The oil market has had a somewhat muted reaction to recent attacks on oil tankers, appearing to have set aside concerns about the diplomatic storm brewing in the Middle East and instead focusing on the latest oil demand projections.
The “last barrel” of oil will be pumped from the Gulf Arab region. So said the chief executive officer of Saudi Aramco, Amin Nasser, on the sidelines of the elite gathering of the world’s rich and famous at the Davos World Economic Forum. His remarks came just days after Aramco published the results of a third-party audit of Saudi oil and gas reserves – the first time that the kingdom had allowed an independent audit of what it long considered proprietary information.
The reserves, as estimated by U.S. consultants DeGloyer and MacNaughton, are only slightly higher than the 266.3 billion barrels reported by Saudi Arabia to OPEC for 2018. The DeGloyer and MacNaughton estimate puts total Saudi proven reserves, including in the Neutral Zone shared with Kuwait, at 268.5 billion barrels at the end of 2017.
The principal reason for opening the country’s oil fields to third-party scrutiny was to prepare for an eventual initial public offering of 5 percent of Aramco, now expected in 2021. At the same time, publication of these estimates may put an end to speculation by so-called peak oil theorists that Saudi oil production had already peaked. That argument gained traction following publication in 2005 of the book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” by the late investment banker Matthew Simmons. He and disciples of that theory argued that Saudi Arabia’s supergiant Ghawar oil field, which accounts for roughly half of Saudi production and 5 percent of current supply, had reached a tipping point. At the time, demand for oil was soaring, led by double-digit demand growth in China, and the peak oil message helped to push oil prices higher because it gave rise to fears that future supply would fail to meet demand.
No one at the time predicted the meteoric rise in U.S. light tight oil, or shale oil, production over the past decade or that the United States would overtake leading producers Saudi Arabia and Russia to become the world’s largest oil producer. The peak oil narrative was turned on its head and the talk now is of peak demand, a time when demand for oil will reach a plateau and then decline. With renewables and other clean energy technologies growing as the world transitions to a lower carbon economy, the question now is not whether but when demand for oil will peak. This uncertainty over the future pace of demand growth, the collapse in oil prices at the end of 2014, and a waning appetite for investment in long-cycle upstream oil projects have led to lower investment in upstream, which fell for two consecutive years in 2015 and 2016 and has been slow to pick up since then, despite the oil price recovery. This has led to warnings by both OPEC and the International Energy Agency (IEA) of a possible imbalance between supply and demand in the early part of the next decade and a spike in oil prices should new supply not come on line in time to meet anticipated growth in demand.
“I don’t see peak demand happening in 10 years or even by 2040,” Nasser told CNN in an interview in Davos. “There will continue to be growth in demand … We are the lowest cost producer and the last barrel will come from the region,” he added.
In the interim, however, Saudi Arabia and other oil producers will have to contend with the relentless growth in U.S. oil production, which has proved to be far more resilient than OPEC had anticipated at the start of the “shale revolution” a mere decade ago.
Energy consultancy Rystad Energy estimates that by 2025, the United States will be producing more oil and liquids, usually referred to as natural gas liquids, than Russia and Saudi Araba combined. In its base case oil price scenario (based on an assumption of $58 per barrel (/bbl) for U.S. West Texas Intermediate from 2019-25), Rystad sees U.S. liquids production surpassing 25 million barrels per day (mb/d) over the next six years, according to a report published at the end of January. The United States produced 11 mb/d of oil in 2018, according to the U.S. Energy Information Agency, the statistical arm of the U.S. Department of Energy.
In Saudi Arabia, the Ghawar field is still pumping away and producing roughly half of total Saudi oil output, which averaged 10.2 mb/d in 2017, according to Aramco’s Annual Review 2017. Saudi Arabia has capacity to go beyond its November 2018 record of just over 11 mb/d but has had to scale back output to comply with an OPEC decision to curb supply under a December 2018 deal with non-OPEC countries led by Russia. Notably, Saudi production numbers were achieved without production from the Neutral Zone, which has remained shut down since 2015 due to a dispute with Kuwait. That concession area is operated by the United States’ Chevron on the Saudi side of the partitioned zone, which has capacity to produce 500,000 b/d. If anything, the world is awash with oil and more is coming with U.S. additional shale oil barrels expected in the second half of the year, albeit at a higher cost than Middle Eastern oil.
Saudi Minister of Energy, Industry, and Mineral Resources Khalid al-Falih said, in announcing the certified reserve figures, that not only did the audited figure confirm the accuracy of Aramco’s own estimates of reserves but also served to highlight that the vast reserves were also among the lowest cost in the world to extract, at $4/bbl.
At 268.5 billion barrels, Saudi Arabia’s reserves are second only to those of Venezuela, which had an estimated 302.8 billion barrels at the end of 2018. But the numbers can be misleading. Despite these vast reserves, Venezuelan production has been falling and is now in even steeper decline due to mismanagement and underinvestment by the state oil company PDVSA, a situation that may worsen in view of the current political crisis gripping the South American country. Saudi Arabia, on the other hand, has the advantage not only of having huge reserves, a first-class operator in Aramco, low costs, and economies of scale, but more important yet, it enjoys political stability that has allowed it to maintain a loyal customer base.
Furthermore, decline rates of fields in the Middle East are far lower than the global average, estimated at 1.4 percent annually, compared with a global average of 3-4 percent, according to a presentation by an expert at a recent energy conference in London. The rationale for peak oil theorists was that Saudi reserves remained constant and even rose without significant new discoveries to replace the billions of barrels already produced. This can be attributed partly to good reservoir management and modern technology, which allows for higher extraction from existing reservoirs, even those that have been producing for more than half a century as is the case with Ghawar. Given that the actual oil in place, or in the ground, is nearly double the proven reserve number, the amount of oil that can be commercially exploited could be even higher in the future with advanced technology.
Whether Aramco will invest in net new capacity remains to be seen. In recent years, the state-owned Saudi integrated oil company has focused more on the downstream and on producing more nonassociated gas to meet demand for electricity and water desalination. It has pledged to maintain 1.5-2 mb/d of spare production capacity at all times, but, even at a lower decline rate, it will need to maintain a high level of investment in the upstream.
The IEA, in its 2018 World Energy Outlook sees U.S. shale oil production peaking in the mid-2020s and declining thereafter. It sees a need for new sources of supply regardless of whether demand peaks. Much of that new supply will have to come from Middle Eastern producers to meet oil demand that will be driven in coming decades by the petrochemical industry, heavy trucks, aviation, and shipping.
The IEA’s New Policies Scenario estimates that there will be an oil demand increase of 7.5 mb/d between 2017 and 2025. Without future capital investment into existing fields or new fields, current sources of supply (including conventional crude oil, natural gas liquids, tight oil, extra-heavy oil and bitumen, processing gains, etc.) would fall by more than 45 mb/d over this period due to what is known as natural decline and would have to be replaced. It sees a supply gap of 26 mb/d by 2025 even should its demand-constrained Sustainable Development Scenario come to pass. U.S. shale will cover part of the gap, but more conventional oil will be needed to avoid a supply shock, two of the IEA’s analysts argued in November 2018.
“The volumes of conventional crude oil receiving development approval would therefore need to double from today’s levels, alongside robust growth in other sources of production, if there is to be a smooth matching of supply and demand in the New Policies Scenario,” suggested Tim Gould, head of division for Energy Supply Outlooks and Investment, and Christophe McGlade, World Energy Outlook energy analyst.
Given the size of Saudi Arabia’s now-confirmed oil resources, it is fair to assume that it will continue to have a central role in the global energy arena, perhaps right down to the day the “last barrel” of oil is drawn.
Tim Callen, mission chief for Saudi Arabia at the International Monetary Fund, spoke with AGSIW about Saudi Arabia's economic reform agenda.
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