Saudi Arabia drops bombshell

Reversal of pledges to expand daily oil production beyond 12.5 million barrels has far reaching world oil supply implications

Kay Cashman

Petroleum News

On April 20, Reuters reported that Saudi Arabia, the world’s biggest oil producer and exporter, had put its plans to increase long-term oil production on hold.

In a series of statements top Saudi officials, including Saudi King Abdullah, warned consumers it will not expand oil field development beyond 12.5 million barrels per day, reversing recent pledges to U.S. President George W. Bush.

Current Saudi production capacity is about 11.3 million bpd, and is scheduled to rise to 12.5 million bpd next year.

Peak Oil Review said April 21 that the King’s remarks seemed to confirm a statement made last year by Saudi Oil Minister Ali al-Naimi who, when asked “How high can your production go?” replied, “We’ll get to 12.5 million barrels a day and then we’ll see.”

If the Saudi announcement was a bombshell, American newspapers nearly ignored it, the publication said.

Steve Andrews and Randy Udall canvassed experts to see what they thought about the Saudi statements. Andrews and Udall are two of the five co-founders of the Association for the Study of Peak Oil & Gas USA, or ASPO-USA, which publishes Peak Oil Review.

Following are some of the excerpts they provided their readers:

• Tom Petrie, vice president, Merrill Lynch: “King Abdullah’s quote speaks to the fast-emerging reality of what I call ‘practical peak oil.’ The Saudis and other exporters are placing a new emphasis on elongating the petroleum exploitation and depletion cycle. This stems from a growing awareness of the challenges of conventional resource maturity, as well as rising resource nationalism. This is likely to result in an earlier occurrence of global peak oil output than many consumers yet recognize.”

• Charles T. Maxwell, senior energy analyst, Weeden & Co: “If Saudi Arabia’s oil reserves are not going to be made available to the world in future years, beyond the expansion they have already signaled (to 12.5 million barrels per day), then the geologic oil supply constraints that we are feeling in many other parts of the world are going to close in on us earlier and more severely than we previously thought. It’s a major change in policy. It’s a powerful message. It makes the geologic message that much more decisive.”

• Chris Skrebowski, editor of Petroleum Review: “King Abdullah’s statement represents the final seal of approval on an emerging Saudi policy of restricting output to save oil for future generations. In recent years the Saudis have been managing expectations of future capacity steadily downwards. No one now talks of their reaching 15m/bpd. If they reach 12.5m/bpd, while maintaining 1-25m/bpd of ‘spare’ capacity, we should plan for Saudi production to be 9-115m/bpd for the foreseeable future.

“High oil prices and bulging treasuries are giving producing countries the option of maximizing plateau production. We may never know if these decisions are being dictated by geology or driven by a political imperative of ‘saving oil for later generations.’ I suspect it’s a mixture of the two.

“In any case, there is now a broad-based move by energy exporters, including Russia, Angola, Azerbaijan, and Norway, to restrict expansion to maximize plateau flows. If this takes hold, then global supplies will reach a peak rather earlier than analysis of future projects would indicate.”

• Matt Simmons, chairman of Simmons & Co. International: “This statement by the Supreme Ruler of Saudi Arabia has far-reaching implications. That King Abdullah would now instruct his servants to conserve the oil they pump and save some for the kids and grandkids of today’s Saudi citizens is most profound.

“King Abdullah has exhibited a sense of wisdom not seen since his brother, King Faisal ruled the Kingdom until his tragic assassination. Assuming his health continues, he might lead Saudi Arabia successfully into a post-peak world and create sustainable middle class wealth for the 90 percent of Saudi Arabia who had accidentally been left behind.”

• Jeffrey Rubin, chief economist, CIBC World markets: “A far more plausible explanation for faltering growth in Saudi production and exports is that they are rapidly approaching maximum production. Given soaring rates of internal consumption for oil, they will soon be exporting less not more crude to world oil markets.

“Russian Natural Resource Minister Yuri Trutnev has said that Russian production and exports will fall this year, for the first time in a decade. We forecast that exports from OPEC, Russia and Mexico will actually decline by 2.5 million barrels per day between now and 2012. It’s far from obvious who is going to fill this supply gap, let alone meet the need of future global crude demand growth.”

• Jeremy Gilbert, BP’s retired chief petroleum engineer: “I have no idea whether there was a real choice for the Saudis to make. Perhaps it’s all ‘spin’; perhaps there were discoveries, but there was some property of the reservoirs which made them very difficult to develop, and it made sense to delay development until improved technology or much higher prices arrived; perhaps it’s the plain basic truth — a very rare commodity.

“What I do know is that several countries in the Gulf have long chosen to operate their fields with depletion rates far below those that a Western company would consider optimal, or even sensible. Depletion rates of between 1 and 2 percent per year are not uncommon in the United Arab Emirates. Local leaders have repeatedly said that they feel an obligation to preserve some of their natural resources. These feelings must be intensified when their recent production has been sold for U.S. dollars which have depreciated by 25 percent or more against other strong world currencies over the last four years.

“The countries around the Gulf, which would once have come to the aid of a faltering U.S., now are either delighted about the U.S. plight or just don’t care. They are not going to do anything to reduce world oil prices. Instead, they are going to maximize their economic take while minimizing depletion of their sole natural resource.”

• Herman Franssen, president of International Energy Associates: “King Abdullah’s remarks reflect the new thinking in the Middle East, where the Kuwaiti parliament has also expressed a need to stabilize oil exports. Higher oil prices enable producers to focus more on domestic investments than on increasing exports. All Gulf countries have seen huge growth in domestic demand for power and fuel. By 2015, Iran may consume as much of its crude oil as they export. The King’s remarks mean that we in the industrialized countries better start looking for other solutions.

“The world should bless this intelligent pronouncement. It is a reflection that Twilight set in on the oil fields of Arabia a few years ago.”