Saudi's Top
Field In Decline?
By Adam Porter
15 April 2005
Aljazeera
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.
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.
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 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
"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.
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.
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.
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.
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?"
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."
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.