The Hindu Business Line : Why an oil crisis is imminent

Do world's oil producers have any headroom? Unlikely as Saudi Arabia's oil fields are said to be declining. There have not been any new discoveries since the 1970s. It is unlikely that Saudi Arabia's oil production capacity will climb much higher than its current capacity of 10 million barrels a day. Thus, a global energy crisis is pretty much inevitable, says Pratap Ravindran.

CRUDE oil rose above $59 a barrel in New York for the first time on June 20, in spite of the Organisation of Petroleum Exporting Countries agreeing to raise its production limits by 500,000 barrels per day from July (in addition to putting another 500,000 bpd on the market soon if prices remained high) and the assertion by Saudi Arabia — the only OPEC member with significant production capacity to spare — that it is meeting demand as much as it can.

On that day, the United Progressive Alliance (UPA) Government at the Centre worked up the nerve to increase petrol and diesel prices in the country.

On June 21, oil prices kept climbing to hit yet another new intraday high near $60 a barrel even as the OPEC president, Sheikh Ahmed Fahd Al Ahmed Al Sabah, said the group would review the possibility of raising its output ceiling by half a million barrels by the end of the week. Once again, OPEC's statement had minimal impact on prices.

Some analysts were inclined to attribute the spike to concerns about the ability of refiners to keep pace with the demand for oil.

Others differed in that they were of the view that concerns arising from the closure of the US, German and British consulates in Lagos after a warning of a terrorist threat and the impact that this development would have on oil supply from Nigeria.

It may be recalled that this country, the world's eighth-largest crude exporter and the fifth-biggest exporter of oil to the US, has been identified by Osama bin Laden as ripe for `liberation'. And so, these analysts talked about how the political upheaval in a "strategic country" may cause a disruption in oil supply. In short, analysts were divided over whether the ever-increasing price of oil could be attributed to the inadequacy of refining capacity or a shortfall in production.

But they were united in maintaining a studied silence about the scenario sketched by Mr Matthew R. Simmons in Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Mr Simmons is the founder and Chairman of the world's largest energy investment banking company, Simmons & Co. International.

A board member of Kerr-McGee Corporation, Brown-Forman Corporation, the Centre for Houstons Future, the Houston Technology Centre, and the Atlantic Council of the United States of America, Mr Simmons is also a member of the US Counsel of Foreign Relations and took part in the now disputed secret energy meetings organised by Washington.

In short, he is a man who knows...

Mr Simmons' thesis is as simple as it is scary: Saudi Arabia's oil fields now are in decline and the country will not be able to meet the global demand for oil in the coming years.Saudi Arabia, with over 260 billion barrels of proven oil reserves (a quarter of the world's total), is not only the top foreign supplier of oil to the US — the world's largest energy consumer — but also the sole source of liquidity in the oil market.

According to the US Department of Energy's Energy Information Administration (EIA), the world will become increasingly dependent on Arabian oil in the next two decades.

To deal with this escalating dependence, Saudi Arabia will have to produce 13.6 million barrels a day (mbd) by 2010 and 19.5 mbd by 2020.

Both the International Energy Agency (IEA) and the EIA take it as a given that the Saudi Arabian oil output will double over the next 15-20 years. But Mr Simmons says this is not going to happen. He points out that Saudi Arabia's oil fields now are declining.

Saudi Arabia has over 300 recognised reservoirs but 90 per cent of its oil comes from the five super giant fields discovered between 1940 and 1965. There have not been any new discoveries of such fields since the 1970s.

Further, aquifers are being drained to pump oil out from ever deepening wells, a sure sign that oil near the surface is either exhausted or getting to be. The most significant of the oil fields is Ghawar. Found in 1948, it is the world's largest oil field and accounts for about 60 per cent of Saudi Arabia's oil production. The giant field's current proven reserves work out to 12 per cent of the world's total.

The field produces 5 mbd, or around 6.25 per cent of the global oil production. According to Mr Simmons, Ghawar's northern regions are almost depleted. Further, two other giant fields, Abqaiq and Berri, have also peaked. These mean that Saudi Arabia's oil production capacity will not climb much higher than its current capacity of 10 mbd. Ergo, a global energy crisis is pretty much inevitable.

Mr Simmons analysed 200 technical papers of the Society of Petroleum Engineers on Saudi Arabian reserves and his work was peer reviewed by a dozen senior technical experts. They cannot be dismissed lightly.

And so, officials of Saudi Aramco, the state-owned oil company, flew to Washington to try and refute Mr Simmons' analysis.

In a speech before the Centre for Strategic and International Studies in Washington D.C., Mr Nansen G. Saleri, a reservoir manager for Saudi Aramco, insisted that Saudi Arabia can maintain production capacity at the current rate of 10 mbd for the rest of this decade and, if required, can increase maximum output by 20-50 per cent within a decade. This claim was pure spin.

According to The New York Times, Saudi Arabian oil officials, privately, were worried that production beyond 12 mbd would damage the oil fields.

According to Mr Simmons, analysing Saudi Arabia's capacity is not a simple matter. Saudi Aramco has not provided production data for more than two decades.

Nor do the data systems of OPEC, the IEA or the EIA yield much insight into what lies below the Saudi Arabian sand. Says Mr Simmons: "Their predictive track record has been awful. In the land of the blind, reliable OPEC data are either untrusted or non-existent."

Mr Simmons is now calling for a new era of true energy transparency.

"The IEA should roll up their sleeves and work to obtain far better demand and cost data and far better decline data for non-OPEC oil. OPEC should provide field-by-field production and well-by-well data, budget details and third party engineering reports."

"... The entire world assumes Saudi Arabia can carry everyone's energy needs on its back cheaply. If this turns out not to work there is no `Plan B'. Global spare capacity is now `all Saudi Arabia'. This is the world's insurance policy and no third-party inspector has examined it for years. Conventional wisdom says "don't worry, trust today,'' but if conventional wisdom is wrong, the world faces a giant energy crisis."

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