Saudi Arabia and Peak Oil

Recently, Wikileaks made a lot of news by making public a large number of cables and correspondence between various governments and their agencies. While most of the focus from the media has been on revelations pointing mostly to the US wars in Iraq and Afghanistan (and other diplomatic shenanigans), there were also some interesting revelations that directly affect our industry:

WikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices

The US fears that Saudi Arabia, the world’s largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.

The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom’s crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.

(snip)

Jeremy Leggett, convenor of the UK Industry Taskforce on Peak Oil and Energy Security, said: “We are asleep at the wheel here: choosing to ignore a threat to the global economy that is quite as bad as the credit crunch, quite possibly worse.”

Well, that doesn’t sound good.

First, for anyone unfamiliar with the term, here’s a brief description of Peak Oil (via Wikipedia):

Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.^[1] This concept is based on the observed production rates of individual oil wells, and the combined production rate of a field of related oil wells. The aggregate production rate from an oil field over time usually grows exponentially until the rate peaks and then declines—sometimes rapidly—until the field is depleted. This concept is derived from the Hubbert curve, and has been shown to be applicable to the sum of a nation’s domestic production rate, and is similarly applied to the global rate of petroleum production. Peak oil is often confused with oil depletion; peak oil is the point of maximum production while depletion refers to a period of falling reserves and supply.

This is obviously a big deal, since so much of Canada’s (and the world’s) economy depends on petroleum products, and any viable alternative – by my own estimation – is a long way off, especially at the current levels of investment and development.

I highly recommend giving the Guardian article a read in full. But the crux of the story is summed up much better by others, such as Kevin Drum at Mother Jones and Ariel Schwartz at Fast Company.

Ariel Schwartz:

Peak oil […] is no longer the fringe theory it was just 10 years ago. Even Jeroen van der Veer, the chief executive of Royal Dutch Shell, has admitted that oil supply may no longer keep up with demand by 2015. But the just-released cables, which detail a back-and-forth between the U.S. consul general and geologist Sadad al-Husseini, the former head of exploration at Saudi Aramco, confirms that the situation is serious.

Here’s an excerpt from one cable:

“In a presentation, Abdallah al-Saif, current Aramco senior vice-president for exploration, reported that Aramco has 716bn barrels of total reserves, of which 51% are recoverable, and that in 20 years Aramco will have 900bn barrels of reserves.

“Al-Husseini disagrees with this analysis, believing Aramco’s reserves are overstated by as much as 300bn barrels. In his view once 50% of original proven reserves has been reached…a steady output in decline will ensue and no amount of effort will be able to stop it. He believes that what will result is a plateau in total output that will last approximately 15 years followed by decreasing output.”Other cables from the U.S. embassy in Riyadh go on to express fears that “Saudi Aramco is having to run harder to stay in place–to replace the decline in existing production,” and that “Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period.”

Kevin Drum:

This won’t come as a surprise to anyone who’s been following the oil industry over the past few years. Matthew Simmons’ Twilight in the Desert, which I reviewed six years ago, made a detailed case that Saudi Arabia’s production capacity had pretty much maxed out already, and Business Week published an article three years ago based on internal Saudi documents that said much the same: the Saudis could pump 12 million barrels a day in short spurts but only 10 million barrels on a steady basis — and that’s all there is. Production capacity just isn’t going up.

Both authors seem to agree that Peak Oil is coming, whether we like it or not.

I’m hoping this post can spur a bit of a conversation in the comments section, though I don’t want this to be about the value (or lack thereof) of Wikileaks as such. I am hoping to focus the discussion on the Peak Oil theory, and is Canada equipped to deal with it?

Am I right to be worried? Or is it safe to assume that as extraction methods and technology improves, we can make up declining production in the Middle East by exploiting existing reserves, such as the oil sands here at home?

Jump in and, by all means, talk me off the ledge!

GeoLogic