June 2 , 2004 0950 PDT (FTW) -- Washington, DC. by Julian Darley
 The world now knows all too well that there were no weapons of mass
destruction in Iraq
as claimed by Bush and Blair. What was required was a cover story,
in this case to make war. It is an old story. Humans have been
practicing deception (and war) since history began, and if chimps
are anything to go by, most likely well before that. The real
question appears to be whether one gets caught or not. If one were
to be charitable towards the war-mongers-in-chief, even though they
show no signs of charity towards the Iraqis or anyone else (except
their big business patrons and puppet-masters), one might say that
they really thought that if they looked hard enough, for long
enough, they might find something nasty in the wood shed. But so far
they haven't, and short of planting some WMD, it seems unlikely that
they will.

Next door, in Saudi Arabia, they are also desperate to find
something they have promised the world, namely a few hundred billion
barrels of oil reserves and several million extra barrels of
production a day for half a century. It may well be that if they
can't find these barrels, it will be of much greater significance to
the world than even the non-existent WMD.

If the world weren't facing increasingly obvious and severe
difficulties in meeting global oil demand, the spotlight might not
be shining so brightly on Saudi Arabia.

But there are many indicators of problems, and those of another
secretive organization, Royal Dutch Shell, make an interesting
comparison. Shell has seen three reserve write-downs this year,
slicing 4.35 billion barrels from its reserves (along with a further
reduction of half a billion for last year). It is under financial
investigation by the US SEC (Securities & Exchange Commission) and
by their UK counterpart, the FSA (Financial Services Authority); and
it is being investigated for criminal deception by US Department of
Justice over its "lost" reserves, not to mention many law suits from
aggrieved investors. And now comes the suggestion that unless it
improves its exploration record Shell will "run out of oil in a
decade."

No one is suggesting that Saudi Arabia will 'run out' of oil in a
decade, but there are rising concerns that they can neither keep
producing at the current rate of about 8.5 million barrels a day for
more than a few more years, nor find all the 261 billion barrels of
recoverable reserves they say they have proved, far less the extra
100 billion barrels of recoverable oil they claim they will discover
by 2025.

Finding out what is really going on in Saudi Arabia is very much
harder than in Shell, but at an energy conference in Washington,
D.C. on 27th April (sponsored by the Center for Strategic and
International Studies and the Saudi Business Council), the Saudi oil
and finance ministers, the head of the state oil company, Aramco,
and some U.S. counterparts, offered a second helping of the new
policy of Saudi glasnost, or openness. In fact, the Saudi material,
though delivered from almost the highest pulpit, was largely a
repeat of the same sermon from two months ago, when two moderately
high ranking Aramco officials told the world to trust them and stop
worrying. This time we were told once, twice, and thrice again, by
Americans as well, that the industrial world has nothing to worry
about on the oil front for decades.

That so many high-ranking Saudi and US officials should gather in
public to tell us not to worry about the world's biggest oil
exporter should be quite worrisome.

The need for questions was underlined all day by a stream of
contradictions and a statement from Federal Reserve Chairman Alan
Greenspan, who turned attention away from the future of global oil
and towards the bleak future of U.S. natural gas.

The scare that drew the Saudis back to Washington began two months
ago, when the world's largest private energy banker, Matt Simmons,
began loudly voicing his concern about the state of the Saudi oil
reserves to the media.

Simmons said then that "the entire world assumes Saudi Arabia can
carry everyone's energy needs on its back cheaply. If this turns out
to not work, there is no Plan B, and the world will face a giant
energy crisis."

The happy tune hummed on Tuesday was that while people have been
warning that we will run out of oil since the 1880s, the market has
always proved them wrong. In an effort to calm fears, Saudi and
American officials joined ranks to get their stories straight. Saudi
Petroleum Minister Ali Naimi told the packed house of bankers,
diplomats, economists, and media "you can rest assured that our
booked reserves are very real" and guaranteed that there would
be "no shortage of oil for the next fifty years." He seemed at times
insulted that anyone would even question the size of Saudi Arabia's
boundless bounty.

U.S. Deputy Energy Secretary Kyle McSlarrow agreed with the Saudis
that serious oil difficulties won't begin for another forty or fifty
years, though there are "challenges." For instance, he wasn't at all
happy about gasoline prices, which he blamed on high oil prices,
driven up by the recent OPEC cut in production. Indeed, oil prices
have been closer to $40 than $30 per barrel for all of April, when
prices should be at their lowest for the year.

The Saudis countered by suggesting that the U.S. could lower gas
taxes if it wanted cheaper driving, and they offered a paradoxical
reassurance that they were absolutely committed to oil at $25 a
barrel, but not any time soon. However, one oil analyst has recently
declared that $25 oil is as "dead as a dodo." Just how uncommitted
the Saudis are to lower oil prices was later underscored by the
Saudi Minister of Finance, Dr. Ibrahim Al-Assaf, who said that they
will need to spend billions of dollars on desalination and power
plants.

Those billions won't come from exporting sand. Oil export revenues
make up more than 90 percent of total Saudi export earnings, about
80 percent of state revenues, and around 40 percent of the country's
GDP. Dr. Assaf also said that although Saudi Arabia is seeing 4
percent economic growth, it really needs 8 percent to cope with its
growing social problems and exploding population, which at nearly
3.5% is one of the fastest growing in the world. Unemployment is
estimated at between 20 and 30%, and is thought to be expanding at
up to 100,000 men a year, mostly resentful, unskilled and often
illiterate young men, with all that that implies for calls to jihad.
The Saudis have made efforts to diversify their economy, but
unfortunately much of that effort has been directed towards
involvement in petroleum-related products, instead of activities
genuinely disconnected from petroleum production.

This has echoes of efforts in previous decades by the petroleum
super-majors to become less dependent on oil production. They tended
to find that there was no business as profitable as the oil
business.

All told, it doesn't take a super-computer to work out where most of
Saudi Arabia's new economic growth must come from.

Most interestingly and encouragingly for oil peak aficionados,
several speakers, including energy analyst and White House advisor
Daniel Yergin, explicitly denied what has come to be termed the "oil
peak." The term oil peak refers to the inevitable peak and decline
in production of a non-renewable natural resource. U.S. oil peaked
in 1970, just three years before the devastating Arab oil embargo.
If in 1973 U.S. oil output had had spare capacity, the effects of
the embargo would have been much more muted -- perhaps the Persian
Gulf producers would not even have tried it.

Now there are growing voices inside and outside the oil industry
warning that with world oil discovery having peaked in the 1960s, it
has been nearly a quarter century since we found more oil than we
used.

They remind us that exactly forty years after US oil discovery
peaked in 1930, its production peaked. In other words, the world is
now where America was in 1970. Since an unexpected decline in world
oil production is generally regarded as a catastrophe, no government
or official institution has yet admitted it. Signs of oil peak
therefore have to be found indirectly.

Even those who believe that this is the decade that oil will peak
and decline had thought that the Middle East, and Saudi Arabia in
particular, would be immune for at least another ten to fifteen
years.

Now it seems even that shard of confidence might be misplaced.

Cutting No Slack
Whether or not it is true that Saudi oil reserves are 'very real,'
the oil minister did say something that no one disputes: that the
economic miracle of the 20th century depended on a plentiful supply
of cheap oil, and that future stability depends on spare capacity.
With light sweet oil having just cleared $39 a barrel, the highest
price since Iraq invaded Kuwait in 1990, and supply problems from
Venezuela to Nigeria and Iraq and Indonesia, the cheap abundance is
already in serious doubt. Where is that spare capacity, that may
soon be so badly needed? Nowhere but Saudi Arabia, according to Guy
Caruso, head of the U.S. Energy Information Administration, the
statistical arm of the Department of Energy. He said that in the
entire world there is only two million barrels a day of spare
capacity, and that all of that two million is in Saudi Arabia.

In itself, two million barrels a day is far too little slack for a
system that needs 80 million barrels a day, and more dangerous still
to have it all in one unstable place. Just how unstable has been
demonstrated in the last month by a spate of suicide bombings,
including in the capital, Riyadh, and, last week, on the very day
when the CEO of Saudi Aramco, Abdullah Jumah, was announcing in
Washington that "there is nowhere in the world that oil facilities
are protected as well as in Saudi Arabia and Saudi Aramco," came a
highly explicit threat of new and more ferocious attacks by Al
Qaeda. In brazen contrast to the words of the Aramco CEO, Al Qaeda
said that "the apostate Saudi government will be incapable of
protecting their interests or providing security for them." So it
proved. Days later, apparently delivering on their promise, gunmen
killed five Western engineers in the petrochemical city of Yanbu, in
the western, Red Sea region of Saudi Arabia. This attack has sent
shock waves through the Saudi petroleum industry, and along with the
coordinated, suicide bombing attempt on an Iraqi oil export terminal
at Basra, is one of the overt factors driving oil prices ever
higher.

But security concerns, however deadly, are operational matters. What
if the Saudi spare production capacity itself is not real? Credible
sources have suggested that Saudi Arabia can barely maintain its
current output of around 8.5 million barrels a day, and that when it
does increase output, it is only briefly and mainly by means of
using its strategic reserve, which was only recently created, and
may be as large as 70 million barrels. If this is the case, it could
indeed maintain a 2-million-barrel-a-day increase in output, but
only for a month. Is this what they would use to back the Saudi
promise to help Bush win another term, as Bob Woodward recently
claimed, in Plan of Attack? The Saudis vigorously denied any such
promise, but no one probed them deeply about the exact nature of
their spare capacity and great, new projects.

Moving beyond "trust us," closer investigation offers little room
for comfort. Most of the great, new projects that they are talking
about bringing on, are neither new nor great. "I read the SPE papers
about the big projects they have coming up," said Matt Simmons after
hearing the names of the fields, "and they're very crappy projects."
He noted that one of the fields, Qatif, was discovered nearly 60
years ago. "To say that's one of the greatest fields ever - it is
not," he said emphatically. "By 1977 it was such a sorry field that
it was converted over to be used as a storage cavern for excess
refinery production at RasTanura (the world's largest petroleum
port, located in the Eastern region). That's their next on target -
to get 500,000 barrels a day. I said, Man alive, if that's the next
best thing they have, it tells you an awful lot about all these 64
fields that have never produced."

Indeed, the fact that about only a quarters of Saudi Ariabia's 85
fields have been produced has led to questions as to why they have
spent so much effort on mature, or perhaps dying fields like Ghawar,
if they have so many other new and better prospects. The calls are
beginning, and will only intensify, to allow outside inspectors to
come and examine the true state of Saudi oil reserves and capacity.
If they are so large, why should the Saudis have any worries about
allowing the inspectors in? The parallels with neighboring Iraq may
seem fanciful, but it is possible that the Saudis don't want
inspectors for the same reason as Saddam didn't - because there is
nothing there to find, but maintaining the illusion, and confusion,
is vital.

And the confusion is considerable. Amongst the many Saudi analysts
poring over every scrap of information that the Saudis divulge, or
accidentally leak out, some are now suggesting that when the Saudis
say reserves, what they really mean is original oil in place, or
OOIP. Alternatively some of their reserve numbers might prove
realistic, but only if very high recovery rates were assumed.
Recovery rates that could only be achieved over a very extended
period at very low rates of oil production and very high rates of
water production. If this were to be the case, it could mean that
Ghawar, which the Saudis say is 48% depleted, far from having
another 50 billion barrels left, may have little more than 5 billion
that could be produced at high flow rates. Admittedly this is close
to a worst-case scenario. It assumes a lowish, though not
unreasonable OOIP of 115 billion barrels for Ghawar, but also a
high, though not impossible, recovery rate of 50 to 55%. However,
without outside verifiable data, such a situation must at least be
contemplated because of the enormous significance of the world's
largest oil field. If such a grim forecast were to prove true, with
Ghawar providing well over 60% of Saudi oil production, and more
than 5% of world production, it would help explain why the Saudis
have been calling on other Middle Eastern OPEC countries to increase
their output, when they must know very well that they can't. It may
be that all of the Middle East is running flat out just to stand
still. No wonder Matt Simmons is so concerned.

Interpreting the Oracle, Alan Greenspan
Simmons is not alone in his concern. In his April 27th CSIS
comments, Alan Greenspan took a surprisingly skeptical approach,
first questioning whether we could be so sure that all was well with
oil, by pointing out that six-year long-term futures prices have
seen a "dramatic rise." He expressed dismay yet again that too
little attention was being paid to these kinds of long-range energy
prices, which were ominous indicators of a difficult energy future,
which could "alter the magnitude of and manner in which the United
States consumes energy."

Greenspan warned that we had spent "more than a century draining the
more immediately accessible sources of crude oil," and that much new
technology was being devoted to exploring and producing in very
harsh physical environments. And unlike the other speakers, he
cryptically left the door open for oil peak as being an underlying
cause of rising oil prices by saying that the "strength of crude oil
prices presumably reflects fears of long-term supply disruptions in
the Middle East." He didn't sound very convincing. Then, again, he
may be signaling that he is not convinced either by Saudi claims of
practically endless oil.

However, there is no doubting that Greenspan sounds both convincing,
and really concerned, when he talks about US natural gas. Despite
this being a conference about oil, he reserved his strongest remarks
for gas.

He pointed out that long range natural gas futures jumped in 2001,
and that natural gas is really something to worry about. So much so,
Greenspan warned, that in order to get access to the world natural
gas markets, America must build a huge new rash of liquefied natural
gas terminals, especially offshore (where it is harder to argue that
they are a safety hazard). Without immense capital investment,
natural gas prices will stay high, and that will hurt the economy.

In fact, Greenspan is saying quite openly, that in the near term,
there is no solution to tight natural gas, and this will have broad
effects on industry trying to increase jobs, and on a power sector
struggling to supply ever more electricity to an economy that must
grow fast in this highly political year. He words have been
prophetic, he may note with regret. Within a week of his speech,
natural gas prices were over six dollars per thousand cubic feet, a
historical record for May, when prices should be at their lowest
ahead of the re-injection season, when US storage caverns aim to
fill up with some 3 trillion cubic feet of gas. To cap his
prognosis, San Diego county came close to ordering blackouts this
week, thanks to heat and an over-stressed grid system. The week
before, California had just been assured that it would escape
rolling blackouts this summer.

Andy Weissman, one of the foremost US natural gas analysts, is ready
to bet that gas prices will top $8 before the end of June, and
possibly even range up to $15 before the summer's end. He said that
gas prices will soon be a cause of "profound concern," especially
given that oil may also soon be exploring $50 or even higher.
Similar worries are just starting to spread in the financial press.
An interesting question remains unanswered -Alan Greenspan seems to
take US gas decline very seriously. Did he give a hint at CSIS that
he thinks the world oil is not far behind, or does he believe the
eternal optimists in the DoE and Saudi Arabia, who are still
saying "don't worry for fifty years?"

Some economists are predicting that 2004 will see the highest
economic growth for a generation, both in the U.S. and in the world.
That growth, fueled by ravenous desire for oil by China, and now
India, combined with American gas (natural and -oline) problems,
seems set to make 2004 a tough year both for energy optimists and
for oil and gas, and possibly ruin the rosy forecasts of super
growth.

Which brings us back to Saudi Arabia. If it turns out to be playing
by the same rules as Shell, now facing threats of criminal
investigation for lying about its proven reserves, the whole world
really should start asking for some tangible, outside proof that
Saudi Arabia is still the king of oil, just to be sure that its much
vaunted barrels of oil production haven't gone the same way as
Saddam's missing weapon.