Tuesday, May 10, 2005

CSIS Report On Saudi Capacity

As a rejoinder to the Matt Simmons report on Saudi oil production peaking, Crossroads Arabia provides a detailed report (PDF) by Anthony H. Cordesman, Nawaf Obaid, and Khalid Al-Rodhan of the CSIS Arleigh A. Burke Chair in Strategy Program. I've read about half of it; Simmons fans won't find much in it to change their minds. Some excerpts:
  • pp. 7-8: regarding the credibility of Saudi reserves claims:
    [Simmons pulls] together a chain of negative indicators and possibilities that deserve serious consideration. However, much of their validity depends on the Saudi managers Aramco being wrong or covering up massive risks and development problems, and virtually all of the other analysts examining world oil reserves and production potential being wrong about both the size of the world's oil reserves and the ability of modern technology to provide future significant gains in ultimate recovery. His analysis also does not fully explore the extent to which technology gain can increase production (an area of considerable uncertainly) or the extent sustained high prices would lead to more efficient exploration, production and recovery.
    Of course, Simmons would likely point out that the rest of the world is dependent on those same Saudi managers to get those numbers in the first place.
  • p. 11: "The world oil market is losing 1 million bpd from depletion every year." At least they admit that much (but of course, that's only happening to those other countries).
  • p. 24: an explanation for what Simmons claims is his "smoking gun":
    The first energy crisis of 1973-74, triggered by the 1973 Arab Israeli War, led to a rapid increase in oil prices, which previously had been remarkably stable at $1.80-2.00 per barrel. However, demand for Saudi crude continued to rise in the aftermath of the crisis and company produced more than 9 million bpd in 1977 and hit a peak of 9.6 million bpd in 1981. At a 1976 Board meeting, a capital budget to increase capacity to 13.4 million bpd was approved, with plans on the drawing board for a capacity expansion to 20 million bpd by 1983.

    However, the impact of rapidly rising prices began to reduce global consumption of crude and stimulate non-OPEC production. In an ill-fated move, OPEC first adopted quotas in 1982 in an effort to maintain crude price levels. As a consequence, demand for Saudi oil dipped below 3 million bpd in 1985, before the Kingdom finally launched a price war to regain market share. The Kingdom did slowly claw back market share to the point that it was producing nearly 6 million bpd in 1990, before Saddam Hussein invaded Kuwait and effectively ceded Iraq's market share to Saudi Arabia, the one producer quickly able to fill the supply gap.

    Given this history, it is not surprising that critics like Matthew Simmons should have uncovered warnings from Aramco's oil engineers made to Senate investigators in 1979 that Saudi reserves could not sustain planned production levels. At that time, as the concessionaire holding rights to produce unlimited quantities of Saudi crude until the scheduled end of the concession agreement in 1999, the American shareholders were faced with mixed fiduciary obligations to their shareholders themselves, to the Saudi government, and a broader stewardship duty to the world at large. But there is no particular evidence that were examining 50-year scenarios for what would be best for the Kingdom or for a global transition to alternate fuels. In fact, there was jockeying among the shareholders for the most advantageous position.

  • p. 33: Regarding reserves transparancy:
    Saudi Arabia is very unlikely to provide perfect transparency about its future production plans and capacity...

    ... much of the assessment of future Saudi production capacity -- as is the case with the plans in many other nations -- depends largely on Saudi credibility, and particularly the credibility of Saudi Aramco.

    That credibility has so far been high.

There's a tremendous amount of material here, and as I said, I haven't really digested even half of it yet. One additional impression I get is that the Saudis really aren't exerting much effort on new field exploration, and in any case, new reserves are likely to be "substantially smaller than current proven accumulations" (p. 18).

Thanks to reader Hatcher for pointing me at this.