The availability of future oil supplies from Saudi Arabia and Iraq is a major concern globally and particularly for the main oil-consuming regions of the world.
In some years in the past, these two countries have contributed more than 17% and 5%, respectively, to total world oil production.
They currently contribute less than 13% and 2% to world oil production, respectively, while they hold 20.7% and 9.1% of the world's remaining oil reserves.
Thus these two countries will play more-significant roles in supplying the world's oil needs in the future.
Obviously, questions about the reliability of these figures and the security of their oil supplies are critical issues for the future of the global oil market; many observers have expressed concerns on both the technical and the political aspects for the sustainability of oil supplies from Saudi Arabia and Iraq.
Some authors have questioned the size of the oil reserves, arguing that they are not as large as given in most publications. There are also trepidations about the future political stability of the Middle East in general and of Saudi Arabia and Iraq in particular.
Such questions especially have been raised for Saudi Arabia following the Sept. 11, 2001, terrorist attacks in the US. The recent attacks inside Iraq have also led some analysts to raise similar questions about that country.
Obviously, these questions are extremely important. Answers are by no means simple, but an attempt is made in the discussion that follows.
Technical questions
Remaining oil reserves
The "reported oil reserves"2 of Saudi Arabia and Iraq are 261.9 billion bbl and 115 billion bbl, respectively, compared with 1,265.8 billion bbl reported for the world's total remaining oil reserves. Various authors question the accuracy of these figures. It is often said that the reported reserves are exaggerated figures, and some refer to them as "political" reserves.
In the mid-1980s significant increases in oil reserves were announced for these and the other member countries of the Organization of Petroleum Exporting Countries.
Some authors have argued that the increases were not based on sound technical principles: Rather, the governments announced the high reserves in order to secure greater production quotas within the expected reduced production ceiling that was to be decided by OPEC at that time.
These authors take the preincrease figures of reserves as more reliable—about 170 billion bbl for Saudi Arabia and about 50 billion bbl for Iraq.
It should be remembered that during 1980-85, OPEC producers reduced their oil production to about 15 million b/d from more than 30 million b/d in order to defend the price of oil in the international market. Saudi Arabia had borne the largest production cut over that period.
However, in a policy switch in 1986, OPEC countries decided not to continue with their voluntary production cuts. Instead, they increased their oil production, which led to the collapse of the price of oil to less than $10/bbl from about $28/bbl and resulted in a serious crisis in the world oil market and for the international oil industry.
Following several months of international deliberations and negotiations, it generally was expected that OPEC and possibly some non-OPEC producers would cooperate in reducing the global oversupply of oil. A lower and more sustainable oil price target also was anticipated.
More importantly, the general expectation was that OPEC had to choose a lower ceiling for its overall production and that the lower volume had to be distributed among the member countries as lower individual "quotas."
In anticipation for the intra-OPEC negotiations on the new quotas, most member countries announced increases in their reserves. The total increase amounted to about 300 billion bbl. As noted earlier, some analysts dispute this increase and refer to the new and higher figures as "political" reserves.
We at CGES do not share this pessimistic view, at least not for Saudi Arabia and Iraq. Detailed field-by-field studies carried out by CGES in the 1990s have confirmed the higher remaining reserves for the two countries.3
As a general remark, it is fair to remember that for decades these and other Middle East countries had treated all data and information on their oil industry activities as state secrets. Thus the results of many years of exploration work had been confined only to the files of their national oil companies. The impending negotiations on production quotas within OPEC made them announce these results, although no details were provided at the time.
Undiscovered oil resources
Another topic of discussion is the size of the undiscovered resources in Saudi Arabia and Iraq.
The previously mentioned CGES study on Iraq, undertaken with Petrolog Associates, did confirm that the expected quantity of oil to be discovered from future exploration work could be greater than 200 billion bbl. Similar figures also had been estimated by others.
However, the US Geological Survey's World Petroleum Assessment in 2000 estimated Iraq's undiscovered oil at only 45.1 billion bbl. This is too low, and we firmly believe that the higher figures are quite reasonable. Although we have not carried out a study on the undiscovered oil resources of Saudi Arabia, it is quite likely that the future discoveries in that country could be greater than the 87.1 billion bbl estimated by the USGS.
It has to be emphasized that serious exploration had not been carried out in Saudi Arabia since the early 1980s. The financial incentives were not sufficient for the US company members of the Arabian American Oil Co. consortium (Aramco). They had to fund the exploration work and would receive $0.05/bbl of discovered oil in place.
In addition, it has been reported that their earlier studies had shown even less potential (15 billion bbl+).
Since that time, field operations have provided a much better understanding of the Saudi Arabian basins and, more importantly, the technical advances in exploration techniques in the last 2 decades provide a much higher upside potential for Saudi Arabia.
However, the general perception of many familiar with the region is that the future discoveries in Iraq could be greater than the future discoveries in Saudi Arabia. Nevertheless, it has to be emphasized that the figures for both countries are all "estimates." These quantities of oil might or might not be discovered, and risks are implicit in all exploration activities. However, exploration work could bring positive as well as negative surprises.
Reserves vs. production
Whatever the exact size of the future oil discoveries in Saudi Arabia and Iraq, their existing reserves suggest that these two countries have the potential to produce at higher rates than they do at present.
A simple comparison of the size of their reserves and their current production with those of other oil producing countries in the world suggests this higher potential. The countries with smaller reserves (even in the Middle East) produce at proportionately higher rates. Saudi Arabia and Iraq also could produce at higher rates.4
However, the comparison also shows that the existence of large oil resources, even large proved reserves, cannot be taken as equivalent to high rates of oil production. First, field development work has to be undertaken before reserves could be converted to streamlined oil production capacity. Considering the size of the giant and supergiant fields in Saudi Arabia and Iraq, their development operations are megascale projects.
More importantly, the field operations require megascale investments. This is true for most oil field development projects in the Middle East. The unit cost of development is not that high and in fact could be cheaper than many other parts of the world. However, the total required investment for each field is considerable, and the provision of this capital is itself a major problem for developing the fields.
Second, it also could be argued that some technical characteristics of these supergiant fields do not allow high rates of production comparable with the size of their reserves. For example, the production in the different parts of a reservoir should be such that a generally uniform depletion is achieved across the whole reservoir. On the other hand, the field could extend over a very large area, and serious practical difficulties might not easily allow this uniform depletion on a commercial basis. Most probably over the large area of a field, significant variations exist in the reservoir rock and fluid properties, in the pattern and density of fractures, and possibly even in the gravity and other properties of the crude.
A high rate of production in one part of the reservoir could cause distortions in the water-oil and/or gas-oil contacts in the other parts of the reservoir. Continued production could result in large volumes of oil becoming bypassed in the tighter parts. The production rate of oil and the pattern and the rate of injection of water should also vary in the different parts of the reservoir. A field's overall oil production may have to be curtailed in line with its low producing parts.
Generally in order to maximize oil recovery, the oil wells should be drilled around the periphery of the field and near the oil-water contact. With the gradual rise of the oil-water contact, the lower parts of a producing well should be plugged off. Most probably, the well should be later abandoned and a new well drilled higher up in the oil zone, with the process repeated all around the periphery of the field. If the producing wells are drilled further inside the oil zone, the life of each well will be longer, but the overall sweep efficiency of oil would be much lower. For example, in Saudi Arabia production wells were drilled mainly downdip, and when a well was completely watered out, it would be converted to a water injector well or be abandoned. A limited number of wells had been drilled updip for reservoir data and possibly were also utilized for limited production.
Other factors also might not allow a high rate of production or possibly any production from parts of the field on a commercial basis. Examples of these factors could be the provision of water supplies needed for reservoir injection, the available infrastructure in the area, the distance to markets or to export facilities, and the crude quality and its market price compared with other oil fields in the country. In such cases, oil production in the supergiant field may have to be maintained at a relatively low rate. On the other hand, a smaller field, more conveniently located and perhaps with a higher-value crude, will be developed earlier and put on stream at a relatively higher rate of production compared with the size of its reserves.
Saudi oil production
A historical production profile of Saudi Arabia is shown in Fig. 1, giving the average annual crude oil production of the country (excluding its 50% share of the production from the partitioned Neutral Zone between Saudi Arabia and Kuwait). It is seen that oil production reached nearly 10 million b/d in 1979-80. This production rate was the nominal sustainable average annual production capacity of Saudi Arabia in the following years.
The actual production was much lower, at one point less than 3 million b/d, due to OPEC policy decisions. It could be envisioned that field development and maintenance work also had been curtailed in line with the lower production. It has been reported that by the mid-1980s, the mothballing of fields and producing areas lowered the capacity to 7 million b/d. Simple decline studies suggest that the maximum sustainable capacity (including the mothballed facilities) fell to about 8.5 million b/d by 1990.
However, production was raised to 8.5 million b/d from 5.5 million b/d within a few months after Saddam Hussein invaded Kuwait in August 1990. The extra Saudi oil was intended to compensate for part of the 4-5 million b/d loss of oil supplies from Iraq and Kuwait to the world market. Saudi Arabia's production capacity was raised to 10 million b/d soon afterwards.
The kingdom's oil production capacity was more or less maintained at about 10 million b/d in the 1990s. The development of Shaybah field (500,000 b/d of Arab Extra Light crude) and of part of southern Ghawar field, Haradh 1 (300,000 b/d of Arab Light crude) was carried out in this period. It is generally considered that the capacity in older fields was allowed to fall, thus reducing the drilling and field maintenance costs for Saudi Aramco as a whole.
In 2003, further development work was completed in southern Ghawar field (Haradh 2 at 300,000 b/d of Arab Light). The expansion of Abu Sa'fah field (150,000 b/d of Arab Medium crude) is to be completed in 2004 and of Qatif field (500,000 b/d of Arab Medium crude) by 2004-05. Further expansion in southern Ghawar (Haradh 3 at 300,000 b/d of Arab Light) is to be completed in 2006. Expansion work in Khursaniyah field (Arab Medium) and in Fadhili and Abu Hadriyah (Arab Light) fields could add another 500,000 b/d in the coming years—most probably by the end of this decade. These expansion projects amount to a total of 1.75 million b/d.
In spite of these projects in the pipeline, the growth of the total production capacity of Saudi Arabia is not that certain. Saudi authorities have stated that these expansion projects will compensate for the decline in existing fields.
Some analysts, on the other hand, have suggested that there will be an actual increase of 1.75 million b/d in Saudi oil production capacity. In practice, it is most likely that field production maintenance operations will be reduced in some of the existing fields or parts of these fields will be mothballed. In this way, capital expenditure would be optimized.
Other expansion projects also have been reported in the press. The Nuayyim field is to provide 75,000 b/d of Arab Super Light crude.
However, even if this field can reach production above 50,000 b/d, it would most probably compensate for the decline in the other fields in the area south of Riyadh, such as Howtah, which is already in decline. The Paeleozoic sand reservoirs are generally limited in size, their flow properties are not very favorable, and the wells soon show decline in production.
Manifa field is to provide up to 600,000 b/d, probably in 300,000 b/d increments, but these most probably would come on line in the future.
Similarly it has been reported that Khurais field could add more than 1 million b/d of capacity. This appears too high a rate for this field. More importantly, the logistical infrastructure requirements are extremely difficult and might be delayed.
As in the South Ghawar area, the Saudi authorities do not allow the use of local, low-salinity (<5,000 ppm salts) subsurface waters for injection into the reservoirs.
Therefore, millions of barrels of water for injection into the reservoirs have to be transported over long distances from the Persian Gulf. The economics of the Khurais project make the development of this field a low priority.
Thus the total readily available production capacity could remain about 10 million b/d. However, an additional 1-1.5 million b/d capacity could be brought on stream at short notice.
More importantly, it should be noted that in the coming years the planners in Saudi Aramco could revise some of the present field development plans, and some projects could be delayed or slowed down.
Iraqi oil production
Fig. 2 shows the average annual crude oil production of Iraq.
It is seen that Iraqi production nearly reached 3.5 million b/d in 1979, although its daily production had reached higher rates over shorter periods. However, oil production has been much lower ever since then, due to the Iran-Iraq war (1980-88), Saddam's occupation of Kuwait (1990-91), the international sanctions and sporadic air raids on Iraq (1990-2003), and finally, the military operations leading to the fall of Saddam Hussein (April 2003) and the lootings and terrorist attacks since then.
Iraq's current oil production capacity is estimated to be about 2.8 million b/d. Iraq National Oil Co.'s (INOC) operational plans are in place to raise this capacity to about 3.5 million b/d provided that sufficient funds—about $2-3 billion, depending on the extent of damages—are available and that the security situation permits the participation of international and local service companies and manufacturers in the field operations.
Raising Iraq's oil production capacity to more than 3.5 million b/d will require the development of giant and supergiant oil fields, as foreseen in INOC's plans.
They include new development work in Halfaya, Nahr Umr, Majnoon, West Qurna, and other appraised fields (mostly in the south of Iraq) contributing 3.8 million b/d of incremental capacity, the development of additional reservoirs in producing fields contributing 900,000 b/d, and capacity maintenance in existing fields, as well as continued exploration and expansion of transportation, storage, and loading facilities.
These operations will require the provision of heavy investments and the participation of foreign oil companies. The required investment could be nearly $25 billion in order to reach a production capacity of 6-7 million b/d.
Higher production figures of 8-10 million b/d also have been forecast, although they would require a successful outcome from the future exploration work and the finding of the huge undiscovered resources estimated today.
An important point that should be noted is the lead time required for the implementation of these operations. The practical limitations do not allow too rapid a rate of field development.
For example, the availability of drilling rigs and operators; the capacity of the manufacturers of equipment, tools, tubulars, and field facilities; and the availability of contractors and support facilities could impose serious limitations on the speed with which Iraq's oil production capacity could be expanded, even if the security situation does not hinder such operations.
Policy questions
Domestic, regional considerations
The decisions on field development and capacity expansion projects are also a function of domestic and/or regional factors.
Countries usually give priority to developing the oil fields that extend to neighboring countries. Most such joint fields are not unitized, and each country tries to hasten the development work and maximize the production in the part of the fields located within its own borders.
An interesting example has been the development of Shaybah field in Saudi Arabia. This field is located in the desert area in the southeast of the country and straddles the border between Saudi Arabia and the emirate of Abu Dhabi in the UAE.
Based on an agreement between the Saudi king and the ruler of the emirate, this field was to belong to Saudi Arabia. It could be speculated that the field was developed in order to establish Saudi sovereignty over the field during the life of the ruler of Abu Dhabi.
However, another and equally important reason for developing Shaybah field could have been the technical difficulties of maintaining the production of Arab Light in the northern parts of Ghawar field or the technical and logistical problems of developing the southern parts of Ghawar field, as well as the better quality of the oil in Shaybah field.
It has also been mentioned that Saddam Hussein hastened the development of Kirkuk field in northern Iraq and ordered the short-term maximization of its production in order to hasten the depletion of oil in Iraq's Kurdish areas.
Revolutions, wars, military action
The destructive impact of revolutions, wars, and military actions is unfortunately most noticed in Iraq. The exploration and field development operations by INOC and by foreign companies have been frequently disrupted. Peaceful periods of normal industry operations had, in fact, been quite limited over many decades.
Yet, INOC managed to make notable achievements even during those short periods. The company repeatedly had prepared field development plans and begun their implementation on a number of occasions, only to have its field activities soon interrupted.
The latest oil production capacity expansion plans under the previous regime had been prepared in the 1990s. Furthermore, negotiations had been conducted with a number of foreign oil companies for the development of some of these fields.
Detailed contracts had been prepared and even initialed with a number of companies, although the agreements were mostly pending the lifting of sanctions. Reportedly, some of these contracts were definite, but significant field operations had not commenced due to air attacks and the later military actions by US-led forces.
Further damage to oil production facilities occurred during the military operations leading to the fall of Saddam Hussein in April 2003. More importantly, the field installations and oil transportation facilities have suffered significant damage from the looting and terrorist operations since the fall of the regime.
Iraq's existing production capacity and its future potential were discussed previously. However, they are in turn dependent on the improvement of the security situation and, more importantly, the establishment of a legitimate government and a new parliament and possibly the approval of a new contractual framework. Only then could serious negotiations with the foreign companies take place and later result in major investment and field development operations.
OPEC production quotas
The actual production of oil from Saudi Arabia and Iraq and indeed from other OPEC countries is dependent not just on technical factors such as the size of the reserves or the production potential of the reservoirs. OPEC oil production policies also play an important role.
As noted earlier, for most of the period since the early 1980s, production ceilings had been chosen voluntarily by the organization. These limited oil supplies to the world market and prevented a decline or collapse of the price of oil.
Thus most member countries of OPEC have produced at a lower rate than had been technically possible, leaving them with unused production capacity.
The size of the unused capacity has varied according to the conditions in the world oil market and in the different member countries. The unused capacity has ranged from several million barrels per day for Saudi Arabia in the 1980s to much smaller quantities in the other countries and at other times.
Currently, OPEC is limiting its oil production, and OPEC policy still remains a very important factor in the supply of oil from all OPEC member countries to the international oil market.
Nevertheless, it is useful to remember that OPEC policies are aimed at maximizing members' oil revenues without causing a world recession. The choice of a production ceiling and quotas is the means for such maximization, not the end goal.
OPEC actually has increased production and has maintained oil supplies to the world market following unexpected disruptions of production in different parts of the world.
A recent example of this policy was in late 2002 and early 2003 in response to the drastic fall in Venezuela's oil production and exports brought about by oil workers' strikes and also a reduction of oil from Nigeria
OPEC capacity expansion questions
A policy dilemma for OPEC as a whole has been and still is whether it should maintain spare production capacity. The future supplies from Saudi Arabia and Iraq will be to a large extent influenced by this policy. Many important parameters have to be considered for answering this question. Some are domestic parameters, while others relate to global issues.
Among the domestic parameters one could include the following questions:
- Does the size of a country's oil reserves permit the expansion of production capacity?
- Should foreign oil companies become involved and provide capital, technology, and project management for capacity expansion?
- Should the government use its own financial resources and have the national oil company carry out the production capacity expansion projects?
Of the global issues one could note these questions:
- Will there be sufficient demand for the expanded oil production capacity in the future?
- In case of a global excess in oil production capacity, should only the member countries of OPEC limit their oil production?
- Will other oil producers also share that burden?
The costly experience of having to hold large unused oil production capacity has made OPEC member countries apprehensive when planning to expand their exploration and, more importantly, their field development operations.
However, the response to this apprehension varies among OPEC members. Some do not have a large reserve base, and their potential for capacity expansion is limited.
Some have experienced difficulties trying to develop their reserves and expand production or even maintain their existing capacities.
These difficulties have been due to various factors, such as the availability of capital and technical or institutional constraints.
Some countries appear less concerned, since they have not been seriously observing the production quotas, as shown by their behavior in recent years.
However, Saudi Arabia and Iraq fall into yet two other categories from this point of view.
Outlook for Iraq
Iraq has been given a carte blanche since it started to export oil in the second half of the 1990s.
Following many years of sanctions and the suffering of the Iraqi people, other OPEC members considered it only fair to allow Iraq to remain outside the quota scheme. It appears that this situation will continue for a few more years.
In any case, as already noted here Iraq has not been able to expand its production capacity. It appears that it would be at least a few more years before the security situation becomes calm, a parliament and a legitimate government are installed, major field development contracts are signed, field operations commence, and oil production capacity expands.
In planning and executing projects, Iraqi authorities will not be concerned about the prospects of excess production capacity, at least for some years yet.
Outlook for Saudi Arabia
Saudi Arabia is yet a different case.
The kingdom possesses the largest oil production capacity and has held the largest volume of unused capacity among the members of OPEC.
Historically, it has been the most disciplined OPEC member in observing production quotas, although its overproduction recently has become more significant.
In spite of the high costs of holding unused capacity, on average Saudi Arabia has benefited greatly from its spare capacity.
Following the 1990-91 march of Saddam's troops into Kuwait, the cessation of Kuwaiti production and the international sanctions on Iraqi oil, it was Saudi Arabia who took the "lion's share" and increased its oil exports by about 3 million b/d in 1990-91. The kingdom generally has kept the higher market share and has enjoyed huge financial benefits ever since.
Will Saudi Arabia expand its production capacity any further? The fields under development and the projects in the pipeline were discussed earlier in greater detail. The new capacity additions could total more than 2 million b/d in the next 10 years.
However, capacity maintenance work in the existing fields might or might not be vigorously followed, and the total capacity might not rise that much. On the other hand, developments in the international oil market in the coming years could dictate major modifications to these policy prognoses.
The role of Saudi Arabia (and OPEC) in the global oil market in the next 1 or 2 decades will depend on the growth rate and the size of world oil demand and of oil production outside OPEC.
Will the relatively low growth of world oil demand in the last few years continue, or will a high oil demand growth resume? Will the world experience a sustainable and strong economic recovery or a modest recovery? In any case, will the recovery be oil-intensive or less dependent on oil? The answer is not clear, and the debate continues.
Similarly, will oil production in non-OPEC areas peak soon, or will innovative technologies extract more oil from the existing fields and discover and develop yet more oil?
For example, will the sediments around the continental margins and into deepwater areas bring surprises? The answer is not clear, and in fact a very hot debate continues on this subject.
What are the Saudi planners' views in these debates? Will Saudi Arabia choose to undertake the previously mentioned, costly megascale development projects of its oil fields in anticipation of another opportunity (as in 1990-91) to increase its market share, or will the kingdom tread a more cautious path?
Let us remember that Saudi Aramco has borrowed in the international capital market, the Saudi government has a domestic debt comparable to the size of the country's GDP (gross domestic product), and the kingdom has decided not to open the oil sector to outside investment.
These trends suggest that the cautious approach is more probable.
Lastly, following recent press reports,5 it is important to emphasize here that the size of Saudi Arabia's oil reserves will not be a constraining factor for choosing any of these policy alternatives.
Political constraints for Middle East oil supplies
The question of political constraints for oil supplies from Saudi Arabia, Iraq, and elsewhere in the Middle East is an open-ended question, and numerous scenarios could be envisioned.
Most observers often concentrate on the worst or most dramatic scenarios. Press headlines, politicians' comments, and conference topics indicate this concern. However, these concerns are probably misplaced. Middle East oil producers will always want to export their oil.
In the last few decades their economies have become even more dependent on oil revenues. An obvious example is the rise of the young population and their job requirements. The investments for job creation cannot be provided if oil is not exported, whatever the political preferences of a new regime in any Middle Eastern country.
Saudi Arabia and Iraq will strive to produce and export their oil whatever the political alignment of their governments in the coming years.
Revolutions, wars, even an Al-Qaeda government might introduce a hiatus in oil production and exports, but no government can remain immune from these basic issues.
Sooner rather than later, the new government would come back at producing and exporting its oil again.
Acknowledgment
The author wishes to thank E.O. Price for his generous advice and valuable comments and for reading the manuscript. Naturally, any error and shortcoming will be the responsibility of the author. The views expressed here are the author's and do not necessarily represent the official position of the Centre for Global Energy Studies.
References
1. Knightsbridge, London, SW1X 7LY, UK. CGES is a nonprofit institution established in 1990 by Sheikh Ahmed Zaki Yamani, the former oil minister of Saudi Arabia.
2. E.g., Oil & Gas Journal.
3. Oil Production Capacity in the Gulf: Volume II Saudi Arabia, 1993; Volume IV Iraq (joint study with Petrolog Associates), 1997. More details from the latter study were published by T. Shafiq (OGJ, Dec. 15, 2003, p. 34, and Dec. 22, 2003, p. 48).
4. These issues are explained in more details in M. Takin: "Many new ventures in the Middle East focus on old oil, gas fields," (OGJ, May 27, 1996, p. 31).
5. E.g., "Forecast of Rising Oil Demand Challenges Tired Saudi Fields," New York Times, Feb. 24, 2004; "Saudi Aramco dismisses claims over problems meeting rising global demands for oil," Financial Times, Feb. 27, 2004.
This article was adapted from a paper presented at the IP Week conference in London on Feb. 16.
The author
Manouchehr Takin is senior petroleum upstream analyst with the Centre for Global Energy Studies. He worked for 9 years as senior officer in the Organization of Petroleum Exporting Countries Secretariat analyzing global energy and oil markets. Before that, he worked with National Iranian Oil Co., Ultramar Ltd., Amoco International, the Iranian Oil Consortium, and other oil companies. Takin holds a BS in geology from Manchester University, UK, an MBA from the Industrial Management Institute, Iran, and a PhD in geophysics from Cambridge University, UK.
