September 06, 2007
Open thread on declining Saudi oil production
An article I wrote on Saudi Arabia's Ghawar oil field appears in the latest issue of Atlantic magazine. I'm putting up this post primarily to provide a forum for readers who might want to offer comments on that discussion.
Here's a brief snippet of the part of the article that's available without a subscription, to get the discussion going:
No country is more important to oil markets than Saudi Arabia. The kingdom produced roughly 9.2 million barrels of crude a day in 2006, and accounted for 19 percent of world oil exports. Many analysts expect it to supply a quarter of the world's added production over the next few years. And as the only producer with significant excess capacity, it has played a crucial role in alleviating temporary supply disruptions, increasing daily production by 3.1 million barrels during the first Gulf War, for example, when oil production in Iraq and Kuwait dropped by 5.3 million barrels.
The Ghawar oil field is the kingdom's crown jewel. Stretching for more than 150 miles beneath the desert, it is the largest known deposit in the world. It produces perhaps twice as much oil as any other field, and has doubtless accounted for more than half of Saudi Arabia's oil production. Yet the Saudis have been removing oil from this reservoir for half a century. Sooner or later, its production must fall.
Posted by James Hamilton at September 6, 2007 08:56 PMdigg this | reddit
My latest blog post asks if now is the time for OPEC to announce production cuts.
Posted by: Paul Cox at September 6, 2007 09:55 PM
Here's some very recent evidence of increased acceptance of the reality of oil depletion......
On page 27 of their report on the credit crunch, Heading for the Rocks, The Economist writes:
...given the lack of any major prospects for increased production outside of Saudi Arabia, and the threat of geo-political tension in key oil-producing areas, a return to US $20/barrel oil remains highly unlikely, even in our worst case scenario.
Their worst case scenario BTW is the US becoming '90s Japan (10% chance). But more importantly, observe that they have completely abandoned their favorite idea of a big production surge ahead. Instead it's all eyes on Saudi Arabia.
A new report by US oil research firm, Harrison Lovegrove, contained the following:
Without expressing a position on the matter, we believe that the issue [peak oil ] has become part of the industry's long-term planning
With remarkable sangfroid, they then outline business cases for oil producers in the case of peak oil. Here is the complete section from page 9:
The debate over peak oil continues, and, in fact, has become quite heated. Without expressing a position on the matter, we
believe that the issue has become part of the industry's long-term planning. If the peak oil theory is correct, and a decline in
world production is imminent, a company must choose among four alternatives -- try to become a dominant participant, find a
niche operational talent, harvest assets, or liquidate quickly.
Selecting the best option among these four requires that a company properly evaluate its ability to compete in a shrinking
industry. Lacking a competitive advantage in one or more of its business lines may force it to choose between harvest and
liquidation. Clearly, the selection will be determined by whether acceptable returns can still be earned during the decline and by
whether market demand allows for a sale of assets. Anticipation of poor future returns and a less favorable market encourages
rapid liquidation. A stronger asset purchase market or more limited reinvestment needs allows the choice of the harvest strategy,
perhaps in the form of conversion to an income security. However, harvest is merely an orderly, delayed liquidation.
If the company possesses a competitive advantage, it can attempt to become the dominant producer in a region, allowing it to
access oilfield services at lower cost than others. After all, the service companies will become anxious for business in a world that
is producing less oil every year, and their largest customers could easily command discounts. But there may be little to be gained
in building a large enterprise if returns are falling and exiting is becoming more difficult.
Finally, niche operators identify a means to earn higher returns, perhaps by exploiting a technological advantage or by developing
production that is better suited to the needs of the market or a contracting refining industry. Niche operations, by their nature,
are limited in scope, but it should be possible to use acquisitions to add others that are amenable to internal management skills.
Posted by: Asebius at September 7, 2007 07:35 AM
You know, times must be changing if a post suggesting a decline in Saudi Oil production is no longer considered controversial enough to bother posting one way or the other. The lack of comments speaks volumes.
Posted by: Jack at September 7, 2007 08:06 AM
I'm not familiar with Harrison Lovegrove, but all the oil company managements I talk to favor this posture, all the time:
Exxon Mobil CEO Says Saudi Arabia has Resources to Boost Crude Output Capacity to 12.5 MLN BPD
---Reuters News Fri 9/7/2007
Posted by: Anarchus at September 7, 2007 11:12 AM
Hah! Just found out that a couple of days ago Harrison Lovegrove was sold to a much larger player.
They took their own advice.
Posted by: Asebius at September 7, 2007 01:25 PM
How has Saudi oil production been doing since all the discussion about it a few months ago? Is there a recent graph from The Oil Drum or some other source?
Posted by: Hal at September 7, 2007 05:05 PM
Hal, according to the EIA, Saudi oil production had dropped to 8.6mb/d as of February and remained at that level for March, April and May. Thus an update of the graph I posted here would show a horizontal line extending for the next three months from the low point reached in February.
Posted by: JDH at September 8, 2007 08:00 AM
From the EIA data, the maximum sustained daily average from all listed sources came at 33.685 millions barrel per day in ... April 2005.
There is a clear downward trend after April 2005 for productions from EIA listed sources (which list about 35-40% of world total production).
Posted by: Laurent GUERBY at September 8, 2007 11:33 AM
Last time I looked, al Ghawar was producing at least three times as much as the next largest producing field in the world. After all, the former #2, Cantarall in Mexico, just recently went into a major dive in output on the order of 25%.
Posted by: Barkley Rosser at September 9, 2007 02:43 PM
Here is an interesting opinion on Saudi's stance on tomorrow's OPEC decision and a related chart showing Saudi market share. The author seems to be completely unaware of the possibility that Saudia Arabia may be incapable of raising production.
Posted by: CG at September 10, 2007 12:41 PM
As someone who spent many years in the Saudi oilfields, let me just say that the oildrum.com is not a credible source of analysis when it comes to evaluating the Saudi oilfields. The assertion that Ghawar is "running dry" is a load of hooey. Of course, you can't convince those people who buy into the premise because they have drunk the Kool-Aid.
Posted by: Elvis at September 13, 2007 05:32 AM
"As someone who spent many years in the Saudi oilfields, let me just say that the oildrum.com is not a credible source of analysis when it comes to evaluating the Saudi oilfields."
OK, you've said it.
However, why you've said it, without providing examples, puts your own credibility in a dubious light. Either you have data to back up your assertion, or you don't. If you do, haul it out. If you don't, the sound you're hearing is a whole bunch of readers not being persuaded.
Posted by: Hal O'Brien at September 14, 2007 06:10 PM
Asebius: Perhaps I'm missing something, but it seems to me the Harrison Lovegrove analysis is short at least one option. (Let alone, it's a bit immodest with that "must choose among..." -- as if there isn't anything possible that they haven't thought of.)
To wit -- if supply is going to be constantly and predictably decreasing, and demand is going to be steady or rising, this implies price will also be constantly and predictably increasing, yes? Nothing very radical there.
But one implication is, the longer you hold off selling, the more valuable the oil will become.
Far from endorsing either the "harvest assets" or the "liquidate quickly" approaches, this would imply that cutting production and hanging on for dear life may well be the course that would maximize total returns.
Though perhaps they see something I don't.
Posted by: Hal O'Brien at September 14, 2007 06:20 PM
CG has said that the oildrum.com is a load of hoey. This is basically correct. The website is not an objective source of information about the oilfield business, but rather the voice of an advocacy group within the oilfield. I have 10 years working in the oilfield services business. There is an intense debate going on within the oil industry about 'peak oil' The long and the short of it is, that oil is non-renewable on a human timescale, so it will inevitably become depleted. What this means is that the cost it will take to get more will exceed the price anybody will be willing to pay for it. The Ghwar oil field is very important, and when/if it has peaked is very important for Saudi Arabia, and somewhat less so for the price of oil as a whole.
It is not hooey to assert that Ghwar is running dry. In my opinion it will still be the largest (or one of the largest) producing fields in the world for the next 20-30 years. However it is definiately in plateau (no increases in production) and may be entering it's declining production phases. Since Saudi Arabia doesn't allow much data out of ARAMCO most people don't know the status of the field in detail.
Present day oil companies will IMHO be fine with something roughly approximating their current business model. The alternatives to oil and gas are all currently as expensive or more expensive than oil and gas are, and thus the incentive to continue producing oil and gas remains. The major alternatives (oil sands, oil shale, solar energy, coal, wind energy) are in fact also being developed by or in substantial part by oil and gas companies, so whenever the economics dictate, you can expect to see these alternatives take off. The first of these already has, as Canada's oil sands industry has grown exponentially in the last few years.
Posted by: Eric Gagen at September 17, 2007 12:54 PM