Oil Mirage?

Beijing was busy this October. It not only hosted a meeting of the fifth plenum of the Communist Party, but down the highway at Grand Epoch City, a replica of the royal part of ancient Beijing, the G20 finance ministers were also in conference. Participants at both sessions left with optimistic words ringing in their ears. At the G20, Saudi Arabia’s Finance Minister, Dr Ibrahim Abdulaziz al-Assaf, told delegates that the Saudi national oil company, Aramco, would act to stabilise oil prices. A day earlier Communist Party officials had told delegates that China had set a five-year plan to increase GDP per capita to about $US1700 by 2010 '” double the 2000 figure.
But while Australian Treasurer Peter Costello returned from Beijing with a spring in his step and told us the oil price would moderate, he may not have noticed that Dr al-Assaf had spoken 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’s start with a big fact: the seven largest Saudi fields, which account for about 11% of global production, are being drained of more than nine million barrels each day. This is not production from 70 '” or 200 fields in the case of the North Sea, or 500,000 fields in the case in the United States '” but seven. These seven supply about 90% of all Saudi oil so if the Saudis are not finding the equivalent of nine million barrels a day (3.3 billion barrels a year) part of this volume, maybe a large part, is being drawn from inventory. The obvious question Costello should have shot over the table was: "That’s great news, but how much did you replace 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 "not a lot". Unfortunately, the only person who has researched this question thoroughly and/or made it public is Matthew Simmons, the Houston based founder of Simmons & Company International. 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 more than 300,000 barrels a day with one, Ghawar, producing some 4.5 million, sometimes five million, barrels a day. 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 oomph '” in the hundreds of thousands.

But the reality is that recent Saudi discovery record is scanty. After 30 years of exploration, often employing outside experts and the latest technology, producible oil discoveries have been in dozens, not hundreds.

In reality, there is very little public data to go on if we’re talking about the Saudis producing a lot more oil, bringing lower oil prices, calm world markets; and little 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, but he can’t be dismissed lightly. His company maintains data 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 lthough he has annoyed some oil executives, others have applauded his efforts to bring clarity to the world oil reserve data.

So taking Simmons at face value, he compares the generalised Saudi claims about increased capacity and 50 years of remaining high production with 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 the Khurais field will produce in the future. This is interesting, as Khurais produced 20,000–40,000 barrels a day during the 1970s, and peaked at 144,000 barrels in 1983. Are the Saudis planning to lift production by 450%?

The 500,000 figure refers to another field called Shaybah. It produced 600,000 barrels a day in 1981 but is apparently down to 300,000 now. It will be lifted back to 500,000. Mighty as this figure is, it sets alarm bells ringing again. Even if the Khurais and Shaybah fields can be renovated to produce these flows 30 years into their production history, how long do they last? Five years '” 10?

Saudi Aramco officials seriously 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.

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 '” we may not see much of this extra oil for a while, if indeed we see it at all.

Richard Campbell is a stockbroker at Bell Potter Securities.