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BACKGROUND BOOKS:
- RICHARD HEINBERG, THE PARTY'S OVER: OIL, WAR, AND THE FATE OF INDUSTRIAL SOCIETIES
- RICHARD HEINBERG, POWERDOWN
- WILLIAM CATTON, JR, OVERSHOOT: THE ECOLOGICAL BASIS OF REVOLUTIONARY CHANGE
- KENNETH DEFFEYES, HUBBERT'S PEAK: THE IMPENDING WORLD OIL SHORTAGE
[The math is not complicated here. Ghawar (alternately spelled Gharwar) has always been the largest oil field in Saudi Arabia, dwarfing even other large Saudi fields. By definition and universal acknowledgment, approximately 25% of the planet's oil reserves are in Saudi Arabia which is today producing roughly 12% of total world oil output. Setting aside the fact that new discoveries take between three and seven years to bring online there is to be no respite here and no miracle discovery that can possibly make a difference. This article also reveals that no significant discoveries have been made in Saudi Arabia which will supply any Saudi light oil for the next seven years. No doubt Aramco and Saudi Oil Minister Shaikh Ali Naimi will blast the Bank of Montreal's report alleging conflict of interest because of the bank's deep commitment to Albertan tar sands projects. The latter are extremely expensive, destructive and heavy users of natural gas. But it is now only a matter of a relatively short period of time before another "heavyweight" confirmation of Ghawar's decline surfaces somewhere. -MCR]
Bank says Saudi's top field in decline
Aljazeera
By Adam Porter in Perpignan, France
Tuesday 12 April 2005 10:10 AM GMT
http://english.aljazeera.net/NR/exeres/08B97BCF-7BE6-4F1D-A846-7ACB9B0F8894.htm
In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.
 Gharwar's decline may spook markets and force prices up |
Speculation over the actual size of Saudi Arabia's oil reserves is reaching fever pitch as a major bank says the kingdom's - and the world's - biggest field, Gharwar, is in irreversible decline.
The Bank of Montreal's analyst Don Coxe, working from their Chicago office, is the first mainstream number-cruncher to say that Gharwar's days are fated.
Coxe uses the phrase 'Hubbert's Peak' to describe the situation. This refers to the seminal geologist M King Hubbert, who predicted the unavoidable decline of oilfields back in the 1950s.
"The combination of the news that there's no new Saudi Light coming on stream for the next seven years plus the 27% projected decline from existing fields means Hubbert's Peak has arrived in Saudi Arabia," says Coxe, referring to data compiled by the International Energy Association's (IEA) August 2004 monthly report.
Problematic effects
The Canadian bank is the latest in a line of oil opinion-makers to speak out about.
Others, notably banker Matt Simmons and the head of the Association for the study of Peak Oil (Aspo), Colin Campbell, have called into question the validity of its stated reserves, supposedly 258 billion barrels.
 Some say Gharwar may have been damaged by poor management |
If Gharwar, the world's biggest field, is seen to be "in decline", as Coxe says, the effects could be problematic. Markets could panic, forcing prices up, creating shortages and profoundly affecting the world economy.
"The kingdom's decline rate will be among the world's fastest as this decade wanes," predicts Coxe. "Most importantly, Hubbert's Peak must have arrived for Gharwar, the world's biggest oilfield."
Coxe dismisses Saudi claims that the country can produce extra capacity to satisfy surging demand. He notes that Saudi promises to increase production last year failed to materialise. Aramco had pledged an extra 500,000 barrels of oil immediately and an extra 5 million bpd by 2012.
He says the markets had "assumed this first flow would be a half million barrels daily of the benchmark Saudi Light, the high-end product that any oil refinery can process. Instead ... the new oil was heavy, sulphurous oil that only a few refineries had the spare capacity to use".
Continuing, he asks: "What about those 5mbpd of new production by 2012? It turned out that only 2.5 million barrels would be net additions to Saudi output: Declines from existing fields will slash production by 2.5 million bpd."
Saudi response
Saudi Aramco's chief executive officer Abd Allah Jumaa denies anything of the sort is happening.
"We have ambitious expansion plans to boost our capacity ... [and] raise our production capacity to 15 million barrels a day... We are confident that we can maintain these production rates for about half a century"
Saudi Aramco's chief executive officer Abd Allah Jumaa
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"We have ambitious expansion plans to boost our capacity to 12 million bpd and also have a long-term crude development scenario that would raise our production capacity to 15 million barrels a day. We are confident that we can maintain these production rates for about half a century," he says.
However, Campbell noted that in 1990 Saudi Arabia, along with other Opec producing countries, notably Kuwait, revised their reserve estimates overnight.
This was in order to pump more oil as part of Opec's quota arrangement. The more reserves you claimed to have, the more money you made.
Same reserves
Saudi Arabia announced "a massive increase from 170 to 258gb in 1990. It had evidently decided to follow Kuwait's practice of reporting original, not remaining reserves," Campbell says.
Since that time, despite pumping around 9mbpd, Saudi Aramco says the size of its reserves have not only remained the same but increased slightly from 258gb to 259gb thanks to better extraction techniques.
However, Simmons believes Gharwar, responsible for around 5mbpd of Saudi output, may have been damaged by poor management.
Pumping large amounts of oil at the maximum rate can damage the geological structure of the field, usually referred to as "rate sensitivity". Basically the hole falls in on itself, making large amounts of oil within it un-extractable.
Lack of transparency
The rising speculation among analysts may ultimately be the fault of the Saudis. The lack of outside independent scrutiny has created space for sceptics like Coxe to question their facts and figures.
 Ali al-Nuaimi's Saudi oil ministry is accused of not being transparent |
In 2005 alone, the OECD, the G7, the IEA and the IMF have all openly called for increased transparency over oil reserve calculations, mainly from Middle Eastern states.
The market cannot hope to understand its current position without knowing how much oil lies in reserve. This is at the heart of much of the current oil market's problems.
But Coxe's figures may even be on the sympathetic side. According to Saudi Aramco's own statistics, existing Saudi fields deplete by 600,000 to 800,000bpd each year. If such levels are maintained until 2012, Saudi depletion will have reached a minimum of 4.2mbpd.
Water injection
In other words - by their own admission - Saudi Arabia will have added only 800,000bpd of supply in the next seven years. That is the best case scenario.
To put these rates into context, the IEA predicts a year-on-year rise of 1.6mbpd by the fourth quarter of 2005.
One factor contributing to the scrutiny the Gharwar field faces is the huge amount of water injection used. Water is pumped into an ageing oilfield in order to maintain high pressure inside.
This allows the oil to be pumped out at the original constant rate. Eventually, however, the water reaches the well-head, and the field effectively dies.
Coxe goes on to ask why new Saudi fields, not just ageing ones, are also water injected.
"As if that weren't bad enough news, the Saudis claim they need at least $32 a barrel to justify new production, because ... new production ... requires water flooding. Water flooding on newborn Saudi wells? Isn't water flooding [the] Viagra of ageing wells?"
"As if that weren't bad enough news, the Saudis claim they need at least $32 a barrel to justify new production, because ... new production ... requires water flooding. Water flooding on newborn Saudi wells? Isn't water flooding [the] Viagra of ageing wells?"
Don Coxe,
Bank of Montreal analyst
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Abd Allah on the other hand states that it is modern techniques, not water injection, that will let Aramco meet any future demand.
"We are confident that we can extend [our] success well into the future given continued advances in exploration and production technologies and the fact that vast relatively unexplored areas exist in the kingdom with potential hydrocarbons to be discovered."
Canada oil link
While the Bank of Montreal weighing in on the prospects of Gharwar depletion is noteworthy, it should be pointed out that the bank is financially involved with the Albertan oil sand deposits.
The Albertan "sands" are deposits of sticky oil and sand, traditionally too costly to extract, which are now receiving great attention as conventional oil prices rise.
Coxe is extremely bullish on prospects of companies working in Alberta.
"The Alberta oil sands companies aren't like other oil companies," he says.
These companies are, of course, potential alternatives to Saudi oil. But Coxe ends up painting a bleak picture.
"With Opec's excess capacity ... tapped out, oil consumers have lost their security blanket against petro-chills. Free markets ... can be messy and unpredictable, little people can get hurt."
As debate over Gharwar intensifies, pressure on Saudi Arabia to independently reveal its actual size will come from many sources.
Now, for the first time, a major bank has joined that chorus. The arguments over the world's biggest oilfield are set to stay.
Heading For Peak: Skrebowski's Oilfield Megaprojects Update
Chris Skrebowski, Editor of Petroleum Review (UK) interviewed by Julian Darley
11 April 2005
http://www.globalpublicmedia.com/transcripts/379
In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.
In Brief: For Global Public Media, Chris Skrebowski, author of the important Oilfields Megaprojects Report for the UK Petroleum Review, explains to Julian Darley why 2005 will be a critical year for global oil.
Julian Darley: Can you explain what a 'megaproject' is?
Chris Skrebowski: Yes. The definition of a megaproject that I use is any field development which is going to produce in excess of 100,000 barrels a day. Now the reason I pick that figure is that because on normal sizing of projects, this is the equivalent of about 500 million barrels [reserves]. Now that is in effect the cut off point where a project will make a useful difference to a company's or a country's production. Once you get much below that you're into quite small projects. There are large numbers of them and they're difficult to tabulate and they make rather less impact on the whole.
JD: So what is your Oilfields Megaprojects Report?
CS: What I've done is I've simply tabulated all the known, that is to say publicised, projects that we know about in the world. Now these days the companies aren't reticent, they don't keep projects secret. They're keen to tell the world and tell their shareholders what new production they've got coming up. So we have fair confidence that if we've got the listing right we've got most of these. In addition there is a tendency to publicise fairly quickly any large discovery that's been made. So in addition to tabulating projects that have gone into projects that we have dates for, I have a listing of large discoveries which are likely to become projects perhaps with a bit more work and then we'll get the full description of the dates to go with them.
JD: Can you explain the significance of your report, in other words, why you do it.
CS: The reason I do it is because this tells us fairly clearly how future production flows are going to work. The reason it's able to do this is that the oil industry actually is a quite slow moving industry. These projects have very long lead times. For example a typical large offshore project is taking at least five years from when you first hear about it to when it produces its first oil.
Even large onshore projects take 3 to 4 years from when you hear of it to when it's in production. And the faster project you can have on this side is maybe the reworking of a large oil field in maybe Saudi Arabia, but even then you're talking about two and a half years so you don't really have surprises, nothing really creeps up on you. So if you continuously update this you get a really good idea of the flow of future oil.
JD: This side of 2010 we can't really have any miracle new production coming on board that you don't really know about?
CS: Not of a magnitude that would really alter the outcome. That's to say yes, people can scrabble around, they can put little extra wells here and there. There may be some small projects they can conduct, but it really won't make a significant difference to the outcome. So in that sense the dye is pretty well cast, out certainly to 2010 and maybe beyond that.
JD: Now the matter of depletion is not really that easy to understand. I mean in principle it's easy to understand, but in practice as so many things, it's not so easy. Can you explain a bit more about depletion especially as its happening now in the world. For instance the fact that Exxon and the International Energy Agency have suggested 5% depletion which would be around 4 million barrels per day reduction, and yet in your editorial for Petroleum Review (April 2005) recently you said we only need to make up for one million barrels a day. Can you explain the discrepancy?
CS: Yes, hopefully this is reasonably straight forward. All oil fields deplete, literally from the day they start. So you know, very quickly if you've got a field there will be some wells which are not producing as much as they were say last year. And you'll be drilling new ones to compensate or some of the existing ones will be able to be turned up and they will compensate. Now that's a completely normal process and no one thinks very much about it.
To give a very homely analogy, if you go do down to your local pub and you order a pint of beer, and you find that they're drawing it from a different beer engine from last time you were in, it's really of not much interest to you. You're still getting your beer. They for some reason have changed the tap around, connected the kegs differently. So that's the sort of every day depletion. Now there then comes a point when perhaps it's not any longer a depletion within a field, but some parts of a country are actually in decline, but they are still being offset by increasing production from another part of the country. Canada's quite a good example of this. The conventional production in western Canada is in decline at the moment. Over recent years of shore production in eastern Canada has gone up. Production from heavy oil and from tar sands has gone up. So, if you are a buyer of Canadian crude you wouldn't be that bothered. You're not getting it from quite where you were before but that doesn't bother you.
So, if we go back to the pub analogy, if you go down to your local pub, this would be the equivalent of being told "well we're not serving that beer in this bar but if you go to the upstairs bar you can get it there." So it would mildly inconvenience you and no more. Now this, if you like, has been a key part of the oil industry since its inception.
But, then there's the third type of depletion and that's the type that worries us. That's when an entire country - because we define our measurements on the basis of countries - starts to decline. And this becomes different because now the customers for that oil now have to go off and find a new supplier. So for example the UK North Sea is going down at about 150,000 barrels a day, 200,000 barrels a day. Now the people that were buying that oil now have to go off and find another supplier. For that other supplier, they are like new demand, new customers.
So again if we go back to the slightly forced analogy of the pub: You've gone down to the pub, you've asked for your pint of beer. They've reluctantly admitted that they haven't got it. You're now going to go off and find an other pub and see if they've got some. Now that, if you think about it is a completely different situation than if you've just got to the upstairs bar or taking it from a different beer engine.
So to put the numbers on it, the overall decline which is largely being covered for by normal oil industry activity is around 4 million barrels a day per year. The specific decline which has got to be made up from somewhere else is around one million barrels a day per year. That's the number which is recorded in the editorial.
JD: And that is the one million barrels a day per day which must be made up by genuine new fields, not just infilling, and working the old fields over to get more out of them?
CS: Yes, that's right. This number is now on the rise. It's on the rise because more countries are moving from being able to expand production to production actually declining. We know that over the last three years the numbers in decline have been fairly steady. One or two have been added. Yemen went over the edge last year. And so it's been holding it around that one mb/d mark. But in the next couple of years we expect some very big countries, very big producers to move into decline. We expect China to go. We expect Mexico to go. We expect India to go a little later. We expect Malaysia a little earlier. Denmark probably this year. Brunei probably the year after. So then suddenly that one mb/d is going to crank up, maybe to 1.3, maybe to 1.4, maybe even more than that.
And so you're getting a sort of tipping effect. It's like a scales.
JD: And there is one further extremely important factor, is there not, and that is the matter of demand growth, which has become such an important factor. So is it correct to say that what new fields have to make up for is the roughly one million barrels a day per year decline that we've talked about, but also this demand growth. Can you say how much the demand growth is expected to be, or indeed has been, and how that adds up.
CS: Well two observations, the first observation is that the playing field isn't level, it's on a slope. So we've got to produce a million barrels a day that we didn't expect to just to stand still. That's before we meet any new demand.
Now the new demand , and it's difficult to disentangle how much of that is this one mb/d and how much is genuine new demand in the sense we normally recognise it, ran last year at around 2mb/d. Which was about the fourth highest increase on record. Now initially people were surprised by this. We had the strange phenomena where we had the IEA revise their demand estimates up. And we've been repeating the same process this year. So we're already up to an estimate of 1.8 mb/d for this year. But no one's very confident it will stop there. They think it will probably go on up. No one's quite sure how far it will go up. Possibly not quite as high as last year, but then again possibly as high.
So that adds up to somewhere between two and three million barrels a day extra if you add the one million together with the 1.8, 1.9 or even more?
Well I think we should assume that the one was included in the final outcome of 2.7 that we saw last year. In fact the early estimates I expect were simply because they didn't include that number.
Again it's difficult to disentangle, because everyone has a slightly different way of dealing with depletion. Some total it up, some net it off on each country. It gets... Conceptually it's quite simple, in practical terms it's quite complicated how you treat it.
JD: Can you then tie together and say what does that mean for this year, thinking about the amount of depletion, the amount of demand, and the amount of new supply that can come on to meet that?
CS: Yes I can. My best estimate for new supply for new supply in 2005 is around a million b/d of OPEC production and maybe 1.5 mb/d of non-OPEC production if everything worked perfectly. But already the countries are saying that they think it will be a lot closer to one. So that would give us potentially two mb/d of new capacity. Now the EIA is already estimating demand growth at 2.2. The IEA is still estimating it at 1.8 but I suspect will revise it in this next month's report. So we're already looking as though it's barely going to cover our immediate requirements. The immediate conclusion is that the price is going to stay high. The situation's going to remain tight.
And we'll bet testing if that little bit of spare capacity in Saudi Arabia is really there or not.
JD: Spare capacity is important because it mollifies, quietens down prices. And when it gets very small, prices become very volatile. How much space capacity do you think is really left in the world now?
CS: We are told that there is about 1.5, 1.8in Saudi Arabia. That is probably true. The question is how much of that is in any sense usable, given that some of this is rather high sulfur crude which we've no refinery capacity to cope with. So I think the short answer is, not very much. Which is an unsatisfactory answer, but probably the best answer you'll get.
JD: Yet OPEC is debating whether to debate whether to raise its output quota by another half million b/d to 28mb/d in the near future. Do you think it can actually deliver? What does that all mean?
CS: As you're hinting, it's not at all clear what it means. I mean OPEC as an organisation can only function if it does have spare capacity. Once you have no spare capacity you have no particular lever except the rather dramatic lever of simply turning it off, and watching the prices spike. So OPEC's power depends on having spare capacity and using that to move prices in a range that they want. Now clearly OPEC has largely lost control of price which implies they really don't have much usable spare capacity to work with.
I think we're into the sort of politics of this and talking up the idea that they have slightly more leverage than they actually do.
JD: Which presumably at a certain point will be bitten by reality?
CS: It's in no one's interest to demonstrate this too clearly. Which sounds an overly cynical remark. You see if we really thought there was no spare capacity and there was nothing we could do then I suspect we'd all start to get a bit panicky. It therefore seems quite important to either maintain the believe or the reality that there is a little bit of slack in the system.
JD: In your list of fields coming on in the next five to seven years, many of which as you've said are in the 100,000 b/d category, which would have been by previous world standards quite small. But there are a couple of very large ones due to come on before 2010, though not many, and the largest of those due on in the next five years is the Saudi Arabian field of Khurais. Now this has been described in less than kind terms by analysts such as Matt Simmons. Do you really think that Khurais can deliver 1.2 mb/d by 2009 as is suggested?
CS: I think on these occasions, it's probably wise to suspend disbelief. If the Saudis are telling us it can produce this and are prepared to invest on this basis, then the answer is yes, it probably can do this. The question is, can it do this for any length of time? The problem with many Saudi fields is that they are basically carbonate reefs which don't necessarily give up their oil very easily. There's a certain amount of oil which moves into to the fissures and fractures. And that can be produced at quite high rates. But then once you've cleared that out, the rate of movement out of the main body of carbonate is really quite slow. So I think the key question with a lot of the less productive Saudi fields is not whether they can achieve the numbers the Saudis claim but whether they can maintain that for any length of time.
JD: And is it not also true that certain fields that have been suggested as new fields, by the Saudis for instance, are not really very new? Can you say something about Khurais again as an example? It's not really a new field is it?
CS: No, it was discovered in 1957. As far as we can tell it was put into production in 1964. It produced at no very dramatic rates until the mid-80s, and appears to have been turned off when prices went weak and the Saudis turned a lot of their peripheral fields out, to concentrate a lot of their man power on a limited amount of their more productive fields.
JD: And that not very impressive production was about 150,000 barrels a day, is that right?
CS: That's a figure I've heard, yes.
JD: Which is nowhere near the 1.2 million barrels a day which is being projected.
CS: No. By the sound of things we're talking about a total rework of this field. This field has large multi-billion barrel reserves in it. The question, as I said earlier, is to make these barrels flow in a productive manner. Now presumably they will be using further applications of these large, maximum reservoirs contact wells. They'll presumably be going in for some kind of heavy fracturing program too, to try to open up the reservoir and make it flow better. And we're talking about quite an extended time-frame for a known field to be reworked. We're talking about nearly 4 years before it achieves this flow rate, so obviously they have plans to do a great deal of work on it.
JD: That's a projection for 2009. Are there any projections for this year, 2005 and 2006, which you think will be on the optimistic side which you think will slip and not reach their targets?
CS: I can't sort of point to any specific project, and say I think that will slip, apart from the point that would be slightly invidious. What I can say is that the experience of recent years is of considerable slippage. Areas that have seen particularly bad project slippage have been places like Nigeria where we have seen very extended time frames between the discovery of a field and its likely first production date. Some of these are now slipping out to 8 even 9 years. Which you know, is way beyond the average of the megaprojects which is just shy of 6 years. Which if we've seen anything in a consistent movement, it's the smearing out of the project profile. And if we're now starting to say that the project profile may be short of our immediate requirements, smearing it out further - well, we'll last longer but we still are missing all the time, if you see what I mean.
And an alternative analysis which is being used by the CIBC (Canadian Imperial Bank of Commerce) is to look at the potential shortfall and what price you'd need to close that shortfall by destroying demand. And the figures that they're coming up with are quite dramatic. They see this sort of shortfall increasing from about one mb/d in 2006 which they believe can be closed by the price rising to $61/b, and then they take it up to 2.8 mb/d the year after at $70 oil. 2008 they've got shortfall of 5 million barrels and $80 oil. 2009 they're up to $90 oil. 2010 they're up to $101 oil.
Now this is a rather economist's approach because it assumes that everything works smoothly. I'm not sure that high oil prices can be accommodated in that sense. It seems much more likely that they will induce some significant economic set back.
JD: Such as economic recession or even depression?
CS: Hard to see what else they could do. I mean, you know, given that a very high proportion of oil use is in areas where it's not very easy to substitute. If you are forced not to do that, then that will have a huge impact on economic activity. I mean, if you lose your job obviously you don't spend so much fuel to get to work, because you're not going to work. But that's a rather dramatic way to cut back gasoline usage.
JD: That's what is sometimes called demand destruction.
CS: Well that's what they're talking about. Only they are assuming I think that this is a smooth and controllable process. What I'm just asking is, can we be that confident?
JD: In the light of much evidence, and in the light of your report, do you think that Ken Deffeyes' suggestion of Thanksgiving 2005 being the time of peak, is too bold in your opinion?
CS: No, that is entirely possible. We're now into, you know, a sort of unknown land. We haven't been in this situation before. I don't think we know quite how to analyse it. We're taking traditional, fairly conventional analysis. And we're saying let's see what happens when we do this. And I suppose the rough answer we get is that from this year on it looks difficult to get it to add up comfortably. It certainly looks as though after about 2008 it really doesn't add up. But it's not quite clear what more you can say.
JD: With that, thank you very much indeed.
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BANK SAYS SAUDI'S TOP FIELD IN DECLINE