Big Oil Asks: Where Will Tomorrow's Oil Come From?

By Jason Simpkins

The Kingdom of Saudi Arabia is the world’s leading petroleum exporter. Officially, it has reserves of about 260 billion barrels of crude oil - approximately 24% of the world’s total proven petroleum reserves.

But Saudi Arabia has a problem. And it’s the same one that every oil-producing nation will face someday: Its oilwells are drying up.

Saudi Arabia’s largest and most productive field, the Ghawar field, produces about five million barrels a day - accounting for more than half of the kingdom’s total production and 6% of total world output. But Ghawar was discovered in 1948 and has required large-scale injections of seawater to artificially pressurize the well since the 1970s. There’s no telling when the last drop of oil will be purged from the biggest oil find of the 20th century, but there’s no doubt Ghawar has seen better days.

As investing legend Jim Rogers pointed out in a recent interview with Money Morning Investment Director Keith Fitz-Gerald Saudi Arabia has claimed to have the same amount of oil it did 20 years ago, but logic seems to run contrary to that assertion.

"Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve," Rogers told Money Morning during an interview in Singapore last month. "It’s astonishing. The figure never goes up and it never goes down. They have produced dozens of millions - billions - of dollars of oil in that period of time.

"If you go to Saudi Arabia, you have to wonder: ‘How could this be? How could it be that every year for 20 years in a row, you always have 260 billion barrels of oil in reserve?’ The Saudis say: ‘You either believe us or you don’t.’ And that’s the end of the conversation."

About 75% the Kingdom’s revenue and 90% of its export earnings come from the oil industry. The oil industry accounts for 45% of Saudi Arabia’s gross domestic product, compared with 40% from the private sector. Without oil, Saudi Arabia would be little more than a desert. So its absolutely imperative the Kingdom find a way to maintain its high production levels.

With all of the most productive, most accessible and most cost-efficient reserves already tapped, Saudi Arabia has undertaken one of the largest industrial projects being executed in the world today. It is spending an estimated $15 billion on a vast network of pipes, treatment facilities, horizontal wells, and water-injection systems for its Khurais complex - a reserve expected to yield 1.2 million barrels a day.

Originally discovered in 1957, Saudi officials hoped the field would turn out to be another Ghawar but were vastly disappointed. The reserve lacks natural pressure, a key component in getting oil out of the ground. It was put into limited production in 1959 before being sidelined. It was brought back online when oil prices spiked in the 1970s and hit a brief peak of 150,000 barrels a day in 1981 before being shut down again.

"It was mainly token production, enough to help power the city of Riyadh and keep the king’s palace cool," Jack Zagar, a reservoir engineer who worked on Khurais in the 1970s, told The Wall Street Journal.

In 2001, reservoir engineers launched an investigation into the field’s potential and found that injecting massive amounts of seawater would be the only way to generate any significant output from the field. But Khurais is located about 120 miles inland from the Persian Gulf, and more than 60 miles west of Ghawar. Hundreds of miles of pipes will be needed to transport highly filtered saltwater from the Gulf and carry oil back from the middle of the desert.

According to the Wall Street Journal, Saudi Arabian Oil Co., otherwise known as Aramco, spent 20 months shooting 2.8 million three dimensional images of the field’s geological makeup. The company then built models to simulate how the field might respond to water injection. The water injection program will require125 injection wells and dozens of electric submersible pumps to drive 2.4 million barrels of seawater a day into the reserve. That’s two barrels of water for every barrel of oil the company hopes to extract.

"This will be the biggest smart field the world has ever seen," Nansen Saleri, Aramco’s former head of management, told the Journal.

It will also be a very risky procedure as the water will have to be filtered down to minute particles to avoid clogging the Khurais’ dense layers of rock and blocking the oil. Aramco also runs the risk of flooding the well.

"When you’re injecting water into the periphery [of a field], if you hit fissures in the rock and aren’t managing it well, you can have water flow in and kill a well. And a dead well doesn’t flow," Saleri said.

At $15 billion, the well will also be very expensive, but with the majority of the world’s "low hanging fruit" already spoken for costly endeavors like these are the future of the oil industry. While in even the latter part of the 1990s it may have cost Aramco $4,000 to add one barrel of daily production capacity, analysts believe it now costs $16,000 for the same production increase.

Could Brazil be the "New Saudi Arabia?"

Rising global demand is a big reason reserves are running low and prices are shooting higher. The International Energy Agency estimates that demand could climb to 99 million barrels a day by 2015, up from the 87 million barrels this year.

But the fact that there hasn’t been a significant oil discovery in the last half century hasn’t hurt either.

And while there may be no stemming the rise in demand, the possibility of another significant discovery, the discovery of a deposit large enough to significantly alter the world’s energy landscape can’t be ruled out.

In fact, just such a discovery may already have been made. Not in the Middle East or Russia, but in Brazil.

Just last week, Haroldo Lima, the head of Brazil’s National Petroleum Agency, revealed the unofficial figures from a new reservoir, known as Carioca, which could hold 33 billion barrels of oil and gas. If true, Carioca would be the world’s largest discovery in at least 32 years. Upon hearing the news, brokers and analysts rushed to tell their clients that Brazil, as one minister put it just months ago, was about to become the "new Saudi Arabia."

Of course, both Jose Sergio Gabrielli, chief executive officer of Petroleo Brasileiro SA (PBR), or Petrobras, and Energy Minister Edison Lobao said at a press conference at Petrobras headquarters Thursday that they couldn’t confirm Lima’s estimate and reiterated that further drilling was needed before any estimate on volumes could be made.

Even if Lima is exaggerating, experts say even 10 billion recoverable barrels of oil (worth about $1.2 trillion at today’s prices) would be a remarkable find and enough to catapult Brazil into the world’s oil-producing elite. Brazil currently has about 12 billion barrels of proven reserves, and could soon find itself nestled between Nigeria (with 36 billion barrels) and Venezuela (80 billion). [See a related report in today’s issue of Money Morning that details why the price of oil still has much further to run.]

However, Petrobas has a history of playing down its discoveries and is infamous for leaking discovery data. The company downplayed the discovery of the Tupi oil field before announcing last November that the reserve contained between 5 billion and 8 billion barrels of light oil and gas.

Still the only certainty that comes with the Carioca discovery is that the oil, no matter how much there is, will be very hard to reach. The field is 170 miles offshore, more than 6,000 feet under the surface of the water trapped beneath a shelf of salt 500 miles long and 125 miles wide.

A decade ago, gaining access to such a field would have been a pipe dream (no pun intended). Just like Khurais, extraction will be a very costly process, even with today’s technology.

Petrobas will have to ante up quite a bit of cash to expand its use of drilling rigs, which are in short supply. Right now, there are only 40 rigs on the planet capable of drilling into massive deep-sea salt deposits.

Petrobas has already awarded Norway’s SeaDrill Ltd. contracts of up to $4.1 billion for deepwater rigs and signed a letter of understanding with Texas’ Noble for drilling contracts worth as much as $4 billion.

Companies like Transocean Inc. (RIG) Diamond Offshore Drilling Inc. (DO), and Pride International Inc. (PDE) could also be taking orders soon, as another big Brazilian discovery and record high oil prices could lead to a massive rush on deep-sea drilling equipment. In addition to the coast of Brazil, sub-sea salt layers are also present off the coast of Africa and in the Gulf of Mexico.

Comments

[The Fitzman]

the problem is peak oil, and the urgency of addressing this problem is much greater than that posed by global warming. unfortunately, people are mistaken into thinking global warming is the more serious issue, when peak oil could drastically change the entire economy of the world by 2015. here is a *real* energy policy:

seekingalpha.com/artic...

unfortunately, our "leaders" do everything wrong: ethanol, complain about higher prices and promise to bring them down, when in fact higher prices are probably the only thing that will prod our "leaders" and people into addressing the realities of peak oil. problem here is that time is running out and america, the largest user and importer of oil, is very quickly heading into the abyss....

[Joules Burn]

See analysis of satellite imagery and more for Khurais here:
satelliteoerthedesert....

[jack kreg]

Enter your comment here"Brazil’s Petrobras discovered 33 billion barrels of oil and gas in the Atlantic, the world’s largest discovery in at least 32 years. "
While Americans sit on 20-40 billion barrels of oil in ANWR, where daily production, 1-2 million barrels, would match our imports from the Saudi's, who supply 15% of the USA's oil imports.
First we must drill for all know oil in the USA and its waters.
Second, we must build 50 large scale coal to fuel refinery's,
Third, we must build 50 nuclear power plants and convert our auto fleet to electric, which can be charged with our new power source, nuclear.
These 3 steps will make America much less dependent on oil imports, will strengthen our economy, by providing a huge number of new jobs in the energy industry, will strengthen our dollar, by keeping in America, most of the $400 Billion currently spent on oil imports.
Most important, it will provide a long term solution to America's need for more and more energy.

[cal48koho]

Fitzman's analysis is spot on and the peak oil issue is THE issue that our clueless politocos and citizenry still don't get. Jack Kreg represents another view that we will maintain our lifestyle and drill our way out of our problem. Be careful of accepting unsubstantiated figures. The USGS estimates of ANWR reserves are a bit over 7 Bb and that from an agency with 50 year history of bloated bogus estimates. The nearest field to ANWR is BP's Badami field which was closed in 2003 because of puny production from what was believed to be a sizable field. 50 Nuclear plants will never get built. Do we need to upgrade our electric infrastructure? Of course! And with as diverse a mix as possible including nuclear, wind, solar, tide...you name it. If we are to have any transportation infrastructure, it will have to be from electrifying it and that doesn't mean from electric cars which have no utility except perhaps in the cities. Travel only by private auto is as dead as a doornail. If there is any oil off Florida or Virginia or Maine, we may indeed need to dill there as well as ANWR but using oil to power Hummers is absurd. The Saudis have announced they will be hoarding their reserves for future generations and we should be doing the same. The US model of sprawling suburbs accessed by automobiles is a hopeless model which is starting to implode as I type this. We need to devise a new model right now for our transportation, living, agriculture and business needs.

[AviGandhi]

Fitzman/Cal48,

While I agree that peak oil is an issue, I believe you're harping on it for the wrong reasons. Why must we fear how either peak oil or global warming will "drastically change the entire economy"? What's wrong with making technological progress?

We've relied on fossil fuels since the dawn of the Industrial Revolution. Now that the Nuclear Age, the Space Age, and the Computer Age have come, don't you think it's high time we move on to a source of energy that is cleaner, longer-lasting, and ultimately more efficient?

Not only would this address the peak oil problem, it would also address the climate change problem that Fitzman spurns but making them non-issues. I agree that corn-based ethanol is the wrong way to go, but no one seems to realize that 21 of the 36 billion gallons of ethanol per year mandated to be produced by 2022 must come from CELLULOSIC sources. That's independent of food prices and, with companies like Bluefire Ethanol developing processing plants that not only turn landfill waste to fuel but also derive 70% of the facility's power from methane released by decaying heaps of trash, it's also independent of oil/gas prices.

Oil is a terrible long-term investment. It's time for investors to start being flexible, and to realize that the future isn't in black gold - it's in green fuel.

[GlobalWarmingExaminer]

I agree with Jack but we will probably do the wrong things:
- Tax all the greedy oil companies to capture their windfall profits
- Never drill in ANWR because it is only about 1 year supply at current rates
- Nuclear is absurd - It only works in France
-We should invest our money in Nuclear Fusion - which is clean and politically correct
- There is more power from the Sun and Wind then we could possibly ever use
- Drilling off the coasts would ruin our environment and only reward the oil companies
- We should develop solar powered cars
- Oil prices are too high and when we find the person who sets the price we should shoot him
- make all cars get at least 34 mpg
- We could all start taking the bus

[Ronmac]

Analyst, that is the worst, most clueless set of recommendations I have seen yet. Those "greedy" oil companies are what is keeping us in any energy at all. Nuclear, is in fact, a very good way to produce electricity. Oh, you got a couple right, wind and sun are indeed needed in much greater volumes also. Drilling off of the coasts does not "ruin the environment". Solar powered cars? Sure. No one person sets oil prices. We needed high oil prices earlier to keep us from driving Hummers and living a hundred miles from our work places. Yes cars do need to get much higher mileage, higher prices will help with that. And, yes taking the bus will help.

[rbblum]

US politicians 'get it'. In order for them to maintain a position of political power (one step in front of lobbyists, two steps ahead of business and the wealthy, and three steps above their constituents) they must maintain their own priorities and own time schedule . . . regardless of what the end result will be. Otherwise, logic, commonsense and rational actions would have already been implemented regarding current and future energy sources.

[JREwing]

I love oil.

[Kezorm]

Ronmac missed that "analyst's" list was a list of the WRONG things we will probably do in reaction to crude shortages.

Jack Kreg's ideas are agreeable in that nuclear should be part of the mix - most especially if we looked far ahead and began designing nuclear plants that can accommodate a mix of Uranium and Thorium going forward, for Thorium is abundant.

Speaking of ANWAR, has anyone ever watched the Lindsey William's Youtube videos concerning an alleged major discovery somewhere off the Alaskan coast called Gull Island. Lindsey may have misinterpreted some of the motives for the events he observed, but I have a hard time imaging that he is lying about the events he relates. If he is telling the truth, ARCO found a very large field there in the 1970's and then the government told them to seal it up and forget about it. While it is possible to disagree with William's opinion on why the government might do something like that, it is very intriguing to consider the possibility that the geological conditions which birthed the 1.3 trillion barrels of tar sands might extend north parallel to the Canadian foreland regions and just might have produced an equally bountiful deposit of hydrocarbons that were spared the fate of turning into tar.

Anyway, here is the link:

www.youtube.com/watch?...

[Makinmoney]

Offshore is the only viable place to find the large reserves. Oil servicers and drillers seem to have a lot of work ahead, as this article suggests

[JREwing]

When the pain gets big enough, there's going to be drilling everywhere: ANWR, OCS, Federal land in the west, hell even here in Germany, where I am, the government gave permission to drill in several places. Never thought I read that in the paper.