Commentary: Why is Saudi Arabia not a Threat to Fracking?

August 5, 2013

(Note: Commentaries do not necessarily represent the position of ASPO-USA.)

Several media outlets have recently carried a story about a prominent Saudi prince warning that Saudi Arabia is increasingly vulnerable to competition from the US shale revolution, as a result of fracking in tight/shale plays.

I would turn the question around and ask why is Saudi Arabia not a threat to fracking?

Note that as annual Brent crude oil prices doubled from $25 in 2002 to $55 in 2005, Saudi net oil exports increased from 7.1 million b/d in 2002 to 9.1 million b/d in 2005 (total petroleum liquids + other liquids, EIA).

The Saudi Oil Minister, in early 2004, explicitly stated that the then ongoing large increase in Saudi net oil exports was an attempt to bring oil prices in line with the then stated goal of maintaining a $22 to $28 oil price band. In any case, at the 2002 to 2005 rate of increase in Saudi net oil exports, their net oil exports would have been over 16 mbpd in 2012, as annual Brent crude oil prices more than doubled again, from $55 in 2005 to $112 in 2012, with one year over year decline in oil prices, in 2009.

However, in contrast to the 2002 to 2005 Saudi response to a doubling in the price of oil, the Saudis have shown seven straight years of annual net exports below the 2005 rate of 9.1 mbpd, with Saudi net oil exports ranging between 7.6 and 8.7 mbpd for 2006 to 2012 inclusive, as annual oil prices doubled again.

If the Saudis have virtually infinite oil reserves, and their public pronouncements continually suggest that they have the “capacity” to produce well in excess of 12 mbpd almost indefinitely, why are they allowing high oil prices to encourage alternative sources of oil production, e.g., the very expensive and very high decline rate shale plays in the US?

While it’s certainly at least possible that the Saudis abandoned their traditional swing producer role, and decided to encourage, starting in 2006, higher oil prices, and thus encourage alternative sources of oil, by cutting their net oil exports, it’s also at least possible, as Matt Simmons suggested in 2005, that Saudi oil fields are finite after all.

I realize that this is a controversial assertion–that Saudi Arabian oil fields are not infinite–but it’s a possibility that is at least worth considering. At the 2005 to 2012 rate of decline in the ratio of Saudi liquids production to liquids consumption, I estimate that Saudi Arabia, like many other former net oil exporters, e.g., Indonesia, could be approaching zero net oil exports in less than 30 years. This would imply that Saudi Arabia may have shipped about half of their post-2005 Cumulative Net Exports of oil by the end of 2017.

In fact, an examination of 2005 to 2012 data indicate that a majority of the Top 33 net oil exporters in the world in 2005 are already headed toward the point in time when they would become members of AFPEC–the Association of Former Petroleum Exporting Countries.

While currently increasing US crude oil production is very helpful, it is very likely that we will continue to show the post-1970 "Undulating Decline" pattern that we have seen in US crude oil production (currently US crude oil production is about 25% below our 1970 peak rate), as new sources of oil come on line, and then inevitably peak and decline.

The very slow increase in global crude oil production since 2005, combined with a material post-2005 decline in Global net oil exports, have provided considerable incentives for US oil companies to make money in tight/shale plays. But I think that the assertion by many in the Cornucopian camp that shale plays will result in a virtually infinite rate of increase in global crude oil production is wildly unrealistic.

We are still facing high–and increasing–overall decline rates from existing oil wells in the US. At a 10%/year overall decline rate, which in my opinion is conservative, the US oil industry, in order to just maintain the 2013 crude oil production rate, would have to put online the productive equivalent of the current production from every oil field in the United States of America over the next 10 years, from the Gulf of Mexico to the Eagle Ford, to the Permian Basin, to the Bakken to Alaska. Or, at a 10%/year decline rate from existing wells, we would need the current productive equivalent of 10 Bakken Plays over the next 10 years, just to maintain current production.

On the natural gas side, a recent Citi Research report (estimating a 24%/year decline rate in US natural gas production from existing wells), implies that the industry has to replace virtually 100% of current US gas production in four years, just to maintain a dry natural gas production rate of 66 BCF/day. Or, at a 24%/year decline rate, we would need the productive equivalent of the peak production rate of 30 Barnett Shale Plays over the next 10 years, just to maintain current production.

The dominant pattern that we have seen globally, at least through 2012, is that developed net oil importing countries like the US were gradually being forced out of the market for exported oil, via price rationing, as the developing countries, led by China, consumed an increasing share of a declining post-2005 volume of global oil exports.

For more information on global net exports of oil, following is a link to a recent article on the topic:

Jeffrey J. Brown is a licensed professional geoscientist. He has conducted analysis of Peak Oil issues for many years, and has authored numerous articles with a special emphasis on global oil exports. In early 2006, Jeff first proposed a simple mathematical model for oil-exporting countries called the “Export Land Model” (ELM), which is now regarded as foundational for analysis of this critical issue.

Jeffrey J. Brown

Jeffrey J. Brown is a licensed professional geoscientist responsible for the discovery of several oil and gas fields in west central Texas, and currently managing an exploration joint venture. He’s authored numerous articles with a special emphasis on global oil exports.

Tags: Saudi Arabian oil production, Shale gas, Shale Oil