Skeptics doubt Saudi Arabia can boost oil supply
By Jim Landers
The Saudis have had their big show on the Red Sea. Now the oil markets will test the peak oil theory.
A growing number of oil traders believe the kingdom has reached the peak of its oil production capacity and won't be able to fill your tank in the future. They are buying and selling contracts dating all the way out to 2016, and their expectations are pulling prices toward $140 a barrel.
On Monday, the day after an emergency meeting of oil producers and consuming nations here, oil futures continued their climb, rising $1.38 a barrel to settle at $136.74.
The Saudis say they will sell whatever the market wants for the rest of this year. Production will be at 9.7 million barrels a day in July, up 200,000 barrels from where it is now. If the market wants 10 million barrels a day, that's available.
The Saudis say they're spending $60 billion over the next five years to maintain and expand production capacity – first to 12.5 million barrels a day by the end of 2009 and then to 15 million barrels a day if the demand is there.
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There are many skeptics. Bruce Bullock of the Maguire Energy Institute at Southern Methodist University says the Saudis are struggling to hit 10 million barrels a day, even though they say they have the ability to produce well above that.
Other analysts say the Saudis are making the market even more precarious by cutting into their spare capacity – the cushion between what they can produce over expected demand.
This lack of confidence in the kingdom stems from a theory that predicts world oil supply has peaked and will decline in the future even as demand increases. The only way to get supply and demand in balance again is by raising the price, and there's been plenty of that this year.
The Saudis did not help their cause by decreasing production in 2006 and 2007. The drop pushed oil companies to use their inventories to balance the market and raised doubts about what was happening in Saudi oil fields.
Most of the world's oil comes from a handful of giant oil fields. After a while, every field reaches its peak and starts to decline. Mexico's Cantarell field in the Gulf of Mexico was one of the most prolific in the world, but production started to fall two years ago. Alaska's Prudhoe Bay oil field peaked years ago, and the North Sea fields of Britain and Norway are down by 1.45 million barrels a day from where they were in 2003.
Peak oil theorists argue that Saudi Arabia's Ghawar field – the largest in the world – is about to fall as well. Ghawar has been in production for 50 years. It produces 5 million barrels a day of oil, almost as much as all the oil fields of the United States.
Houston energy banker Matt Simmons studied hundreds of petroleum engineering papers written over the years about Saudi Arabia's fields and wrote a book called Twilight in the Desert that argues Ghawar and other Saudi fields are going down.
Senior engineers with Saudi Aramco, the national oil company, debated Mr. Simmons at the Center for Strategic and International Studies two years ago. The Saudis argued that sophisticated technologies such as horizontal drilling of wells branching like trees and three-dimensional seismic imaging have extended the life of older oil fields.
Amin Ali Nasser, senior vice president for production with Saudi Aramco, said Monday that Ghawar has a long life ahead of it yet.
Companies pump water into many older fields to build up pressure that pushes the remaining oil to the surface. The amount of water that comes back out through the well is called the "water cut."
Mr. Nasser said Ghawar's water cut is 28 percent, while many fields in other parts of the world have a water cut as high as 80 percent. He also said Ghawar's water cut is falling rather than getting worse.
Mr. Nasser said the world hasn't seen Saudi Arabia reach anything close to peak oil – or, for that matter, peak production.
"Every well has a choke valve on it to keep it at a lower flow rate," he said. "If we want more oil, we open the valves across all the fields. And none of them is wide open."
If the Saudis really want to make their point, they could turn up the valves and turn down the price. Discounts might annoy other OPEC countries, but they would certainly get the attention of oil traders.