When the world wants guidance on monetary policy it turns to the Federal Reserve. When it comes to oil only one institution can be seen as the “central bank” of crude – Saudi Arabia.
Saudi produces 9.5 million barrels a day, or more than one-ninth of the expected global demand of 84 million barrels a day this year.
With a quarter of the world’s proven oil reserves, it is the only single entity that has sufficiently deep pockets to be able to intervene to control the market.
Its state-owned operator, Aramco, insists the country has proven reserves of slightly more than 261 billion barrels – a quarter of global reserves. Taking into account probable and possible reserves, that figure rises as high as 1 trillion.
But what if these numbers are wrong? If someone cast doubt on the depth of reserves held by the Federal Reserve system, there would be a financial crisis.
Within the oil industry, such doubts are starting to emerge about exactly how reliable these forecasts are. Matthew Simmons, a US banker, says: “Until an independent third party conducts an independent reserve audit, the whole world would be wise to cast doubt on the quality of reliability of these numbers.”
Mr Simmons, the chairman and chief executive of a Texan energy investment bank, is calling for a new global standard of transparency for all serious oil and gas producers. He argues that 90 per cent of Saudi Arabia’s oil comes from just five or six fields – of which the three most important were established before 1950.
He points out that reserves estimates have risen from 110 billion to 160 billion in 26 years without major new discoveries. He warns that Saudi oil production may be close to peaking, pointing to the increasing use of high-pressurised water to maintain production in some fields.
“At some point in time the ‘water sweep’ will end and the high reservoir pressure will drop. This is simply the ageing process of any oilfield,” he says, pointing to the North Sea as an example.
His concerns have caught the attention of the US government’s Energy Information Administration, which tracks data across the world’s major producers. It is worried that the Saudis’ fields are suffering from an annual rate of decline of between 5 and 12 per cent, meaning it would have to add 600,000 and 800,000 barrels a day in new capacity each year just to compensate.
Mr Simmons is not alone in gloomy forecasts for an end of oil production. The Association for the Study of Peak Oil believes the Middle East no longer has sufficient spare capacity to play a “swing role” in the market. It sees annual production peaking at 30 billion barrels in 2010 and declining to 12 billion by 2050.
A survey by Barclays Capital of 150 institutional investors at a conference found that almost three-quarters believed prices would end 2005 at least at their current level of $45 (£24) a barrel. One in seven thought they would hit $60.
Saudi Arabia has repeatedly played down these concerns. In a recent speech to the Chatham House think-tank in London, Ali al-Naimi, the Saudi oil minister, insisted the kingdom was confident it could continue to provide stability to the oil market. “People have cast doubt and talked about oil peaking very soon but that is not the reason the oil price is high – that is because there is a very clear fear premium,” he said.
“When I state that our reserves are 261 billion barrels I have a very high degree of confidence that that estimate is a good one.”
Saudi Arabia points to the successful opening of two new oil fields – Qatif and Abu Sa’fah – that have increased its total production from 10.5 to 11.0 million barrels. “For the longer term scenarios to raise capacity to 15 million barrels per day have also been studied and can be set in motion if the global demand requires it,” Mr Naimi said.
At the moment there is little spare capacity from Opec, the oil producers cartel, which is again dominated by Saudi Arabia. According to the latest estimates by the Centre for Global Energy Studies, Opec countries have 2.3 million barrels a day of space capacity – of which Saudi Arabia has 1.6 million.
It is a sign of Saudi’s growing awareness of its key role in the global economic stability that the government and Aramco have been more willing recently to publish figures.
Aramco says it released more data last year than in the previous half-century and claims to be more open about reserves than many investor-owned companies. This claim seems more justifiable after the sequence of restatements of reserves by Shell, the Anglo-Dutch oil major, prompting it to have all its field data audited by outsiders.
Last year the Group of Seven leading industrialised countries added their voices to the call for greater openness among private and public oil outfits.
Saudi Arabia is unlikely to respond with alacrity. As Abdullah Jum’ah, Aramco’s chief executive, told The Economist last month: “Why should we? We have never failed to deliver a single barrel of oil promised to anyone, anywhere.”
Sadad al-Husseini, a former executive vice-president of Aramco, last year pointed out that only 23 of the 84 fields that had been identified as having reserves had been developed. He insisted its estimates were based on accepted definitions, conventional engineering practices, state-of-the-art reservoir simulation and “conservative” economics.
This view is supported by other independent analysts, such as the CGES (Centre for Global Energy Studies). Manouchehr Takin, a senior analyst, said the issue was a red herring in the debate about the oil market. “My own inquires show that these figures can be defended … but this discussion about reserves being 100, 160 or 260 does not really matter,” he says.
The real debate was not about reserves but about productive capacity, which was a response to the state of the current oil market, Mr Takin says. “Opec was forced to reduce its production by 15 barrels a day in the Eighties so with excess output it was difficult to convince governments to spend millions of dollars to increase capacity. Now we are seeing that demand is growing and Aramco is expanding production.”
Oil optimists believe that as the oil price rises, the economic incentives for companies to innovate and intensify searches for new fields will increase.
Last week, Jeroen van der Veer, Shell’s group chief executive, agreed there were insufficient supplies of traditional, on-shore, oil and gas in easy reach of the market. “However, at present oil and gas prices, there is huge scope for unconventional gas, unconventional oil, for applying advanced technology,” he said. Last year Shell replaced only half the oil that it pumped – perhaps the lowest replacement ratio in its history.
“You have to drill deeper, or you have to transport it over longer distances, and of course you have to think about how the whole carbon dioxide development will go,” Mr Van der Veer said. “I do not think that the world is in trouble, immediately, now, but we have to think through not only the aspects of the economics of oil, but how the whole climate change aspects of hydrocarbons will go as well.”
Mr Simmons is not convinced by arguments of this type. “Oil is a fabulous non-renewable substance that underpinned the 20th century miracle,” he says. “But miracles rarely happen forever.”