Article Tools
The debate over future global oil production capacity took a couple of interesting turns over the past two weeks as opinion makers on oil policy argued over the true state of the industry, a $10,000 bet was laid, and George W. Bush weighed in on the subject with some remarkable comments of his own.
Kicking off the action was President Bush with a tour of the Middle East. His Annapolis plan for peace between the Palestinians and Israel went nowhere, but Bush did manage some face time with King Abdullah of Saudi Arabia. The two were photographed spending a relaxing moment viewing some of the King’s prized stallions.
It was a fascinating moment considering the historic ties between the House of Saud and various U.S. administrations (particularly Bush ones). Here was the leader of the world’s reigning empire — the oil-fueled empire that succeeded the coal-fired British empire of the 19th century — reclining with the leader of the world’s key crude producer. What might they have talked about? Oh, to be a fly on the wall.
There must surely have been talk of oil. It’s an election year after all and Bush must be more than a little anxious to get the price of oil down before it begins to hurt the U.S. economy (which, according to U.S. Energy Secretary Samuel Bodman, is now beginning to happen). A decrease in oil would be welcome to many of the world’s poorer nations (especially African ones) who have reportedly dropped out of the bidding for crude because of its high price, which has led to both a downturn in some business activity, and blackouts in Africa.
But when Bush went through with what has become a banally predictable pantomime over the past year — asking the Saudis to increase their production of crude oil in a bid to temper high energy prices — the answer from the Saudis was the same they’ve given many times over the past few months: The world market is well supplied with crude and doesn’t need the extra oil.
Those struggling to keep the lights on will likely argue with that. After all, just a couple more million barrels a day or so making it to market would greatly relieve suffering in some of the world’s poorest countries (such as Sierra Leone, where the country’s electrical generation system is powered by expensive diesel fuel). It’s as if the Saudis don’t care.
But that’s not really like them. Over the past 50 years the desert kingdom has consistently played the role of global provider of crude of last resort, stepping in at key moments to provide extra crude whenever the world has needed it. When the Iranian revolution resulted in oil from Iran going offline, it was the Saudis who stepped in and made up the balance, a role they played again in the first Gulf War. As provider of the single largest chunk of oil to markets, Saudi Arabia has been to this point the world’s swing producer, a role only the Saudis can play and one they have responsibly taken on over the years. So why now, with oil at record levels, are they not playing that role? What’s going on?
The current reticence to step in and up production is even odder when you consider it was just a couple of years ago, when prices of crude first began to rise earlier this decade from the roughly US$20 a barrel crude had traded at through the late ’80s and ’90s, that the Saudis pledged to defend a price band of between US$22 and US$28 a barrel. Since then, of course, crude has since touched US$100. Sure, crude prices can be expected to come off in the wake of the recent market meltdown (and will likely fall further as global demand drops through whatever type of economic downturn is looming), but it is still the case that prices are now roughly 400% above the range they traded at for a generation. What happened to the defense of the trading band? Is there something else going on?
An alternative narrative to the current mainstream crude story — which is, basically, that it’s fine, the world has enough — has slowly emerged over the past couple of years. This alternative narrative challenges the mainstream assumption that Saudi Arabia contains an infinite amount of reserves and an innate ability to increase production as fast and as far as they would like, far above the current 10 million barrels a day. The primary source of this alternative narrative is Matthew Simmons, a Houston-based energy investment banker, who, earlier in this decade, began sifting through the one source of data other than official pronouncements from Saudi Aramco (the national Saudi oil company) that could give a clue as to the real state of Saudi oil resources — some 200 published papers submitted by Saudi engineers to the Society of Petroleum Engineers.
It is, of course, well known that Saudi Arabia stopped publishing detailed data about its operations back in 1982, choosing instead to “go dark” and hide its state secrets behind a veil of secrecy. As a result the world energy industry has motored along on assumptions formed back in the early days of the Saudi miracle (back when Western companies used to run Aramco), and those assumptions have changed little since then.
The problem, though, says Simmons, is that our current picture of global production capacity is seriously flawed. He came to that conclusion after his detailed study of the engineering papers and collected those observations in his authoritative, exhaustive, detailed work, Twilight in the Desert. The theme of the book is simple: Contrary to what we assume about Saudi Arabia, the technical writing on that country’s oil fields suggests the reality is far from what many think.
Simmons himself was surprised with what he found. It’s long been assumed that Saudi Arabia, a vast and exotic desert kingdom (to Westerners anyway) sits atop oceans of oil that are constantly being tapped for new production. Not quite, says Simmons. The truth of Saudi production is that the vast majority of its oil — 80-90% — comes from just half-a-dozen big old fields that were discovered in the post-war period and have been in heavy production over the 50 years since. In fact, Saudi Arabia’s single largest field, Ghawar, the world’s largest, has been responsible for more than half of Saudi production over the past half century, some 6-8% of the world’s total, and Saudi output is still heavily reliant on Ghawar and the other large fields. The idea that there is a lot more to be found in Saudi Arabia is flawed, and in fact, little new production beyond the big old fields is there to be had. The problem as Simmons sees it is this: The Saudi production miracle isn’t a result of new discoveries coming online to replace depleting fields — just a few new fields have been discovered since the ’70s. The real truth of Saudi production is that the country has been relying on these same few massive fields for half a century.
More worryingly, says Simmons, is that as far back as the ’70s Saudi engineers were worried about the ability of these big giants to keep producing at the amazing rates they have. The reason Aramco continues to pull as many barrels as it does from these aging giants is by pumping millions of barrels of water a day into the fields to keep reservoir pressure up. How much longer can we rely on these giants to keep producing like that? That’s not exactly clear. But Simmons’ work seems to clarify one thing: the idea that Saudi Arabia has infinitely more capacity to bring online — capacity that could see its production increase from the current 10 million barrels per day up to say, 12, 15, or even 20 million barrels a day, as many have assumed — is deeply flawed. In fact, says Simmons, most of the kingdom has been closely searched and there is little oil to be found other than the stuff already being produced.
Rate this article
