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EDITOR'S NOTE
An edited version of this article, complete with
graphics, first appeared in the May 17, 2004, issue of Oil
& Gas Journal. Click
here to see the full article and graphics.
The Saudi-American Forum wishes to thank Mr.
Al-Husseini for permission to share this article with our readers
and to the Oil and Gas Journal for its assistance.
Recent media reports have suggested Saudi
Arabia may not be able to supply its share of the world oil demand
for the near future. "Experts" have argued in major U.S.
papers and at energy forums that not only are the Kingdom's
petroleum reserves overstated but also that the Kingdom has
rejected necessary foreign investments in its energy sector and
that poor production practices have damaged its oilfields.
Are these allegations true? Are there problems
in the Kingdom's oilfields? Can the Kingdom meet the growth in
demand for additional production? These questions require explicit
answers. Unfortunately, the policy of years of withholding
technical information has allowed such misconceptions to flourish
even though they have little substance in point of fact.
As of 2004, Saudi
Aramco has established its oil reserves at 260 billion
barrels, which is approximately 25% of the world's proven oil
reserves. Some reports have speculated that these figures may be
drastically inflated. In February 2004, for instance, the Association
for the Study of Peak Oil and Gas suggested that the Kingdom's
oil reserves might be only 180 billion barrels. Others have
speculated that the Kingdom's increase in reserves by almost 100
billion barrels in the early 1980s was unsupported by technical
assessments. The fact that oil prices had doubled between the late
1970s and early 1980s and are still three to four times the oil
prices of the early 1970s in year 2000 dollars was not factored in
by many of these analysts (IEA
World Energy Outlook 2002).
In fact, the Kingdom's oil reserves estimates
are based on SPE, AAPG
and WPC definitions,
conventional petroleum engineering practices, state of art
reservoir simulation, and conservative economics. While these
definitions differ from the more stringent SEC
requirements typical of smaller, shorter life accumulations,
they are the same definitions utilized throughout the world by
countries holding giant oil and gas resources.
During my own tenure at Saudi Aramco as the
senior executive in charge of exploration and production, we
undertook numerous initiatives to improve the accuracy and
reliability of these estimates. We drilled, cored and logged
numerous key wells in every active field and reservoir and
surveyed the most significant oilfields with complete 3-D seismic
coverage. Massive simulation models were constructed to
consolidate this and huge archives of geological and production
data were accumulated to support our understanding of the
reservoirs. These simulations spanned decades of performance
history on a zone-by-zone and well-by-well basis. Over the years,
these models have been updated annually and have confirmed our
predictions of reservoir performance and our calculations of
reserves and oil recoveries.
As to the possibility of future reserves
additions, there are extensive reservoir and source rocks in Saudi
Arabia spanning the Paleozoic through Cenozoic time scales. These
must surely offer additional opportunities for oil and gas
discoveries. The size of such fields, however, will be
substantially smaller than current proven accumulations. This is
due to the seismic reconnaissance and grid coverage that has
already spanned the most promising regions of the Kingdom in
search of giant oil and gas structures. While there may yet be
many undiscovered oil and gas accumulations with millions of
barrels of reserves, they are likely to be of limited acreage and
vertical closure by Saudi standards.
Whether the exploration for such accumulations
will add billions of barrels of future reserves will depend on the
prevailing economics and government policies within the Kingdom.
The more liberal the policies, the more commercially viable
exploration and development will become in future decades.
In terms of immediate additions, the
enhancements to conservative oil recoveries in undeveloped
reservoirs will be more important than new field discoveries.
Furthermore, if the past is any indication of the future, advances
in technology are bound to reduce the cost of recovering marginal
discovered resources, thus adding to the reserves figures. Given
the fact that the discovered but undeveloped Saudi reservoirs make
up about 130 billion barrels of the Kingdom's total reserves, the
addition of new proven reserves through future reservoir
developments is a foregone conclusion.
A 10% increase in recovery estimates for these
reservoirs alone would generate 13 billion barrels of additional
reserves. This is significant but clearly not sufficient to
replace the high rates of Saudi production, currently averaging 3
billion barrels per year. On the other hand, at the current production rates and with an
existing reserves base of 260 billion barrels, the issue of future
reserves replacements will not be a concern until well beyond
2020.
The supposed inability of Saudi Arabia to meet
its production targets in the next few years also requires
discussion. At the current depletion rate of 3 billion barrels per
year, which represents 2.3
% of the remaining 130 billion barrels of proven developed
reserves, this concern is debunked by simple mathematics.
Utilizing existing technology and sound engineering analysis, my
staff and I were confident that Aramco could sustain even higher
rates of production, if necessary.
From an economic point of view, however, the
cost of production must rise to meet increasing production
complexities that evolve with reservoir maturity. Although the
Kingdom's oil reserves are immense, they are not infinite, and
they do include a broad spectrum of reservoir qualities. As
production increases to include lower quality or mature
reservoirs, the cost of production will increase accordingly.
Such steady cost escalations have been
anticipated for a long time. For example, the majority of the
Saudi carbonate reservoirs under production are supported by water
injection. As their depletion advances, high resolution reservoir
simulations have shown that the flood fronts will disperse within
the numerous oil zones. The produced oil will inevitably commingle
with increasing volumes of injected water. Workovers,
recompletions and new horizontal laterals will delay the water
ingress into the producing wells for an extensive period of time.
Eventually, however, this becomes unavoidable. At high water cuts,
wide-spread artificial lift is virtually inevitable. This in turn
will require the processing and disposal of very high volumes of
produced water. These maturity-related transitions may not occur
for years to come, but they are ultimately unavoidable and have
obvious economic implications.
The offshore clastic reservoirs do not have
water injection, but they do have complex geological
configurations and matching variability in aquifer support. The
main sands benefit from very dynamic aquifer support while
stringer sands have less access and therefore less support from
the aquifers. As the main sands are depleted, and in spite of
careful reservoir management, major workovers will become
necessary. These workovers will attempt to selectively tap into
the remaining oil reserves. Since these are concentrated in the
stringer sands, offshore artificial lifts will also become
inevitable in years to come. Whether gas lift or submersible pumps
are utilized, given the size and scale of these operations, the
investments will be substantial and will be accompanied by
increasing operating costs.
Historically, such cost escalation has been
deferred by developing new increments of oil reserves in parallel
with maturing old fields and reservoirs. The past economic limits
that have driven production declines in the older reservoirs in
Saudi Arabia have often occurred at 20% to 25% depletion of the
original reserves in sand and shale reservoirs and 35% to 40% in
the carbonates. Technology and the addition of reserves may extend
these production plateaus to higher levels of depletion, but this
is unlikely to exceed a further gain of 10% to 15% under optimum
economic considerations. On
the other hand, once declines begin, highly commercial production
will still extend for decades, as has been demonstrated by
virtually every mature reservoir in Saudi Arabia.
Inevitably, the higher the production rates,
the more the reservoir maturity is accelerated and the shorter the
overall duration of the optimum economic production plateau.
Front-end investments may be accelerated to achieve higher
production plateaus, but these do not always give optimum oil and
gas recoveries or full reservoir life cycle economics. In Saudi
Arabia, optimum economics depend on many variables, including the
integrated economics of the full suit of reservoir developments,
based on the maturity and status of all the available fields and
reservoirs.
Based on these considerations, the Kingdom can
certainly increase its production to 15 million barrels per day
based on its existing reserves base. Sustaining such an elevated
rate of production for decades, however, will be contingent on the
future quantity and quality of reserves additions. This in turn
will be contingent on future technology developments and the then
prevailing prices for fossil fuels and energy substitutes. In
addition, it will be vital that such a rate increase is managed by
a very large and highly qualified body of professional Saudi-Arab
specialists. This is essential in order to avoid any misjudgments
in reservoir or production engineering practices and to avoid
undermining the available reserves base through inadequate
reservoir management.
From a policy point of view, the decision to
actually expand long-term production capacity is further
complicated by the quality of long-term energy forecasts. For
2020, these estimates have varied in recent years from 90 to over
120 million barrels per day of total oil consumption. With such
disparities in projected demand, the risks of idle capacity or
price collapse are very severe for major oil producers. In an
industry with project lead times that are measured in years and
capital investments measured in billions of dollars, such
inconsistencies are not conducive to firm long-term facilities
planning or capacity investments. In my own experience, the
quality of the long-term forecasts has been the most severe
impediment in the face of orderly capacity expansions and
long-term project economics.
Accounts in the Western press have also
criticized Saudi oil production practices, claiming that they have
damaged the reservoirs in some of the major oilfields. Yet,
extensive studies have been undertaken over the years, some with
direct assistance from ExxonMobil and Chevron, in order to
anticipate and prevent any such damages. Quarterly production
testing of virtually every active oil well in Saudi Aramco is
conducted to forestall such problems. Breakthrough logging tools
have been developed with Schlumberger, among others, in order to
monitor all oil and gas reservoir zones. These have included
developments to monitor zones shielded behind casing in order to
capture the full spectrum of information required by the reservoir
management teams. This process was institutionalized by the
Kingdom's Ministry of Petroleum and Mineral Resources as far back
as the early 1980s when it demanded from the outset "first
class oilfield practices" from Saudi Aramco.
If this commitment to prudence is adhered to in
the future, the risks of reservoir damages will be minimized. On
the other hand, if cost cutting strategies and high risk
production practices are allowed to prevail, the consequences can
be both devastating and sudden. Examples of such ill considered
strategies might be an early shift to in-field water injection
patterns, a shift to dry crestal production strategies away from
wet flank areas, and the heavy dependence on artificial lift
without an adequate number of wells to tap into the various
complex reservoir zonations.
Finally, the Saudi government has been accused
of being unwilling to accept foreign investments that would
facilitate the development of its oil resources. Without such
investments, it is argued, the Kingdom's capability to satisfy the
world's energy needs will be further eroded. There are two
problems with this argument. First, it ignores the fact that the
government does actively pursue foreign investment in its economy
as exemplified by the downstream energy sector and the recent gas
projects. Such investments have allowed the Kingdom to focus on
its upstream oil sector, which has not suffered for lack of
financing.
Secondly, it ignores the reality that
investments in the oil sector generate their own incremental
revenues. These in turn finance additional investments. The only
scenario where this process would not operate is the scenario
where oil prices collapse, and the returns on investments are
inadequate. In such circumstances, investments to increase
production capacity would not be realistic, and the financing
issue would be a moot point in any case.
In the long-term, the real issues in the oil
industry are not the technical questions of Saudi Arabia's
reserves or oil production capacity. Both of these issues have
been managed well in the past and will continue to be addressed
effectively in the future through advances in technology and
engineering practices.
The real issue is whether there is a real
willingness and commitment by both producers and consumers to
achieve political and economic cooperation in addressing the
unyielding economic imperatives imposed by the global energy
markets. Without such cooperation, energy-related volatility can
only be exacerbated in the face of increasing demand for fossil
fuels and the concentration of reserves in a few centers of
operation.
Regardless of such future developments,
however, it is a foregone conclusion that Saudi Arabia will remain
the cornerstone of global energy supplies, and its role will be
the key role in stabilizing the world's energy markets.
ABOUT
THE AUTHOR
Dr. Sadad Al-Husseini retired
from Saudi Aramco on March 1, as executive vice president and a
member of its board of directors. He joined Aramco in 1972, and
his assignments have included various senior executive posts in
its oil and gas exploration, production, and development
operations. He was a special representative of the kingdom
of Saudi Arabia, in its natural gas negotiations from 2000 to
2002. Al-Husseini was a member of the Saudi Aramco
Management Committee from 1992 until his retirement and was
elected a member of its board in 1996. He also was a member
of the Consolidated Saudi Electric Co. board during 2000-03 as
well as holding other board positions in joint ventures and
subsidiaries of Saudi Aramco. Al-Husseini graduated from the
American University of Beirut with a BS in Geology in 1968.
He obtained his MS in 1970 and PhD in geological sciences in 1973
from Brown University (distinguished graduate school graduate).
He is an honorary member of the American Institute of
Metallurgical, Mining & Petroleum Engineers and the Society of
Petroleum Engineers.
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