What will the rest of the world do if Saudi oil runs out early?

BUSINESS ANALYSIS World's biggest producer says it has 260 billion barrels in reserve - but is that right?

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 (pounds 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."

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee
World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

Max Brooks honours Harlem Hellfighters

The author talks about race, legacy and his Will Smith film option to Tim Walker