Thursday, January 13, 2005

Transparency of Reserves
Yesterday I discussed the prospect of a peak in oil production. The scarcity of good data on global oilfield performance has fueled much of the uncertainty in this area, and nowhere is this truer than for Saudi Arabia's enormous reserves, which underpin both the present and future of global petroleum supply. Many have suggested that the Kingdom and its OPEC brethren stand to benefit from greater transparency (see my posting of 7/30/04), in effect reassuring their global customers of their longevity. This week's Economist (subscription may be required) suggests that the Saudis' historic reticence has begun to dissolve. That is welcome news, indeed.

This prompted me to do a little Googling, which turned up recent presentations on Saudi oilfield management practices, along with some pretty interesting scenarios for future production growth, relying to various degrees on undeveloped and unproved, but "probable and possible" reserves. Reading between the lines suggests that anyone expecting Saudi Aramco to double its production is dreaming, while the most vocal skeptics of Aramco's ability to sustain its current production well into the future, such as Matthew Simmons, are probably wrong, as well.

So the good news is that Saudi Arabia appears to have both the reserves and the expertise to crank out 10 million barrels per day as far as the eye can see. The bad news is that they don't seem to contemplate contributing more than another 2-5 million barrels per day (MBD) toward the roughly 20 MBD of incremental production required to meet projected global oil demand a decade from now. (And this ignores all the new production needed just to replace the natural decline in current production over that timeframe.)

There are two implications to draw from this. The first is that the Saudis might be extremely conservative about their production potential, to avoid depressing future prices. If so, can we count on this? The second and more definite implication is that it is going to take a lot of money and hard work to dig up the rest of that incremental production elsewhere. We will need Russia, Iraq, Iran, Libya, and the Caspian, plus a bunch of places hardly anyone has heard of to make up the difference. Or just a lot of synfuels and alternative energy.

Given the lead time required for either path, the major oil companies had better be thinking very hard about their project selection criteria and future production profiles.

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