Oil Fields Decline Saudi Arabia*

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February 24, 2004

Forecast of Rising Oil Demand Challenges Tired Saudi Fields

By JEFF GERTH

hen visitors tour the headquarters of Saudi Arabia's oil empire — a sleek glass building rising from the desert in Dhahran near the Persian Gulf — they are reminded of its mission in a film projected on a giant screen. "We supply what the world demands every day," it declares.

For decades, that has largely been true. Ever since its rich reserves were discovered more than a half-century ago, Saudi Arabia has pumped the oil needed to keep pace with rising needs, becoming the mainstay of the global energy markets.

But the country's oil fields now are in decline, prompting industry and government officials to raise serious questions about whether the kingdom will be able to satisfy the world's thirst for oil in coming years.

Energy forecasts call for Saudi Arabia to almost double its output in the next decade and after. Oil executives and government officials in the United States and Saudi Arabia, however, say capacity will probably stall near current levels, potentially creating a significant gap in the global energy supply.

Outsiders have not had access to detailed production data from Saudi Aramco, the state-owned oil company, for more than 20 years. But interviews in recent months with experts on Saudi oil fields provided a rare look inside the business and suggested looming problems.

An internal Saudi Aramco plan, the experts said, estimates total production capacity in 2011 at 10.15 million barrels a day, about the current capacity. But to meet expected world demand, the United States Department of Energy's research arm says Saudi Arabia will need to produce 13.6 million barrels a day by 2010 and 19.5 million barrels a day by 2020.

"In the past, the world has counted on Saudi Arabia," one senior Saudi oil executive said. "Now I don't see how long it can be maintained."

Saudi Arabia, the leading exporter for three decades, is not running out of oil. Industry officials are finding, however, that it is becoming more difficult or expensive to extract it. Today, the country produces about eight million barrels a day, roughly one-tenth of the world's needs. It is the top foreign supplier to the United States, the world's leading energy consumer.

Fears of a future energy gap could, of course, turn out to be unfounded. Predictions of oil market behavior have often proved wrong.

But if Saudi production falls short, industry experts say the consequences could be significant. Other large producers, like Russia and Iraq, do not have Saudi Aramco's huge reserves or excess oil capacity to export, and promising new fields elsewhere are not expected to deliver enough oil to make up the difference.

As a result, supplies could tighten and oil prices could increase. The global economy could feel the ripples; previous spikes in oil prices have helped cause recessions, though high oil prices in the last year or so have not slowed strong growth.

Saudi Aramco says its dominance in world oil markets will grow because, "if required," it can expand its capacity to 12 million barrels a day or more by "making necessary investments," according to written responses to questions submitted by The New York Times.

But some experts are skeptical. Edward O. Price Jr., a former top Saudi Aramco and Chevron executive and a leading United States government adviser, says he believes that Saudi Arabia can pump up to 12 million barrels a day "for a few years." But "the world should not expect more from the Saudis," he said. He expects global oil markets to be in short supply by 2015.

Fatih Birol, the chief economist for the International Energy Agency, said the Saudis would not be able to increase production enough for future needs without large-scale foreign investment.

The I.E.A., an independent agency founded by energy-consuming nations, and Washington see investment in energy exploration and field maintenance as vital, but such proposals face strong opposition inside Saudi Arabia. Tensions with the West, particularly the United States, make such investment politically difficult for Saudi society. For example, an effort by Crown Prince Abdullah, the kingdom's de facto ruler, to encourage Western companies to invest $25 billion in his country's natural gas industry essentially collapsed last year.

"Access to Persian Gulf oil reserves, especially Saudi Arabia's, is the key question for the whole world," Dr. Birol said.

President Bush has said he wants to make the United States less reliant on oil-producing countries that "don't like America" by diversifying suppliers and financing research into hydrogen fuel cells, but achieving that remains far off.

His administration backs foreign investment initiatives in the gulf region, including Saudi Arabia, and his energy policies rely on Energy Department projections showing the world even more dependent on Arabian oil in 20 years. That may be enough time for governments to find alternatives, but oil field development requires years of planning and work.

Publicly, Saudi oil executives express optimism about the future of their industry. Some economists are equally optimistic that if oil prices rise high enough, advanced recovery techniques will be applied, averting supply problems.

But privately, some Saudi oil officials are less sanguine.

"We don't see us as the ones making sure the oil is there for the rest of the world," one senior executive said in an interview. A Saudi Aramco official cautioned that even the attempt to get up to 12 million barrels a day would "wreak havoc within a decade," by causing damage to the oil fields.

In an unusual public statement, Sadad al-Husseini, Saudi Aramco's second-ranking executive and its leading geologist, warned at an oil conference in Jakarta in 2002 that global "natural declines in existing capacity are real and must be replaced."

Dr. al-Husseini, one Western oil expert said, has been "the brains of Saudi Aramco's exploration and production." But he has told associates that he plans to resign soon, and his departure, government oil experts in the United States and Saudi Arabia say, could hinder Saudi efforts to bolster production or entice foreign investment.

Saudi Arabia's reported proven reserves, more than 250 billion barrels, are one-fourth of the world's total. The most significant is Ghawar. Discovered in 1948, the 300-mile-long sliver near the Persian Gulf is the world's largest oil field and accounts for more than half of the kingdom's production.

The company told The New York Times that its field production practices, including those at Ghawar, were "at optimum levels" and the risk of steep declines was negligible. But Mr. Price, the former vice president for exploration and production at Saudi Aramco, says that North Ghawar, the most valuable section of the field, was pushed too hard in the past.

"Instead of spreading the production to other fields or areas," Mr. Price said, the Saudis concentrated on North Ghawar. That "accelerated the depletion rate and the time to uncontrolled decline," or the point where the field's production drops dramatically, he said.

In Saudi Arabia, seawater is injected into the giant fields to help move the oil toward the top of the reservoir. But over time, the volume of water that is lifted along with the oil increases, and the volume of oil declines proportionally. Eventually, it becomes uneconomical to extract the oil. There is also a risk that the field can become unstable and collapse.

Ghawar is still far too productive to abandon. But because of increasing problems with managing the water, one Saudi oil executive said, "Ghawar is becoming very costly to maintain."

The average decline rate in Saudi Aramco's mature fields — Ghawar and a few others — "is in the range of 8 percent per year," without additional remediation, according to the company's statement. This means several hundred thousand barrels of daily oil production would have to be added every year just to make up for the diminished output.

Every oil field is unique, and experts cannot predict how long each might last. For its part, Saudi Aramco is counting on Ghawar for years to come.

The company projects that Ghawar will continue to produce more than half its oil. One internal company estimate from 2002 puts Ghawar's production at 5.25 million barrels a day in 2011, more than half the total expected crude oil capacity of 10.15 million, according to United States government officials and oil executives.

"The big risk in Saudi Arabia is that Ghawar's rate of decline increases to an alarming point," said Ali Morteza Samsam Bakhtiari, a senior official with the National Iranian Oil Company. "That will set bells ringing all over the oil world because Ghawar underpins Saudi output and Saudi undergirds worldwide production."

The I.E.A. warned in November that huge investments would be needed to offset the decline rates in mature Middle Eastern oil fields — it put the average at 5 percent — and the increasing costs of oil and gas production. The agency, based in Paris, forecasts that Saudi production will need to reach 20 million barrels a day by 2020. (I.E.A. and other research estimates say that more than 90 percent of that would be crude oil; the rest would be liquid products like natural gas liquids that result from the processing of crude oil.)

In his speech in Jakarta, Dr. al-Husseini noted the need for exploration, pointing out that colleagues at Exxon Mobil predict that more than 50 percent of oil and gas consumption in 2010 must come from new fields and reservoirs.

Harry A. Longwell, the executive vice president of Exxon Mobil, says finding new sources of oil is crucial. Mr. Longwell, in an interview, said that increasing demand and declining production were not new problems, but they were "much larger now because of the world's demand for energy and the magnitude of the numbers now are much larger."

To offset its declines, Saudi Aramco is bringing back into production one idle field, Qatif, and is enhancing production at a nearby offshore field, Abu Safah. The company says that with expert management, these fields will produce about 800,000 barrels a day.

But current and former Saudi Aramco executives question those expectations, contending that the goal of 500,000 barrels a day for Qatif is unrealistic and that development costs are higher than anticipated.

Qatif poses real difficulties. It is near housing for Saudi Arabia's minority Shiite population and contains high concentrations of hydrogen sulfide, a highly toxic gas. Its development is "particularly challenging," according to a technical paper by Saudi Aramco engineers presented last year in Bahrain, which said that 45 percent of potential drilling sites "were rejected due to safety concerns."

At Abu Safah, Saudi Aramco has experienced increasing water problems as it has turned to submersible pumps to extract oil. Experts, including American and Saudi government officials, say the technique is ill advised. Saudi Aramco, in its written response to questions, defended the use of the pumps at Abu Safah and its ability to manage the water after 37 years of production.

One United Sates government energy expert noted that "submersible pumps is what the Soviets went to on an indiscriminate basis in West Siberia and it went south." Samotlor, a huge field in Siberia, once produced more than three million barrels a day, but it declined sharply in the 1980's after the Soviets pushed it too hard. Today it produces only a few hundred thousand barrels a day.

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