February 9, 2011

Wikileaks and Saudi Oil Capacity

The Peak Oilers are abuzz with the latest Wikileaks revelations reported in the UK Guardian, which consists of a series of cables from the U.S. embassy in Saudi Arabia reporting conversations with a Saudi observer knowledgeable about Saudi oil prospects. The confidant, one Sadad al-Husseini, is a geologist and former head of exploration at the Saudi oil giant Aramco. Though al-Husseini is careful to distance himself from the peak oilers and from the views of Matt Simmons regarding an imminent decline in Saudi production, he gives an estimate of Saudi reserves some 40 percent lower than the official figure. In a cable dated December 10, 2007, his views are summarized as follows:
It is al-Husseini's belief that while Aramco can reach 12 million b/d within the next 10 years, it will be unable to meet the goal of 12.5 million b/d by 2009. The former EVP added that sustaining 12 million b/d output will only be possible for a limited period of time, and even then, only with a massive investment program.
According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described and the timeline for their production not as unrestrained as Aramco executives and energy optimists would like to portray. In a December 1 presentation at an Aramco Drilling Symposium, Abdallah al-Saif, current Aramco Senior Vice President for Exploration and Production, reported that Aramco has 716 billion barrels (bbls) of total reserves, of which 51 percent are recoverable. He then offered the promising forecast - based on historical trends - that in 20 years, Aramco will have over 900 billion barrels of total reserves, and future technology will allow for 70 percent recovery.
Al-Husseini disagrees with this analysis, as he believes that Aramco's reserves are overstated by as much as 300 billion bbls of "speculative resources." He instead focuses on original proven reserves, oil that has already been produced or which is available for exploitation based on current technology. All parties estimate this amount to be approximately 360 billion bbls. In al-Husseini's view, once 50 percent depletion of original proven reserves has been reached and the 180 billion bbls threshold crossed, a slow but steady output decline will ensue and no amount of effort will be able to stop it. By al-Husseini's calculations, approximately 116 billion barrels of oil have been produced by Saudi Arabia, meaning only 64 billion barrels remain before reaching this crucial point of inflection. At 12 million b/d production, this inflection point will arrive in 14 years. Thus, while Aramco will likely be able to surpass 12 million b/d in the next decade, soon after reaching that threshold the company will have to expend maximum effort to simply fend off impending output declines. Al-Husseini believes that what will result is a plateau in total output that will last approximately 15 years, followed by decreasing output.

Al-Husseini elaborated that oil field depletion rates also play a significant role in determining the Aramco - and global - production timeline. Increasing output is not simply a function of adding new capacity to already existing operations. Instead, due to depletion rates, new reserves must be brought online to both replace depleted production and satisfy growth in consumption. The International Energy Agency (IEA) has estimated global depletion rates at 4 percent, while a 2006 Aramco statement has estimated Saudi Arabia's overall depletion rate at 2 percent. Al-Husseini estimates that moving forward, satisfying increases in global demand will require bringing online annually at least 6 million b/d of worldwide output, 2 million to satisfy increased demand and 4 million to compensate for declining production in existing fields.
A couple of points may be inserted parenthetically here. When the cable was written, the price of oil had just recently reached $100 a barrel. The world was on the cusp of the extraordinarily volatile year of 2008, when the price reached $145 a barrel in the summer and then collapsed into the fall. We're now back to the levels reached in late 2007. In 2008 the International Energy Agency also released an estimate of global depletion rates far more alarming (at 9 percent) than the 4 percent that al-Husseini estimated, while also projecting that Saudi oil production would grow to 15.6 mbd by 2030.

The immediate import of the cable was that the increases in the price of oil reflected real constraints and not the influence of speculators.
Considering the rapidly growing global demand for energy - led by China, India and internal growth in oil-exporting countries - and in light of the above mentioned constraints on expanding current capacity, al-Husseini believes that the recent oil price increases are not market distortions but instead reflect the underlying reality that demand has met supply (global energy supply having remained relatively stagnant over the past years at approximately 85 million barrels/day). He estimates that the current floor price of oil, removing all geopolitical instability and financial speculation, is approximately 70 - 75 USD/barrel. Due to the longer-term constraints on expanding global output, al-Husseini judges that demand will continue to outpace supply and that for every million b/d shortfall that exists between demand and supply, the floor price of oil will increase 12 USD. Al-Husseini added that new oil discoveries are insufficient relative to the decline of the super-fields, such as Ghawar, that have long been the lynchpin of the global market. 
While al-Husseini believes that Saudi officials overstate capabilities in the interest of spurring foreign investment, he is also critical of international expectations. He stated that the IEA's expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of over 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this "inconvenient truth." Al-Husseini was clear to add that he does not view himself as part of the "peak oil camp," and does not agree with analysts such as Matthew Simmons. He considers himself optimistic about the future of energy, but pragmatic with regards to what resources are available and what level of production is possible. While he fundamentally contradicts the Aramco company line, al-Husseini is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered.

The second issue that will limit any proposed Aramco output expansion can be broadly defined as a lack of supporting resources. For example, in al-Husseini's estimation, it is not the amount of oil available that will prevent Aramco from reaching 12.5 million b/d by 2009, but rather issues such as a lack of available skilled engineers, a shortage of experienced construction companies, insufficient refining capacity, underdeveloped industrial infrastructure, and a need for production management (if too much oil is extracted from a well without proper planning and technique, a well's potential output will be significantly damaged). As previously reported by post (Reftel), the Eastern Province economy is facing severe industrial expansion limits, and despite Aramco's willingness to invest up to 50 billion USD to achieve the 2009 goal, availability of labor, materials and housing may end up as determinative factors.

All in all, al-Husseini's views seem to split the difference between the "peak oilers" and the CERA projections. He gives aid and comfort to the peak oil camp by sharply reducing the estimates of Saudi reserves, but on the other hand seems to accept the CERA view of an undulating plateau of oil production that will be reached in the next decade or so. His estimate that the Saudis will only be able to produce 12 million barrels per day is, on the one hand, well short of the estimates contained in the most recent IEA report (which projected the Saudis would be able to add 5 mbd to their existing capacity over the 2009-2035 period) but, on the other hand, far in excess of the immediate crisis projected by Simmons in his Twilight in the Desert. Saudi Arabia's current production is a bit short of 8.5 mbd; it is uncertain how much spare capacity they have now (though official estimates put it at 2-3 mbd). In its most recent forecast, CERA also makes the point, like al-Husseini, that constraints to increasing production are technological, not geological, at least in the near term (though CERA is referring to the global production of oil liquids more generally rather than, as with al-Husseini, the prospects for Saudi production).

The Early Warning blog (Stuart Staniford) regularly updates Saudi production. Here is EW's latest estimate. "The graph shows five different data sources, together with an average index (thick black line) which summarizes the various data sources into something that is hopefully within hailing distance of the truth."

Staniford also includes a graph of the rig count in Saudi Arabia. The decline since 2008 he interprets as indicating that the Saudis are comfortable with their current level of spare capacity (whatever that is), though it might also be related to the technical constraints that al-Husseini details.

The Guardian also reports the conclusions of some cables sent subsequently.
Seven months later, the US embassy in Riyadh went further in two more cables. "Our mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period."
A fourth cable, in October 2009, claimed that escalating electricity demand by Saudi Arabia may further constrain Saudi oil exports. "Demand [for electricity] is expected to grow 10% a year over the next decade as a result of population and economic growth. As a result it will need to double its generation capacity to 68,000MW in 2018," it said.

It also reported major project delays and accidents as "evidence that the Saudi Aramco is having to run harder to stay in place – to replace the decline in existing production."
Al-Husseini's views had been previously reported, so to specialists, as The Oil Drum observed, it was nothing new that he repeated himself to the American Embassy. Perhaps the most interesting revelation is the strategic conclusion reached by the US Embassy that Saudi Arabia can drive prices up but cannot keep them down.

Al-Husseini himself subsequently issued a press release in which he claimed that US officials had misinterpreted what he was saying and that the summary included "many patently inaccurate statements."
I do not and did not question in any manner the reported reserves of Saudi Aramco which are in fact based on the highest levels of sound and well established engineering and economic principles and practices. Since Saudi Aramco’s proven oil reserves are 260 billion barrels, there is no way I could have said they are in error by 300 billion barrels, a number that exceeds the actual reserves estimate itself. . . . [Note: The US representative evidently mistook Saudi reserves for world reserves.]

In regards to Saudi Aramco’s oil production capacity, the giant multi-billion dollar expansion projects which were funded in recent years are now all a visible reality for the whole industry to see across the Saudi oil fields. . . .All these oil production projects were completed by the end of 2009 and the Kingdom’s total oil production capacity does in fact now stand firmly at 12.5 million barrels per day.
All clear now?

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