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Energy the nexus of everything: February 2011 Archives

Last week the UK Guardian reported on leaked documents from the United States Embassy in Saudi Arabia that indicate a former executive of Saudi Aramco (the national oil company) believes that the publicly stated oil reserves and possible production rates of Saudi Arabia are overly optimistic.

Access the UK Guardian news article here. Access their link to the documents here (bold added by me).

The source for the information sent in the US embassy cable was Dr Sadad al-Husseini who served as Executive Vice President for Exploration and Production from 1992 until his retirement in 2004. I repeat a couple of the important passages from this document here:

"3. (C) According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described and the timeline for their production not as unrestrained as Aramco executives and energy optimists would like to portray. In a December 1 presentation at an Aramco Drilling Symposium, Abdallah al-Saif, current Aramco Senior Vice President for Exploration and Production, reported that Aramco has 716 billion barrels (bbls) of total reserves, of which 51% 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% recovery.

4. (C) Al-Husseini disagrees with this analysis, as he 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 bbls. In al-Husseini's view, once 50% depletion of original proven reserves has been reached and the 180 billion bbls 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 only 64 billion barrels remain before reaching this crucial point of inflection. At 12 million b/d production, this inflection point will arrive in 14 years. Thus, while Aramco will likely be able to surpass 12 million b/d 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."

This embassy cable concludes with the following paragraph:

"8. (C) COMMENT: While al-Husseini believes that Saudi officials overstate capabilities in the interest of spurring foreign investment, he is also critical of international expectations. He stated that the IEA's expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of more than 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this "inconvenient truth." Al-Husseini was clear to add that he does not view himself as part of the "peak oil camp," and does not agree with analysts such as Matthew Simmons. He considers himself optimistic about the future of energy, but pragmatic with regards to what resources are available and what level of production is possible. While he fundamentally contradicts the Aramco company line, al-Husseini is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered. END COMMENT."

So basically al-Husseini is reported to be saying that Saudi Arabia may be able to produce 12 million barrels per day (MMBBL/d), but that it won't last for very long. Note that world oil production has been approximately 84-86 MMBBL/d for the last five years. Note also that Saudi Arabia produced an average of 9.8 MMBBL/d in 2009 and a peak (to date) of 11.1 MMBBL/D in 2005.

Al-Husseini is suggesting that Saudi Arabia may be able to keep production near the range of 12 MMBBL/d for nearly 15 years (should it reach that level within this decade), but that after that time frame the total oil output will begin to decline never again to reach as high of a level of oil production. And in saying this, al-Husseini (see 8. (C) above) is also suggesting that his is not part of the "peak oil camp" (for finding out what the peak oil camp is about – see http:\\www.theoildrum.com), but it is unclear from the cable what he means other than suggesting not to agree with analyses by the late Matthew Simmons, and probably Mr. Simmons' analysis as portrayed in his book Twilight in the Desert. In his book Simmons describes how the Saudis are fighting the uphill battle of depletion of their oil fields and that they are already using very clever and sophisticated engineering to maintain the current production rates. I don't consider Simmons' analyses a knock on the Saudis capabilities, but rather acknowledgment that they are employing many of the latest techniques and doing a very capable job. In short, Simmons says that the Saudis cannot keep increasing world oil production, and al-Husseini is broadly saying the same thing.

Given the impending reality of peak oil production in both the world overall and Saudi Arabia, the rulers know that the oil wealth is not to be squandered and that leaving some oil in the ground is as good of a strategy as any. This statement is supported by another leaked document here, with the relevant excerpt:

"Quoting King Abdullah's recent comments (ref B) that Saudi Arabia would cap production capacity at 12.5 million bpd and "leave crude in the ground for its children", Bourland remarked, "There are more accidents, there are escalating costs (in the oil sector). I think the King is reaching the conclusion that the money is safer in the ground than in the bank. He doesn't want to see it squandered."

My view of peak oil is not that there will be a particular shape of the oil production curve over time (meaning oil production vs. time), but that it will indeed reach a point where production rates will stop increasing and begin decreasing. That is to say the slope of the curve on the oil production decline may not be an exact mirror image of the production curve of the oil production increase of the last 100 years. This curve is commonly approximated as a bell curve, and there are laws of statistics that say this is a reasonable approximation given the large number of oil fields in the world. However, this curve is best applied to regions with rather open and capitalistic markets. Upon the peak occurring, should oil production become more of a geopolitical tool instead of primarily a market tool, the world oil production decline could be steep (leading to much instability) or perhaps rather gradual as long as possible (trying to maintain maximum stability) if production is held back today and in the near future to keep it relatively high in the longer future.

Peak world crude oil production has already occurred (see US data at the Energy Information Administration), and peak total oil production will follow. This is realized clearly by those how pay attention and study the statistics. Because globalization is literally powered and enabled by oil, and relatively cheap oil (< $100/BBL), the impending decline in oil production signals the impending decline in globalized trade and travel. There will not be an abrupt end to globalized trade any time soon by any means, but upon peak oil production becoming realized in the mainstream of business, there will be a significant reshuffling of priorities in terms of what goods do get shipped around the world. But for more on this topic, you can read Jeff Rubin's book, Why Your World is about to get a Whole Lot Smaller, and one of his last reports while Chief Economist at CIBC, also summarized on The Oildrum.