Global energy demand and capacity building in the petroleum sector
By Anthony H. Cordesman
Current estimates indicate that the Middle East and North Africa have some 63 percent of all of the world's proven oil resources, and some 37 percent of its gas. In 2003, Saudi Arabia alone was estimated to have roughly 26 percent of the world's proven oil resources and 4 percent of its gas, Saudi Arabia also provided 12.55 percent of the entire world's oil production, the Gulf provided 28.72 percent, and the entire MENA region provided approximately 34 percent.
The Energy Information Agency (EIA) and the U.S. Geological Survey estimate that Saudi Arabia now has the capacity to produce a maximum of 11.2 million barrels per day of crude (with a sustained capacity of 10.6-10.8). The EIA estimates that these high oil reserves, and low incremental production costs, will ensure that Saudi Arabia and the Gulf region will dominate increases in oil production through at least 2015.
The EIA estimates that Saudi Arabia alone will account for 4.2 million bpd of the total increase, Iraq for 1.6 million bpd, Kuwait for 1.3 million bpd, and the U.A.E. for 1.2 million bpd by 2015 in its reference case projection. These four countries will account for 8.3 million bpd out of a worldwide total of 17.9 (46 percent). To put these figures in perspective, Russia will account for an increase of only 1.3 million bpd.
The International Energy Agency (IEA) estimates that total conventional and nonconventional oil production will increase from 77 million bpd in 2002 to 121.3 million bpd in 2030. This is a total increase of 44.3 million bpd worldwide. The Middle East will account for 30.7 million bpd, or 69 percent of this total. The IEA also estimates that the rate of dependence on the Middle East will increase steadily after 2010 as other fields are depleted in areas where new resources cannot be brought on line. It estimates that 29 million bpd, or 94 percent of the total 31 million bpd increase in OPEC production between 2010 and 2030 will come from Middle Eastern members of OPEC.
In these estimates, and virtually every other major forecast, Saudi Arabia is a key petroleum exporter and central to a steadily more interdependent global economy. Saudi Arabia is also the only oil producer that has consistently sought to maintain surplus oil production capacity, with a nominal goal of 2 million bpd. This situation will not change in the foreseeable future.
There are, however, serious uncertainties in virtually every aspect of such estimates. For example, the claims MENA and Gulf countries make regarding their "proven reserves" have become highly political over the last few decades and may well be exaggerated. Nevertheless, the issue is not whether Saudi Arabia and the Gulf will play a critical role in world energy supplies it is rather how much petroleum capacity they can develop and export.
The kingdom has roughly 80 oil and gas fields and more than 1,000 oil wells; however, more than 50 percent of the kingdom's reserves are in only eight fields. Most estimates indicate that Saudi Arabia holds roughly one-quarter of the world's proven oil reserves, with a nominal figure of 261.90 billion barrels.
Saudi sources have recently gone much higher. On December 27, 2004, Saudi Oil Minister Ali al-Naimi stated that the country's proven reserves can go up to 461 billion barrels in the next few years. He reiterated this point on April 8, 2005. He was quoted as saying "There is a possibility that the kingdom will increase its reserves by around 200 billion barrels, either through new finds or by increasing what it produces from existing fields. ... These reserves enable the kingdom to remain a major oil producer for between 70 and 100 years, even if it raises its production capacity to 15 million bpd, which may well happen during the next 15 years."
Increasing oil reserves by 200 billion barrels, however, continues to be an unverifiable possibility.
There are no certainties here on Saudi capacity and world demand. Matthew Simmons, an outside analyst, has argued that the kingdom's reserves are overestimated by Saudi Aramco. Saudi Aramco claims that the total depletion rate of its oil fields, so far has been approximately 28-30 percent. Mr. Simmons argues that Saudi Aramco is underestimating the depletion rates of the oil fields including, Ghawar, the largest in the world, and that Saudi oil fields have a higher water cut than is reported by Saudi Aramco. The EIA forecasts that Saudi oil production capacity could reach 18.2 million bpd by 2020 and 22.5 million bpd by 2025.
In brief, Mr. Simmons bases his conclusions on the following points:
A large portion of the kingdom's production is based on a small number of giant and super-giant oil fields. All of the giant and super-giant Saudi oil fields, but two, have been discovered a long time ago. Ghawar, for example, accounted for 50-65 percent of Saudi output in 2003.
Saudi giant and super-giant oil fields have matured, which means that they have peaked and are on the decline. The depletion rates of the giant and super-giant oil fields are higher than Saudi Aramco is reporting.
Saudi Aramco has used intense water management to keep reservoir pressures high and postpone the natural depletion on the five large Saudi fields.
Data from Aramco, OPEC, the EIA, and the IEA contradict each other, and have proved to have many holes in them.
The "easy oil" era is over. Vertical wells in Saudi Arabia appear to be obsolete. Maximum recovery contract horizontal wells anchor future production.
Saudi Aramco has explored the kingdom thoroughly, and it is unlikely that future exploration will discover any new giant or super-giant oil fields to take the place of the aging fields.
These points are more a thesis, based on an analytic "chain of negatives" than a definitive proof. They pull together a chain of negative indicators and possibilities that deserve serious consideration. However, much of their validity depends on the Saudi managers Saudi Aramco being wrong or covering up massive risks and development problems, and virtually all of the other analysts examining world oil reserves and production potential being wrong about both the size of the world's oil reserves and the ability of modern technology to provide future significant gains in ultimate recovery.
His analysis also does not fully explore the extent to which technology gain can increase production (an area of considerable uncertainly) or the extent to which sustained high prices would lead to more efficient exploration, production and recovery.
At the same time Simmons does raise a host of legitimate questions and uncertainties in an area where there is little international transparency. Moreover, any other analysis of Saudi Arabia's capacity to sustain and increase production must be based, to a high degree, on what the country's experts and officials say. There is no way to independently validate such projections and claims.
More generally, grave flaws exist in most official estimates of future increases in global demand for oil and the way Saudi Arabia and other exporting states will respond. It is all too clear that the modeling the EIA, IEA, and OPEC use in the global petroleum supply and demand forecasting is still driven by estimating global demand at comparatively low oil prices (the reference case is $25 to $27 per barrel), and does not make a serious effort to explicitly model supply tracks with national plans.
The costs of new production in the MENA area are generally assumed to be extraordinarily low, and there is no explicit analysis of the capability of Saudi Arabia or any other major exporter and supplier to actually produce the amount of oil estimated in the model.
Such models and forecasts also include a host of uncertain assumptions about price-driven elasticity in conservation, efficiency, and alternative/substitute fuels that make every aspect of their forecasts progressively less credible. As a result, the forecasts of EIA, IEA, and OPEC must be regarded as to be at best illustrative of what might happen in a world where virtually everything goes right from the importer's view, where Saudi Arabian and other export capacity automatically responds to need and political and military risk have no impact.