Shedgum, and Uthmaniyah areas of Ghawar, some of the finest-producing reservoirs ever tapped anywhere.

Indeed, none of the lesser fields that have been produced has rivaled the performance of the top four royal fields.

We would all like to be optimists about Saudi Arabian oil production and what it represents for the world's energy future. But if there is a reasonable possibility that the optimistic position is mistaken, then it behooves us to begin preparing for the reality of a world without Saudi oil.

What are the assumptions that underlie the optimistic position? What must one believe in order to include Saudi oil production as a key element in long-term national or international energy policy?

The optimists who support the common wisdom about the kingdom's oil must hold one or several of the following assumptions:

1. The secretiveness of the Saudi oil establishment as well as other Middle Eastern and OPEC producers for the last 25 years has not been part of an effort to conceal troubling realities or enhance political interests.

2. Aramco and its contractors have developed proprietary technology for wringing oil from mature fields and sustaining production that is far superior to that applied by the world's best-known publicly held oil companies in other major oil provinces.

3. The phenomena that have signaled the onset of decline at oilfields elsewhere in the world, and that have been observed in Saudi Arabia's mainstay fields for many years, somehow do not mean coming decline for Saudi oil production.

4. The Saudis have chosen to concentrate production in their aging super-giant fields, even if this risks hastening depletion by overproducing, rather than spread the burden by developing additional discovered fields. But, many other fields have been kept in reserve and could make a significant contribution once they are brought onto production.

5. Saudi Aramco's exploration program has missed additional giant or super-giant oilfields lying beneath the desert sands, but future exploration efforts will surely find them in time to head off a supply crisis.

6. The reserves in Ghawar field really do greatly exceed the estimates made by Aramco in the 1970s.

7. Ghawar, by virtue of its unprecedented size, is simply an exception to all the truths and principles that have governed production and depletion of oil in all of the world's other super-giant oilfields.

8. Aramco could have grown its oil output at any time it wanted during the last 20 years, but the world markets never had the need for more of its oil.

The most striking aspect of the technical challenges now facing all the important Saudi Arabian oilfields —Abqaiq, Ghawar, or even the cluster of recently discovered Hawtah Trend fields that offered such promise — is the difficulty Saudi Aramco is having merely to keep each field's oil output flat.

Unless the kingdom soon discovers a new generation of giant oil and gas fields, it now seems almost impossible that Saudi Arabia could grow its production by any significant amount. Yet every serious long-term energy supply forecast still assumes that Saudi Arabia can boost its oil output to almost any level the world will need.

If it is unrealistic for Saudi Arabia to substantially grow its daily oil output on a long-term sustained basis, a more urgent energy question arises: How easy would it be for Saudi Arabia simply to maintain flat production of seven to eight million barrels a day?

As inconvenient as it would be for a secure global oil supply, even maintaining a prolonged period of plateau production might be unrealistic.

And so we must ask one further question: When Saudi Arabian production finally begins to decline, how rapidly could output actually drop?

These questions are of monumental importance to a world hooked on abundant and inexpensive oil. I argue that these are now the most important energy questions in the world. Unfortunately, they cannot be answered easily.

My research has convinced me it is unlikely that Saudi Arabia could sustain any higher oil output than it now produces, and that even the current production rate may be too high.

However, determining precisely when Saudi Arabian petroleum output will peak — or whether it has already peaked — is still a subjective exercise, not unlike similar efforts to determine peak oil production in other regions.

Amidst these uncertainties, the only sure fact is that when Saudi Arabia's oil production peaks and begins to decline, it will take energy forecasters and policy-makers by total surprise. Not a single serious energy plan devised in the past three decades has envisioned such a scenario.

Too many seemingly knowledgeable oil observers have assumed that Saudi Arabia's giant oilfields are so large that they might even defy the peaking phenomenon, or at least avoid the event for years to come.

While ignorance is bliss, ignoring the consequences of a peaking of Saudi Arabian oil will be far more dangerous than the scorn that many experts directed at the notion that U.S. oil would peak in the 1970s.

Throughout 2004, various Aramco officials and the Saudi Petroleum Ministry claimed that the kingdom had the installed capacity to produce up to 11 million barrels per day and would boost this capacity to 12.5 million in the next few years.

These claims were often accompanied by boasts that production rates of 10, 12, or 15 million barrels per day can be sustained for at least 50 years. The officials also claimed that Saudi oil output reached 9.5 million barrels per day in July 2004 and stayed at that level for the next five months.

While these claims are comforting to many oil observers the IEA's reported crude oil imports by country of origin indicated that there had been only a modest growth in imports from Saudi Arabia from the very steady 4.5 to 4.6 million barrels per day level that had been maintained for the preceding several years.

Little of the reported surge to 9.5 million barrels per day showed up in imports to OECD nations. Faced with an apparent discrepancy, which numbers are we to believe? Even if an oil-exporting nation had valid reasons to keep its oil resources a state secret, do its interests outweigh the global public interest in planning a rational energy future?

Although the barriers to transparency are powerful, the need is compelling — compelling enough to subordinate the interests of the producers to the well being of energy users everywhere.

Information reform can happen. Data can be shared without compromising producers' interests.

We can move from a one-sided system based on "Trust me!' to one of mutuality grounded in "Trust, but verify." Failure to do so will virtually guarantee disruptive energy surprises that will wreak economic havoc.

Excerpted with permission of the publisher John Wiley & Sons, Inc. from Twilight in the Desert. Copyright (c) 2006 by Matthew R. Simmons. This book is available at all bookstores, online booksellers and from the Wiley web site at www.wiley.com, or call 1-800-225-5945.