The Oil and the Glory

A senior Saudi Arabian oil official said in 2007 that the kingdom has 388 billion barrels of recoverable crude oil reserves, about 45 percent more than official public estimates. But about the same time, a retired Saudi Aramco executive met with U.S. diplomats in Dhahran, and asserted that Saudi figures in general are wildly overblown, and that his country is headed for a production peak around 2020, followed by a slow decline, according to new Wikileaks cables.

The issue is pivotal. Put simply, the price of oil — the price you are paying at the pump, indeed the cost of everything in your home — is wholly determined by what oil traders think Saudi reserves and production capability really are. As an example, oil plunged yesterday to their lowest price of the year — $87.87 a barrel — when Saudi Arabian Oil Minister Ali al-Naimi (pictured above) suggested that the kingdom will put new oil supplies on the market to compensate for any uptick in global demand.

The thing is, the Saudis are highly secretive about these figures — unlike almost every important petro-state on the Earth outside the Middle East, the Saudis will not permit their oilfields to be independently audited. One might wonder why that would be the case, and the late Matt Simmons, for example, made much hay suggesting that the reason is that the Saudis simply don’t have as much oil as they claim. I myself got ahold of documents back in 2008 suggesting the same. Sensible voices, however, said such are the thoughts of the conspiratorial-minded, and that the Saudis genuinely possess what they claimed — they were denying the right to verify because … well because that’s just what they do. Here is classic Simmons:

In recent years, the Saudis have brought more productive capacity on line, giving them the capability of producing about 12 million barrels of oil a day. Since the Saudis are currently producing about 8.6 million barrels of oil a day, according to the U.S. Energy Information Administration, that means they alone are providing the world about 3.4 million barrels a day of “spare capacity,” the key metric for oil prices. Basically, traders looking to earn really big money on the tick up or down of daily oil prices focus intently on global supply — for example, tons of money have been earned in recent weeks speculating on the question of what happens if events in Egypt spiral out of control, and force the closure of the Suez Canal, the transit route for about 1.5 million barrels of oil a day. But the existence of a healthy cushion of spare capacity works against such fruitful speculation, because even if the Suez Canal does become totally bottled up, the Saudis can turn up the spigot, and it won’t matter a whit. Which is one big reason why oil prices are down again.

Which brings us to the latest Wikileaks cables, so read on.

In December 2007, a U.S. diplomat named John Kincannon, the U.S. Consul General in Dhahran, reported on Aramco’s first-ever public drilling symposium, at which among the speakers was Abdallah al-Saif, the company’s senior vice president for exploration and production. I first met Kincannon when he was a junior press officer in Peshawar in the late 1980s. In his cable back to Washington, Kincannon wrote that al-Saif was exceptionally bullish about his country’s oil reserve base:

[Al-Saif] reported that Aramco has 716 billion barrels of total reserves, of which 51 percent are recoverable. He then offered the promising forecast – based on historical trends — that in 20 years, Aramco will have over 900 billion barrels of total reserves, and future technology will allow for 70 percent recovery.

That compared with the generally accepted Saudi reserve base of about 260 billion barrels of oil.

But just 10 days earlier, Kincannon had heard a starkly different picture from Sadad al-Husseini, who long held a similar position in Aramco to al-Saif’s from 1992-2004. Al-Husseini is no crank — in addition to his position as executive vp for exploration and production, he sat on Aramco’s board of directors from 1996 until his retirement 12 years later. Al-Husseini cast doubt on some 40 percent of the 716 billion “total reserves,” Kincannon reported. In Kincannon’s account of the meeting, al-Husseini:

… believes that Aramco’s reserves are overstated by as much as 300 billion bbls of ‘speculative resources.’ He instead focuses on original proven reserves, oil that has already been produced or which is available for exploitation based on current technology. All parties estimate this amount to be approximately 360 billion barrels. In al-Husseini’s view, once 50 percent depletion of original proven reserves has been reached and the 180 billion-barrel threshold crossed, a slow but steady output decline will ensue and no amount of effort will be able to stop it.

By al-Husseini’s calculations, approximately 116 billion barrels of oil have been produced by Saudi Arabia, meaning [that] only 64 billion barrels remain before reaching this crucial point of inflection. At 12 million barrels a day of production, this inflection point will arrive in 14 years. Thus, while Aramco will likely be able to surpass 12 million barrels a day in the next decade, soon after reaching that threshold the company will have to expend maximum effort to simply fend off impending output declines. Al-Husseini believes that what will result is a plateau in total output that will last approximately 15 years, followed by decreasing output.

So who is right, al-Saif or his predecessor, al-Husseini? One answer comes from al-Husseini himself. Two years later, he had been converted to those who think that actually Saudi Arabia is a reliable producer, as is made clear in the video below.

But al-Husseini goes on to say that this fact doesn’t change the overall supply picture — the world is still in trouble, he says, when it comes to its reliance on oil. Simply put, he suggests, those who think that the world is going to produce anywhere near the 100 million barrels a day and more projected by some are seriously misled. The short November 2009 video is interesting generally, and al-Husseini himself appears at 1:10 and again at 5:30: