Saudi Arabia is intent on reaffirming its role as the world’s linchpin oil supplier for as long as that hydrocarbon can be economically produced.
And the kingdom sees that day extending decades beyond that claimed by advocates of the view that the world faces an imminent peak and steep decline in oil production.
In the meantime, Saudi efforts are focused on stability—for production capacity as well as for world oil prices. Because the world’s largest oil reserves holder and producer hews to such a conservative approach in shepherding its oil sector, there is a growing emphasis in Saudi Arabia on diversifying its economy. And that means greater opportunities for foreign investors in the country, particularly in natural gas.
While there are some concerns about alternative energy sources and competing oil supplies from other regions, they are minimized by what Saudis see as an inescapable fact: the Persian Gulf holds the lion’s share of the world’s oil resources, and Saudi Arabia dominates that share.
Such insights were gleaned from an exclusive Oil & Gas Journal interview with Ali I. al-Naimi, Saudi minister of petroleum and mineral resources, at the ministry’s headquarters in Riyadh last month. The interview followed on the heels of the formal signing of three gas exploration and development contracts signed with major international oil and gas companies in Riyadh.
That event in turn followed an unusual public defense of Saudi estimates of oil reserves and production potential by two high-ranking officials of the state oil company against claims by a prominent peak-oil theory advocate that the kingdom’s supergiant fields may be facing precipitous decline.
Production capacity potential
Al-Naimi contends that Saudi Arabia will play a vital role in meeting the world’s future oil supply at least to the midpoint of the century.
Depending on which forecast is used, he noted expectations of growth of 20-30 million b/d in consumption from current levels near 80 million b/d.
“Should that actually materialize, I think the call on the [Persian] Gulf area is going to be substantial, and we’re going to be ready to meet it,” he said. “And we have looked at scenarios of what we can do easily today—8 million [b/d], a capacity of 10.5 [million b/d]; we have looked at scenarios of 12 million [b/d] capacity, we have looked at 15 million [b/d] capacity, and those are all feasible.”
The Saudi oil minister noted that Saudi Aramco officials at a Center for Strategic & International Studies symposium in Washington, DC, in February rebutted claims by investment banker Matthew Simmons, president of Houston-based Simmons & Co. International, that Saudi oil fields are aging much faster than previously thought. The Saudi Aramco officials said that Saudi Arabia easily could produce 10-15 million b/d through 2054 (OGJ Online, Feb. 25, 2004).
“I think there were. . .misinformed statements about Saudi Arabia’s reserves, and we felt, because it’s so important for all of the decision-makers not to make a mistake making decisions based on misinformed statements, that we [should] clarify the picture,” he said.
Al-Naimi contends that the Saudi Aramco CSIS presentation “demonstrated that, first of all, our way of depleting fields and reservoirs is very conservative.
“They have demonstrated that the reserves as calculated from the total oil in place is also conservative, that there remains probable and possible reserves to be exploited.”
Openness, politics questioned
The Saudi minister, also currently chairman of Saudi Aramco after logging 48 years with the company, expressed his frustration with the common perceptions of the Saudi oil sector as being closed to outside analysis, its oil policies driven by politics, and its oil reserves estimates having been manufactured to suit political purposes.
Disputing these perceptions, Al-Naimi points to the gas E&D contract tender process.
“You know, we’ve had a web site for over 7 months on this process; every major company was welcome once it was qualified, and there were 51 companies to participate in this. And they came from all over—41 attended our workshop. . .in London; 27 of the 41 came to Saudi Arabia, collected information and data, and then only 6 bid.
“That is a process by which people who have looked at the data decided that they have a better deal somewhere or did not want to bid. Now why would we want to be blamed or accused of political favoritism to the companies that bid? That doesn’t make any sense. How much more public can you be?”
Instead of artificially inflating its reserves estimates, Saudi Arabia has taken an exceptionally conservative approach to managing its oil reservoirs and calculating its oil potential, Al-Naimi contends.
“In Saudi Arabia, we know what we have in the ground, we know our estimates are very conservative, we know our depletion rates are conservative, we know our reservoirs very well.”
He dismissed the claims by peak-oil theorists that the kingdom, in a purported effort to bolster its quota in the Organization of Petroleum Exporting Countries during the 1980s, ratcheted up estimates of proven oil reserves by 100 billion bbl.
“We knew we had to begin with. . .700 billion bbl of oil in place. . . . Now a prudent person does not come without any experience and say, ‘I think I can recover 50% from day one.’ We started very conservatively—I think we started with something like 17% and went forward as we have gained experience; then, yes, in the ’80s, we did change. But based on what? Based on 30 or 40 years of development, and so that’s not a political decision, that’s a technical, professional, scientific decision as a result of the information.”
Al-Naimi sees the latest round of skepticism over Saudi oil potential as echoing similar claims during the 1970s that Saudi reservoir pressures were declining and fields were facing sharp declines. Yet production profiles of even supergiant Ghawar—under peripheral water injection since 1965—show reservoir pressures remaining steady and water cut actually declining, to 33% in 2003 from 36.5% in 1999. And depletion rates for the biggest Saudi fields are only 1-4%/year, with the average depletion to date of all Saudi Aramco fields standing at only 28%. Two giant, shut-in fields, Manifa and Khurais, with combined proved reserves of 40.8 billion bbl, have been depleted by only 1.2% and 1.8%, respectively. The kingdom currently pegs its estimate of proven reserves at 260.4 billion bbl, of which roughly half is developed. And Saudi Aramco claims a 90% certainty for that number, exclusive of enhanced oil recovery efforts, which it notes is a more stringent standard than the major petroleum professional organizations require.
At the same time, there is substantial room for Saudi reserves to grow further, Al-Naimi contends. He estimates that Saudi OOIP will increase to 900 billion bbl. That added increment of 200 billion bbl is even less than the estimate of undiscovered oil resources US Geological Survey assigned to Saudi Arabia in a comprehensive study of global potential oil resources the agency conducted in 2000, the minister pointed out.
He also disputed the notion that the kingdom’s reserves base is being depleted for lack of new discoveries.
“We haven’t suspended exploration; we are very active on both gas and oil exploration. We have been adding reserves as a result of both.”
Saudi Aramco’s business plan calls for reserves replacement of 15 billion bbl during 2005-09, vs. current production of 3 billion bbl/year.
While eager to refute the skepticism over Saudi oil potential, Al-Naimi does not dismiss it.
“We have to take these statements seriously because of the damage they can do to influencing decision-makers,” he said. “And I think it would be tragic for the world to believe that we’re going to be running out of oil in the next 10 years. We may be running out of oil in the next 50 years to in the next 80 years; that’s something else.
“My firm belief is that the last barrel of oil produced is going to be from Saudi Arabia. And that’s not based on wishful thinking; that’s based on my relationship with the [Saudi] oil industry.
Al-Naimi presides over two of the most critical areas for diversifying the Saudi economy away from overreliance on oil revenues: natural gas and minerals. And the two are interrelated. It is these two areas where the kingdom is emphasizing private local and foreign investment, much as has occurred in its huge petrochemical sector, which now accounts for 10% of the world market.
Saudi Arabia has world-class reserves of phosphate and bauxite, with three major mining projects under way to exploit them. The mines, related transportation and support infrastructure, and downstream industries tied to them will use substantial volumes of gas, for both power and water desalination. Another critical impetus for these projects is their labor-intensiveness compared with the oil sector, an urgent consideration for the kingdom’s growing population and high unemployment rates.
Emblematic of the gas initiative are the three contracts signed on Mar. 7 with Russia’s OAO Lukoil, China’s state-owned Sinopec (China Petrochemical Corp.), and a joint venture of ENI SPA and Repsol-YPF SA to explore for and develop nonassociated gas on three blocks covering a total 121,000 sq km in the Rub’ al-Khali basin. Those contracts were awarded early this year (OGJ Online, Jan. 28, 2004). Saudi Aramco will hold a 20% stake in each contract. If commercial gas is discovered, it will be used domestically for power generation, water desalination, and petrochemical feedstocks. The foreign investors have the option of simply selling the gas into Saudi Arabia’s master gas system or also participating in the downstream projects. Those deals followed a potential $4 billion deal, signed in November 2003, in which Royal Dutch/Shell Group and Total SA agreed to explore for and develop gas in a 200,000 sq km area of the Rub’ al-Khali basin.
The contracts mark a watershed for the kingdom in that they represent the first private investment in Saudi Arabia’s upstream petroleum industry since nationalization. At the same time, they are a continuation of earlier efforts to diversify the economy, Al-Naimi noted.
“We had a choice to make a long time ago. . .to liquefy our gas and sell it as LNG; that’s one way, but a more prudent act was to say, ‘Look, let them build industry based on a cheap [resource] in the kingdom and benefit from added value’—and that’s how these industrial cities like Yanbu and Jubail were created and how this huge petrochemical complex was developed, and we’re reaping the benefits of that now.”
The minister estimated Saudi gas production capacity today at 7 bcfd. That compares with his projection of domestic gas demand climbing to 14 bcfd by 2025, based on projected electric power, water desalination, and industrial gas consumption. Saudi power demand alone is increasing by more than 6%/year. Already on the books are 17 major industrial projects for which Saudi Aramco already has committed sufficient gas and NGL volumes from existing reserves.
Oil price questions
Diversifying the Saudi economy away from overreliance on oil revenues is an issue separate from policy decisions made in support of oil prices, according to Al-Naimi.
The Saudi oil minister denied speculation in some quarters that his country has led OPEC into a hawkish price mode so that it can whittle down a large domestic budget deficit.
“We actually don’t think along these lines. We don’t like deficits; deficits are a fact of life, of government, and we deal with them in many ways. But the notions that we want to do this or that to the market and so forth in a negative way, that’s absolutely wrong,” he said.
“We recognize we need a fair price—a price which we have defined as $25/bbl for the [OPEC] basket. And I have said that many times, and so has the Crown Prince (Abdullah) of Saudi Arabia.
“We also want a price that does not affect negatively economic growth. We don’t know the price that will have a negative impact on economic growth, but we don’t want to be anywhere near it. I mean, we really don’t know where it is.
Al-Naimi contends that Saudi Arabia is “very happy” with the economic growth in the world today, which is spawning a resurgence in oil demand growth: “So we are not looking at price just to remediate the deficit.”
“If anything, Saudi Arabia has always stood for moderation. I think we have come many times to bail out the world oil market.”
Instead, Al-Naimi suggested closer examination of other influences on the current state of high oil prices.
He contends that, despite concerns over tight supplies, global oil inventories actually grew by 100 million bbl in 2003 vs. 2002.
“Now, there are other things happening [to the oil market]: the availability of sweet crude. And, unfortunately, there is not enough sweet crude in the world, and therefore there is a squeeze. If [refiners] can find or compete for sweet crudes in general, what’s that doing? Driving that price up.”
But Al-Naimi reckons that a bigger contributor to high oil prices is rampant speculation by investors.
“The dollar interest rate is very low. People don’t want to hang onto cash. People are moving money from equities into commodities.
“All this noise about potential loss of reserves and production peaking, fields that are in decline—that is building a lot of hope in somebody’s mind that, ‘Look, let’s move into commodities because prices are going to go up,’ and what is that doing? It’s driving up the prices.”
He contends that there is nothing in the market today that demonstrates a shortage.
“If anything, we have to be extremely careful not to have a sudden bulge in inventory levels that will cause prices to cascade. . . . What we are seeing today is something outside the realm of the oil industry. . .all of these variables are working to push the price up—but [it is] not the doing of supply and demand.”
In a sense, Al-Naimi can see the justification for such speculation.
“The US dollar position against the euro and the yen is causing people to go into commodities. People that have dollars in Europe are going into commodities. . . . People are moving their money into an area where they believe it is going to give them high returns through higher prices. And this is creating an artificial demand.
“I have no [other] explanation for when the [oil] price jumps a dollar, and nothing has happened to either inventory or supply.”
Al-Naimi is especially indignant over questions about Saudi Aramco’s financial, managerial, or technical capabilities, pointing to current efforts maintain the country’s 10 million b/d of oil production capacity by bringing on stream another 800,000 b/d of capacity from two southern fields in the next few months.
While those efforts will boost Saudi capacity beyond 10 million b/d briefly, the net effect, with natural declines elsewhere, will be to sustain that benchmark.
Al-Naimi pegs current spare productive capacity at 2.5 million b/d, which fell to 500,000 b/d last year as Saudi Arabia ratcheted up output to compensate for outages in Iraq, Venezuela, and Nigeria. With output currently at 8 million b/d, spare capacity should remain at 2-2.5 million b/d.
The kingdom’s cost of several hundred million dollars per year to maintain the spare capacity “goes hand in hand with our objective of stabilizing oil markets,” he said.
“We feel we have a responsibility. We think we delivered last year; we delivered [during the Persian Gulf crisis] in 1990. Every time there is a challenge, we rise to it. And. . .the world benefits from a stable oil market. I think the last 4 or 5 years is a witness to how stable the oil market is.”
Al-Naimi voiced his frustration at ulterior motives often ascribed to Saudi Arabia in oil markets.
“We have no [disguised] intent; our policies are very open. We act upon them. We have delivered during a challenge. I don’t why people say what they say about Saudi Arabia. What they say is wrong.
“We have acted on our policy statement that we want stable oil markets. We want fair prices. We have maintained capacity to do so. We have done everything possible we know, other than just produce to flood the market, which would be damaging to the objective of a stable oil market.”
Threats to oil
Al-Naimi addressed two key threats to future oil market stability: a shift away from oil owing to concerns over postulated catastrophic climate change and a return to competition for market share among major producing countries.
He contends that, regarding which solutions are implemented to combat the perceived threat of global warming, “whatever the world does should not be prejudiced against oil.”
“Actually, in the next 30 years at least, there is not really a substitute for [oil use in] transportation. . .that’s where the bulk of oil is going.
“Now if we are concerned about [carbon dioxide], I believe there is enough technology to sequester CO2 and to take CO2 out of the atmosphere. It doesn’t make any sense to compare consumption of crude oil and pay subsidies to coal. To us, that is inconsistent with the objective of eliminating CO2. Now I think there may have been a political dimension to this.”
Nevertheless, given concerns about climate, working together to combat a perceived threat does not mean reducing or eliminating oil use, he said. “I think we should find a better ameliorating method than just shunting aside oil.”
Al-Naimi also recalled the lesson learned about market share competition in the oil price collapse of 1998-99.
“We have demonstrated that market share alone doesn’t help the industry. And the whole industry suffered—not only producing countries, [but also] consuming countries, for lack of investment.”
The Saudi minister isn’t concerned about competing supplies ramping up from areas such as Russia and the Caspian Sea region.
“Looking at demand, at global growth, I think the world is going to need all of that.
“In the final analysis, production from the [Persian] Gulf area will rise, because that’s where the reserves are, and this is not a statement of complacency. This is a statement of the analysis of facts.”
With oil consumption running at 30 billion bbl/year and discoveries adding only 7 billion/year, according to Al-Naimi, the result is a 23 billion bbl/year deficit.
“Where is this 23 billion [bbl] coming from? It is from depleting existing resources.”
There is a limit to expansion of productive capacity in many areas, he noted.
“We have seen this in the North Sea. No matter what you do today—you can throw all the dollars you have, all the pounds, the euros—you’re not going to be able to add significant capacity.
“And so eventually it’s going to come down, in the next 10 years or so, to the [Persian] Gulf area. I know people today are clamoring for diversification of sources of supply and stability in the gulf area. Believe me, in the final analysis, the world will be better off to depend on the gulf. That’s where God has put those reserves. And we say that, willingly, we are going to be providing those supplies. And this is not a statement of complacency at all, this is a fact of numbers and reserves.”
Recounting his lengthy familiarity with the Saudi oil industry, Al-Naimi invited outsiders to come to the kingdom to find out for themselves how firmly Saudi Arabia is committed to its roles as market stabilizer and producer of last resort.
“The idea is to know us…I think have been born in this industry. . . . There are many things I don’t know, but I think this industry I know well.”
Ali Ibrahim al-Naimi was appointed minister of petroleum and mineral resources on Aug. 2, 1995. Prior to that, he was president and CEO of Saudi Saudi Aramco.
Al-Naimi joined Arabian American Oil Co. (Saudi Aramco) at the age of 12 in 1947. He became an assistant geologist in Saudi Aramco’s exploration department in 1953. During 1963-67, following 7 years of training and education, he worked as a hydrologist and geologist in Saudi Aramco’s exploration department. He followed that with a 2 year stint in the company’s economics and public relations departments in the Abqaiq producing division.
Al-Naimi subsequently worked in the company’s Eastern Province oil operations as foreman, assistant superintendent, superintendent, and manager. He was named a vice-president in 1975, senior vice-president in 1978, and an Aramco director in 1980.
In 1982, Al-Naimi was appointed executive vice-president, operations. He became company president in 1984 and CEO in 1988.
Al-Naimi studied at the International College in Beirut and the American University of Beirut before attending Lehigh University, where he earned a BS in geology, and Stanford University, where he earned an MS in geology.