Biggest oil field in decline in Saudi Arabia?

An analyst at the Bank of Montreal, Don Coxe, says the largest oil field in the world—Ghawar in Saudi Arabia—is in irreversible decline. Coxe is the first oil analyst to make that statement publicly.

“The combination of the news that there’s no new Saudi Light coming on stream for the next seven years, plus the 27 percent projected decline from existing fields means Hubbert’s Peak has arrived in Saudi Arabia,” Coxe said in reference to data compiled by the International Energy Association’s monthly report in August 2004.

Hubbert’s Peak refers to the work of the late geologist M. King Hubbert, who determined all oil fields follow a bell curve, from beginning to produce to reaching a maximum point (the peak) and then inevitable decline.

The Montreal Bank is not the only voice speaking out about this situation. International banker Matt Simmons, who heads the Association for the Study of Peak Oil (Aspo), and top expert Colin Campbell have questioned the validity of reported reserves, which supposedly stand at 258 billion barrels.

Decline of the Ghawar field could trigger panic in the markets, price spikes, shortages and near-collapse of the world economy. “The kingdom’s decline rate will be among the world’s fastest as this decade wanes,” Coxe said. “More importantly, Hubbert’s Peak must have arrived for Ghawar, the world’s biggest oil field.”

The Saudis and Aramco last year pledged to produce an extra 500,000 barrels immediately and an extra 5 million barrels per day (bpd) by 2012. The markets were expecting Saudi light, sweet crude, according to Coxe, but instead, the oil produced was heavy, sulphurous and of use to only a few refineries that had the capacity to process it. As to the promise of 5 million bpd by 2012, the Saudis can turn out only 2.5 million bpd. The downturn in production from existing fields will cut output by another 2.5 million bpd.

Abd Allah Jumaa, chief executive officer for Saudi Aramco, denies there will be any shortfall. “We have ambitious expansion plans to boost our capacity…[and] raise our production capacity to 15 million barrels a day,” he said. “We are confident that we can maintain these production rates for about half a century.”

Campbell noted that in 1990 the Saudis, and other OPEC countries, especially Kuwait, cut their reserve estimates overnight. The Saudis have previously promised increased production, which they failed to meet. Saudi Arabia announced “a massive increase from 170 to 258 billion barrels in 1990. It had evidently decided to follow Kuwait’s practice of reporting original, not remaining reserves,” Campbell said.

Since then, Saudi Aramco has been pumping about 9 million barrels per day, but claims its reserves have increased slightly because of better extraction methods. Simmons, however, thinks that Ghawar, which produces around 5 million bpd of Saudi output, may be suffering from poor management.

Simmons said pumping large amounts of oil at maximum rate can damage the geological structure of the oil field, called “rate sensitivity.” Basically, he said, what happens is the hole collapses on itself, making large amounts of oil within it unobtainable.

While figures on existing oil reserves have been anything but transparent, Coxe’s numbers may be sympathetic. Saudi Aramco’s own statistics show existing Saudi oil fields deplete by 600,000 to 800,000 bpd every year. If those levels continue until 2012, Saudi depletion will be at a minimum of 4.2 million bpd.

One big sign of depletion in Ghawar is the large amount of seawater injection used. Water is pumped into aging fields to raise the pressure in the wells and make the oil accessible. Eventually, the water reaches the well head, and the party is over.

Coxe wants to know why new Saudi fields, not just older ones, also are water injected. “As if that weren’t bad enough news, the Saudis claim they need at least $32 a barrel to justify new production, because…new production…requires water flooding. Water flooding on newborn Saudi wells?,” Coxe asks. “Isn’t water flooding [the] Viagra of aging wells?”

The Saudis and some others will note that the Canadian bank is heavily invested in oil sand deposits in Alberta, Canada. These “sands” are deposits of sticky oil and sand. Ordinarily, they would be too expensive to extract, but they are getting much attention in the midst of sharply rising prices on conventional crude.

As debate over the Ghawar field heats up, the Saudis will be pressured from many sides to disclose the true figures on the actual size of its reserves.

From the April 20-26, 2005, issue

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