Thursday, February 05, 2004

More Oil Depletion
The Wall Street Journal recently carried a short piece citing Matt Simmons, who runs an energy-focused investment bank, on the signs of depletion in some of Saudi Arabia's largest oilfields. This topic and and its relationship to a possible imminent peak in oil production comes up periodically.

I'll comment at greater length tomorrow on the subject of such a peak in production, but while I don't doubt that there is evidence that Saudi Arabia would struggle to increase its production above current levels, it is still hard to imagine that reserves in the Kingdom could be so overstated that they could be close to actual decline.

A somewhat different issue is whether the Saudis can deploy sufficient capital and technology to bring on new production as fast as needed. The Saudi monarchy is under tremendous pressure, both political and demographic, to maintain public services for a rapidly growing population. With oil providing the main revenue stream for the country, can they plow enough money back into exploration and production to avoid using up their margin of "reserve" production? The same issue has hampered Venezuela's oil industry, as they siphoned off oil money for social programs. And the Saudis may have to turn in the same direction that the Venezuelans did: the oil majors.

There is a very strong case that the international oil companies have exactly the capital and technology that the Kingdom needs, if it is to avoid this self-imposed trap. Can they break with their own past sufficiently to offer up the prize of access to the world's largest stock of untapped, low-cost oil reserves? Perhaps the prospect of the same companies diving into Iraq once a government is in place will shake them out of their complacency.

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