Friday, July 30, 2004

Memes vs. Facts
Supposedly, just before the stock market crash of 1929, Bernard Baruch, one of the great financiers of Wall St., got a stock tip from the lad who shined his shoes (upon which he went to his office and instructed his broker to sell everything.)  In similar fashion, the oil-depletion meme now seems to be popping up everywhere.  Today, after logging out of Hotmail, MSN confronted me with this headline, "Is Saudi Arabia Running Out of Oil?"  The article is worth a look, but without rehashing the whole Hubbert argument, which I've discussed at some length in previous blogs, I must say I just want to yell at these people to ask the right question!

Whether you believe the current estimate of Saudi oil reserves of 260 billion barrels, the late 1980s estimate of 170 billion barrels--before most of OPEC revised their reserves upwards to game the quota system--or even the pre-nationalization estimate of 137 billion barrels, there is still a lot of oil left in the Kingdom.  Now, Matthew Simmons may well be right in assessing that the handful of giant fields that account for today's Saudi production are either in decline or nearing it, but that leaves a large number of identified, untapped oil fields for the future.  ExxonMobil and ChevronTexaco could probably confirm this, since they found most of them when they were joint owners of Aramco. 

So if there is plenty of oil left in Saudi Arabia, what is the right question to be asking?  I suggest it is this, "What is the project-by-project buildup behind their assertion that they can sustain production of 10 million barrels per day and grow it to 15, well into the future?"  If Saudi Arabia really wants to be the world's gas station for the next 50 years, rather than have us convert to renewable energy or develop all the oil sands, ultra-heavy oil, and other conventional alternatives, then it behooves them to be more open about their long-term production plans.  Specifically, year-by-year, when and how will they develop additional fields to take up the slack and grow production, as the super-giants like Ghawar slow down?  How much capital will this take, and where will it come from?  Do they have the technical expertise required, and if not, where do they plan to get it?  What assumptions are they making about the prices that underpin those cash flows? 

What this boils down to is providing the kind of information that the publicly-traded oil majors have to furnish in their SEC filings and analyst meetings.  In the past, that would have been unthinkable, and it's a bit hard to imagine now, but the world has changed.  Saudi Arabia is being asked to come to grips with an entirely new security environment, an internal and external challenge of terrorism, and the incompatibility of Saudi education with the modern world.  Why not throw in the lessons of Enron and Shell, in the bargain?  I won't hold my breath, but it's pretty clear that their failure to be forthcoming about this information merely fuels the uncertainty and suspicion that they are hiding something. 

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