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Appointment in Beijing - doubts about Saudi oil |
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Beijing was busy this October. It not only hosted a meeting of the 5th
Plenum of the Communist Party, but down the highway at Grand Epoch
City, an ersatz replica of old Beijing, the G20 finance ministers were
also in conference. Both discussed growth and oil prices and the worry
they posed, but at the G20 Dr Ibrahim Abdulaziz al-Assaf told the
assembled dignitaries that Aramco would act to stabilise oil prices.
This was welcome news as a day earlier at the Plenum delegates were
told that China’s GDP would double by 2010.
But while our Treasurer returned from Grand Epoch City with a spring in
his step to tell us he had the good word from Dr al-Assaf, he may not
have noticed that the Saudi finance minister spoke of greater
“capacity” - not greater oil production. At first sight there seems to
be no difference- extra capacity must lead to more barrels.
Unfortunately in the opaque world of Saudi oil, that’s not necessarily
the case.
Let let’s start with a big and indisputable fact: the seven largest
Saudi fields are being drained of over 9 million barrels per day,
roughly 11% of world production. This is not production from seventy,
or 200 fields in the case of the North Sea, or 500,000 fields in the
case in the USA, but seven. These seven supply about 90% of all
Saudi oil so if the Saudis are not replacing the equivalent of 9
million barrels per day (3.3 billion barrels per annum) part of this
volume, maybe a large part, is being drawn from inventory. The
obvious question Mr Costello should have shot over the table was, “Mate
that’s great news, but how much are you replacing either by new
discoveries or by increasing capacity from existing fields?”
There was probably no direct answer, because as far one can tell the
honest answer was “Mate, not a lot.” Unfortunately there is only person
who has researched this question thoroughly and/or made it public and
that is Matthew Simmons, the Houston based founder of Simmons
International & Co. In his recent personal research project
“Twilight in the Desert” Simmons concluded that there have been no
large finds in Saudi Arabia since the 1980s. In this context
“large” needs defining. The main Saudi fields are monsters producing
over 300,000 barrels a day with one, Ghawar, producing some 4.5 million
bpd. At times it has been producing 5 mbpd. So if you are going to make
a difference to global oil output as Dr Al-Assaf hopes, you’re not
talking some two bit field with a few thousand barrels a day, but
something with real oompf in the hundreds of thousands.
But the reality is that the Saudi discovery record is scanty.
After thirty years of exploration, often employing outside experts and
the latest technology, producible oil discoveries have been in dozens,
not hundreds. The best was the Hawtah cluster found in the centre of
the Peninsula in the late eighties. This decade only 9 discoveries were
made between 2002 and 2004 and only one of these (Abu Sadr south of
Riyadh) was an “oil only” field, the rest being gas or oil and gas. As
Saudi Aramco no longer offers detail about particular field production
or discovery we can only guess how big these nine discoveries are but
we do know that the fields in the central region do not produce massive
quantities by Saudi standards for the simple reason that the most
productive oil zone of the giants on the east coast is absent in the
central region. This zone was weathered away millions of years
ago. This is the reason why the Hawtah group of 11 fields is
great by our standards but minor in Saudi terms. It produces just 2% of
Saudi output.
It is pure conjecture that this “oil only” Abu Sadr field is small, but
it is unlikely to be large or even on the scale of Hawtah fields as the
Armaco PR effort of recent years has not mentioned it. Instead
journalist are taken to a field found 45 years ago called Khurais.
Now I know I am testing the reader’s patience with this précis of
Simmons’ research, but bear in mind this is just about all we have to
go on if we’re talking about a lot more Saudi oil; and therefore lower
oil prices; and therefore calm world markets; and therefore not much
inflation. Saudi Aramco isn’t going to tell us in detail what’s
happening and while Simmons may be overly pessimistic or barking up the
wrong data tree, he can’t be dismissed lightly. His company keeps
figures on most oil and gas fields and all the big oil companies. He
also served for a while as an adviser to Dick Cheney’s national energy
policy committee and while he has annoyed some oil executives, others
have applauded his efforts to bring clarity to and fact to these
questions.
So taking Simmons at face value, he compares the generalised
Saudi claims about increased capacity and “50 to 70 years of remaining
production” with data about specific fields. For example a press
release earlier this year mentioned raising the capacity of one field
by 800,000 barrels a day and another by 500,000. Both are
impressive volumes until we learn that 800,000 barrels is exactly the
amount that Armaco says Khurais will produce in the future. This
is interesting as Khurais produced between twenty and forty thousand
barrels a day during the seventies, and peaked at 144,000 barrels in
1983. They are planning to lift production by 450%?
The 500,000 refers to another field called Shaybah. It produced 600,000
bpd barrels in 1981 but is apparently down to 300,000 now. It will be
lifted back to 500,000. Mighty as this figure is, alarm bells again
ring. Even if Khurais and Shaybah can be renovated to
produce these flows thirty years into their production history, how
long do they last? Five years? Ten. Saudi Aramco officials claim
Khurais will flow at 500,000 for 50 years with no depletion. Maybe, but
it seems strange that only a few hundred kilometres away the United
Emirates are planning for complete depletion and zero oil by
2014. Similar oil structures, similar production history over 40
years but a different outcome. Possible, but strange.
There is also the niggling point that the cost of these upgrades seems
disproportionate to the output. Why spend $3-4 billion upgrading an old
field like Khurais when there must be many splendid young fields ready
to put on line? And did Dr Al-Assaf mention capacity in the
context of replacement, or totally extra oil? We don’t know.
Probably the G20 Ministers were keen to get out to the walled city’s
golf course.
This is where we came in. It is almost certain Dr Al-Assaf
was referring to Khurais and Shaybah, not some vigorous new
fields not previously revealed. To make this all the more disturbing,
the renovation of Khurais has been on the agenda since 2001. Works may
start this year or next for a completion date in 2008 ie we may not see
much of this extra oil for a while, if indeed we see it at all.
And now that we’re back in Beijing, we should not forget the meeting in
Beijing central. You will recall that the economic ministry was gung-ho
about growth. In keeping with policy direction it announced to the
Plenum that GDP for the September quarter did not slacken off as most
commentators in the West said it would. Instead it rose by 9.4%. A few
days later the oil import figure was also announced. Imports did not
fall as commentators mostly said they would. It rose 4% to 76 million
barrels.
Call me old fashioned, call me confused, but somehow I sense that the
G20 ministers should have dropped in on the 5th Plenum. It may have
been boring; it may have been all in classical Mandarin, but I get this
feeling that the two meetings should have connected somehow.
Exactly why I just can’t figure out for the moment.
[This article was originally published in Eureka Report]
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