I still don't get it. Why all the fuss about transparency when you already know that Al Naimi is lying? Is there some possibility that an inspection might reveal he is not lying???

Mr. al-Naimi isn't the next version of the beloved Iraqi Information Minister... in fact, he's standing in for Fernando... of Saturday Night Live fame. Think back to the beloved Billy Crystal character:

It is better to look good, than to feel good.

Pulling a few rigs over to their waters, lots of talk but no action and heavier and more sour oil in the OPEC reference basket, and the finishing touch: upping reserves - again - does smack somewhat of looking good.

Oh man, Stuart, HO was playing devil's advocate, I think....

But seriously, every damn point you just made is right on target IMHO. I've said this in some comments but I will state it here altogether as one statement.

As OPEC (and Saudi Arabia in particular) become more and more aware of their ever-diminishing role in controlling the world oil supply, they are more and more likely to make extraordinary and extravagantly unrealistic claims about their reserves, current capacity and future production ability. This is a transparent and weak psychological attempt on their part to maintain the illusion of control that they have exerted on past oil markets. This latest inflation of their reserve numbers is merely a direct reflection of their need to be in control of the market, to be the keystone to our energy future, to be the swing supplier that they've been for the last 25 years. We need not take this behavour seriously and today, when they made an absurd increased reserves assertion, following 17 years after the unjustified late 80's increase -- which was based on nothing except new OPEC rules -- we surely know that they have, in fact, lost control of the markets and that oil on the world market is about to get a lot more fungible and volatile in price. They fear this result and will do anything in their power to avert it. But it is too late, it is a Brave New World for oil supplies and they are no longer in control.

Well, at least that's my take. Have a good one....

His comments are nothing more than another example of this "it is Tuesday, we must talk down oil" thing that has been going on for months now.  Every single time the report on Oil stocks comes out on Wen. someone talks about Oil on Tuesday.  I dare you to mark your calender and start watching this.  It is hysterical at times.  This whooper of a lie is an idicator to me that we have a whooper of a draw down in the report.  Who knows.  Maybe it was just the latest of absurd statements from them.  

I think these statements could have as much to do with the HOS domestic agenda as it does with trying to calm the financial markets. Don't you think "the people" are going to begin to wonder why their checks are getting smaller (ala Alaska), when the price of oil is nearing all time highs...The last thing they want over there is revolution due to a perception of a declining revenue stream. How do you exploit your oil resources when people keep blowing up infrastructure. Has anyone lived over there that could shed some light on this end of the issue?

Reading HO and Stuart's postings and all the comments to date, here are my thoughts.

I think HO really wanted to get a discussion going about SA comments in the media.  If so he succeeded wonderfully.

I think Stuart brought to light the non oil related reasons for making reserve statements.  He defined the political environment well.

All other posts have brought great data to bear on both sides of these arguments, the technical and political.  I have been greatly educated with respect to the interplay between geologic reserves and need for political position by oil producing entities.  It strikes me this is a lot like the energy markets recently.  The price and the trends of oil, NG, etc. aren't directly linked to the measurable (production)supply on any particular day.  The spin is as (more?) important in manipulating the market than the data.

Thanks to all for having this discussion in the public forum where I can see all sides and make up my own mind.  I am trusting the markets less and less every day because they are too easily manipulated by those with more information and clout than little old me.

Hey, Pootie-Poot wants to play too.

Crude production sags as Putin touts reserves
Russia may have two to three times current estimates

Russia's crude oil production growth may be flagging, but President Vladimir Putin said Tuesday that the country's enormous oil and natural gas reserves were in no danger of running out.

Analysts agree and estimate they could be two to three times higher than currently reported.

"As for our oil and reserves, they are underestimated -- there is enough for generations to come," Putin said, speaking during a nearly three-hour televised question and answer session with the public.

...

But unlike Saudi Arabia, Russia's oil reserves are poorly explored, in part because of their comparative inaccessibility, locked under the seabed or permafrost.

No serious exploration work using the latest technologies has been conducted in Russia since the 1980s, according to Chris Weafer, chief strategist with Moscow-based Alfa Bank.

"A safe number is probably double that figure," Weafer said, referring to the 72 billion barrels. "But it's not impossible it's three times as high."

http://www.chron.com/cs/CDA/ssistory.mpl/business/3372701

SJM, Seymour Hersh documented in the New Yorker back in February that Iran military action is on the agenda. I also happen to think that would be a very bad idea. Perhaps the silver lining in the hurricane trouble is that Bush would seem to be constrained in any appetite for new foreign adventures -- and I say this as an American who would like this to remain a powerful country.

Stuart,

3 thoughts :

1. Don't you think that Saudi is very much releaved that the US is not capable of refining so much crude now. I would guess that the US has effectivly stopped importing Saudi oil (what was it, 1 mbpd?). Al-Naimi can proudly declare that they can produce all the oil the rest of the world needs (and give Ghawar just a little break before it collapses)

2. The whole point of the discussion is that it is completly irrelevant how much oil one has in his backyard, what counts for the producers is how much they can sell at what price. I think that the resent comments of Al-Naimi have to be seen as attempts to ease the oil hungry world into obedient customers.

3. If I were a Saudi oil minister i would be really angree ( at ???) because apparantly the world would have bought all the billions of barrels of oil at 50 dollars, but instead they were sold at prices betweem 2 and 20 dollars.

One issue I haven't seen discussed here is the Saudi need to justify the windfall profits coming from raised oil prices.  

In the past periods of rapidly rising energy costs the Saudis have obliged the US by "recycling" their petrodollars via US Treasuries.

Suppose they no longer wish to reinvest in the US?  Perhaps they feel some concern that the US might find that "unmutual."  They just might need to have some other plausible use for all those profits.

One justification for holding the profits that would be hard to fault is that the money is needed for exploration and development in areas that were previously uneconomic.  Naturally they will not allow outside observers to come in and audit their activity.

Increasing the reserve estimate would be the first step.  Next the Saudis will set up drilling and exploration companies to find the "new reserves."

One motive for announcing new reserves is to set up a situation in which they can spend all these new petrodollars on activities that will lead to the production of more energy.

Bin Laden Energy Development Corporation, for instance.

I think this issue has to be dealt with in stages.  Stuart has brought up a lot of good questions.  I'll focus on just one that I think we should answer in order to better understand Saudi Arabia:

* What do we know about reserve estimation and growth, and its correlation with actual production from, say, 1950 on, and what does that lead us to believe about the limited data that we have from Saudi Arabia?

If we can't answer that question, we're largely making noise.

There is a lot of speculation that can be made about why Saudis are pumping sour (historical outcome of drilling to date--they've tapped into some sour crude and haven't done much with it??). Speculation about why they are spending money on technology to increase production from older fields (bird in the hand?  Known production capability?).  Simmons speculates based on very old data and then wrote a book.  Transparency isn't likely to happen.  These are not publicy traded companies.  There are strategic, economic, and political issues here that transcend the SEC.  And transparency, I think, will lead to enormous political pressure to pump at the cheapest price possible.  Not good for the future.  Let's not do it.  If transparency says there is easy oil, the US will go to great lengths to ensure that easy oil is produced at a cheap price.  If transparency says we're running low, I argue the US will still likely run up against the price wall and let the market drive the response.  Therefore, we're all better off if the Saudis might have a few pockets of reserve in their pocket.  Blather about it.  Create uncertainty.  And maybe, just maybe, we can transform that peak into a long decline.

I would like to see some discussion and definition of the different classes of "reserves". Stuart refers to OOIP, Original Oil In Place. Is that the same as URR, Ultimately Recoverable Reserves? And what about other definitions of reserves?

The U.S. government forces oil companies to define their reserves rather strictly in terms of economically recoverable reserves. As oil prices rise and technology improves, this type of reserves would be expected to increase. Heading Out seemed to be thinking along these lines when he commented that it made sense for the Saudis to raise their reserve estimates after leaving them static for 15 years.

Which definition of reserves are the Saudis using in their recent comments? Do we know this for sure?

I want to try to respond to Stuart's points here, in a couple of messages. He seems to be drawing some strong conclusions from what is ultimately a lack of evidence. I am not stating that Saudi Arabia is telling the truth, only that Stuart's case is highly circumstantial and things could easily be different from what he lays out.

A consortium of world class oil companies with over 40 years free rein over the province and extensive production experience in it, grossly under-estimated the original oil in place (they said 530 bbls, implying Mr al-Naimi's 460bbl reserves plus 110bbl cumulative production to date would represent a greater than 100% recovery rate), or in the alternate, lied under oath to the US Senate about it for unknown reasons.

See JD's comments above, http://www.theoildrum.com/story/2005/9/28/33827/4040#10 . He provides evidence that it is not unusual for reserves to increase.

That in realizing the errors of the Americans, the Saudi's made that realization in two giant leaps, one in 1988 and one in 2005, but did not attribute these sudden massive realizations to any particular cause, or in the alternate, that they maintained internal estimates of reserves different than the external estimates between those giant leaps, but despite this misleading behavior, are now telling the truth.

Of course the Saudis did not discover their reserve increases in two giant leaps. They announced their reserve increases in two giant leaps. That's different. They are undoubtedly analyzing data and doing new field research on an ongoing basis. This may lead them to change their private, internal estimates of those reserves. That they don't choose to keep the world updated every day on the new figures is their political decision. But just because they choose to announce their new reserves rarely doesn't justify calling them liars.

That, more specifically, Saudi Arabia must have been telling the truth last year when it said it's reserves were 260bbl, but Mr al-Naimi must also be telling the truth now that it's new reserves estimate will be 460bbl. These are honest guys, right? So the wonderful technological advances must have been made this year, or at least the work of re-estimating reserves based on the wonderful new technology must all have been done this year. Ditto for 1988.

Again, it doesn't mean that. The fact that Saudi Arabia was publicly sticking to its 15 year old reserve estimates last year is a matter of their stated policy of protecting the privacy of their internal affairs. They have never claimed to be providing transparency. You are erecting a straw man by pretending that the dates of the announcements are the dates of discovery.

I will address further comments in a subsequent post to keep these of manageable length.

I'd like to throw in a possible motive for Al-Naimi lying, that I did not see anyone to have mentioned yet:

Saudis are terrified by the perspective that the world will start persuing oil alternatives now. I do not doubt they have the ability to sell 100$ or 150$ oil for at least 30-40 years to come and then buy some Carribean Archipelago for the whole rotten kings family. But if alterntives are found/implemented than SA will have nothing to offer the rest of the world but its sands.

The main reason the investors do not go for alternatives yet (btw coal liquification is viable at 30$/bbl) is fear - even if there is a mere 5% chance that oil will go back to 20-30$ there are a lot of people that won't risk their cosy chairs and would prefer and will wait until it is too late. So keeping this 5% chance is the most vital interest of SA for the years to come. Just like the US they are simply interested in the prolongment of the status quo.
Which of course screws us all (and the planet Earth as a co-latteral damage).

Here are further responses to Stuart's arguments. To reiterate what I said above: he seems to be drawing strong conclusions from what is ultimately a lack of evidence. I am not stating that Saudi Arabia is telling the truth, only that Stuart's case is highly circumstantial and things could easily be different from what he lays out.

That, despite the fact that cumulative production is less than 1/5 of (cumulative production + claimed reserves), the Saudis cannot readily increase production very much now, even though they were able to raise it readily in the past.

The key word here is "readily". It could be that the new reserves are more difficult to reach and will require considerable new infrastructure investment. Keep in mind that Saudi Arabia is for the most part untracked desert. It is not easy to build new roads and pipelines across hundreds of miles of shifting sands. Moving drilling rigs and other necessary equipment into place is expensive and time consuming. It is no wonder that they have chosen to concentrate their resources on the existing fields.

That, despite the fact that cumulative production is less than 1/5 of (cumulative production + claimed reserves), the Saudis are increasingly producing heavy sour oil that they have to discount, implying they are able to produce less light oil than in the past. Since light oil produces very readily, we would have to believe that most of the 460bbl remaining reserves were heavy oil. But the pre-Saudi Aramco believed most of the OOIP was light.

I don't think it follows that most of the reserves are heavy oil. Rather, it just means that the "readily" available reserves, given current infrastructure, are shifting more towards heavy oil. Although heavy oil is somewhat less valuable than light, it's still something like $50/bbl which is plenty of profit for the Saudis. It may be that $50 heavy oil produced from current wells is more profitable than $65 light oil produced from yet to be developed wells that may be hundreds of miles from existing infrastructure.

That, despite the fact the Saudis are less than 1/5 of the way into reserves, they have had to rework most of their big fields with horizontal MRC wells because of water breakthrough into the original vertical well developments, and increasingly need to start doing water-control downhole even in those wells.

I don't see the big surprise in that they have chosen to do additional horizontal drilling in their existing fields. To me that seems perfectly rational. It allows them to exploit their in-place infrastructure and maximize the return on their investment in building all of those facilities in the first place. It's not surprising to me that it would be cheaper to do this, even with the water problems, than to drill and build new wells in a country as infrastructure-poor as Saudi Arabia.

That, despite the fact that the Saudis are less than 1/5 of the way into reserves, it was financially rational to develop the Shaybah field under very difficult conditions in the middle of massive sand dunes hundreds of miles from anywhere in the empty quarter, or in the alternative that the Saudis use Tarot cards to decide what project to do next.

I don't see your point here. They have to go where the oil is. The fact is that probably 90% of the country can be described as being "in the middle of massive sand dunes hundreds of miles from anywhere". Maybe most of their new reserves are in relatively small fields in exactly such locations. That wouldn't be at all surprising.

That, despite the fact that they are less than 1/5 of the way into reserves, it was worthwhile to develop the Manifa field which has oil too contaminated with vanadium and sulphur for anyone to refine it, or in the alternate that Allah made them do it.

Your sarcasm suggests to me that you are working from emotion rather than reason here. I don't know the details of this field's history or why they chose it. Maybe it was in a good location and even though the oil is low quality, they still thought it would profitable. As noted above, low quality oil is still selling for what would have been considered astronomically high values just a couple of years ago.

Many Asian refineries accept high sulfur oil, so I don't know how literally to take your claim that no one can refine this oil. Are you certain that this entire oil field was developed to the point of production, but that the oil is just sitting in storage tanks somewhere? If so, then I agree that this would be evidence of irrational behavior on the part of SA, but it is not evidence of low oil reserves.

That, despite the fact that they are less than 1/5 of the way into reserves, production is depleting at 5% to 12% per year.

There is no inconsistency between these two facts. Depletion happens to individual fields, not to a whole country. SA could have many other fields, perhaps small ones, which add up to as much oil as all of their big fields. To me that is a very plausible picture. And it is consistent economically with them continuing to produce from their already-developed, large fields, as long as the rates are still profitable.

That, despite the fact that they are less than 1/5 of the way into reserves, and despite the fact that even heavy sour oils are selling in the range of $50/barrel, they are warning us that production will drop next month.

You can't read anything into month by month variations. That tells you nothing about how much their ultimate reserves are. Rather, it reflects a lack of capital investment in past years to develop new fields that can take up the slack of current fields' depletion. This is no doubt due in part to the extremely low oil prices we had through much of the 1990s, as well as political instability in the regime.

To sum up, a consistent picture which explains everything is a politically closed and private Saudi regime, a country with enormous oil deposits, much of which is in small fields that are far from existing infrastructure and which will be expensive to develop, and insufficient capital investment in past years to provide for short term expansion capability. As noted by many observers, the key question going forward is whether Saudi Arabia will be able to accept foreign capital in order to ramp up their development in time to meet future production needs. The possibility that they simply don't have oil to be devloped is not even being considered by mainstream analysis.

I don't think the points Stuart has raised contradict the conventional wisdom on the matter, and are in fact generally consistent with the usual view.

Stuart,
 For obvious reasons, I think the transparency campaign is tilting at windmills, and the Saudis are not going to comply. So I think it would be interesting to establish a standard for verifying the conflicting hypotheses based on future Saudi production.

 Personally, I subscribe to the view of Sadad Al Husseini:

Although Matthew Simmons says it is unlikely that the Saudis will be able to produce 12.5 million barrels a day or sustain output at that level for a significant period of time, Husseini says the target is realistic; he says that Simmons is wrong to state that Saudi Arabia has reached its peak. But 12.5 million is just an interim marker, as far as consuming nations are concerned, on the way to 15 million barrels a day and beyond -- and that is the point at which Husseini says problems will arise.Source(pdf)

 Now you, on the other hand, subscribe to the view that information from the Saudis is lies, and that Matt Simmons' book is the gold standard on Saudi oil reserves. So why don't you tell us, based on Simmons' work, what the actual Saudi reserves are, and draw the future curve of Saudi production on that basis? This would be useful because your hypothesis would then become falsifiable against facts we have access to.

 For reference, we know that Simmons is by far the most pessimistic of all forecasters:

But by 2030 we could easily have a world that can only produce 10 or 15 or 20 million barrels per day, and the shortfall from what we thought we were going to produce is only a modest 100 million barrels per day.Source

This compares with the following 2030 forecasts from other sources:

Simmons: 10-20mbd
Koppelaar: 60mbd
ASPO: 60mbd
BP 2005: 65mbd
Total 2005: 80mbd
Laherrere 2005: 90mbd
EIA 2005 (High price scenario): 115mbd
OPEC 2004: 115mbd
Exxon/Mobil 2005: 115mbd
IEA 2004: 120mbd
http://trendlines.ca/economic.htm

Is it plausable that a whole stream of crappy oil has now become economically recoverable now that the price of crude is above $60, and that the Saudis sensing that in long-term the price will only go up will have even more rubbish available to extract above $80 or $100 thus accounting for these so-called revisions?  

I have been reading about air surveillence of Saudi-Arabia's Empty Quarter that supposedly has been done by Aramco. I am not a geologist or knowledgable of oil exploration, but could someone explain to me how that would have been done? What are the features that would be looked at, and how would they be interpretted in relation to possible oil finds? I ask this because nowadays we have Google Earth, which means we all could do this at home..