UNTAPPED RESERVES, WORLD DEMAND SPUR PRODUCTION EXPANSION

Ibrahim A.H. Ismail
Organization of the Petroleum Exporting Countries (OPEC)
Vienna

To meet projected world oil demand, almost all members of the Organization of Petroleum Exporting Countries (OPEC) have embarked on ambitious capacity expansion programs aimed at increasing oil production capabilities.

These expansion programs are in both new and existing oil fields. In the latter case, the aim is either to maintain production or reduce the production decline rate. However, the recent price deterioration has led some major OPEC producers, such as Saudi Arabia and Iran, to revise downward their capacity plans.

Capital required for capacity expansion is considerable. Therefore, because the primary source of funds will come from within each OPEC country, a reasonably stable and relatively high oil price is required to obtain enough revenue for investing in upstream projects. A supplementary part of the required funds could come from foreign oil companies, banks, financial institutions, or other countries.

Recent environmental concerns on global warming and greenhouse gas emissions, particularly carbon dioxide (CO2) could lead to some control over fossil fuel and particularly oil use and, consequently, reduce demand for OPEC oil. However, this reduction depends on how stringent these constraints will be. This is still an unknown.

This first in a series of two articles discusses the present OPEC capacity and planned expansion in the Middle East. The concluding part will cover the expansion plans in the remaining OPEC countries, capital requirements, and environmental concerns.

BACKGROUND

OPEC's main objectives, as stipulated in Article 2 of its statute, have always been to:

• Coordinate and unify member country petroleum policies and to determine the best means for safeguarding their interests, individually and collectively.

• Ensure the stability of prices in the international oil market with a view of eliminating harmful and unnecessary fluctuations.

• Secure a steady revenue for member countries with due regard, at all times, to the interests of the producing nations.

• Ensure an efficient, economic, and regular supply of petroleum to consuming nations.

• Secure a fair return of capital to those investing in the petroleum industry.

History since 1960 shows that, apart from the relative stability during 1960-1972, oil Prices were never stable and fluctuated in a wide range (Fig. 1). Price stability, during the 1960s and early 1970s, which was characterized by abnormally low oil prices (less than $2/bbl) was due to oil resources in almost all OPEC countries being owned by a group of vertically integrated multinational oil companies that were inclined to keep OPEC crude oil under priced so that more gains could be obtained from the refined products.

Major events, such as the Arab-Israeli war in 1973 and the limited and temporary embargo to U.S. that followed (the Iran-Iraq war and the Gulf crisis), all contributed to instability in oil prices.

New non-OPEC supplies, such as production from the North Sea, Alaska, and other regions contributed to the oil price collapse in 1986 because of oversupply of oil.

OPEC producers, in the past, have stabilized oil prices by changing oil production levels. When prices are low, OPEC reduces oil production. When oil prices become too high, as during the Gulf crisis and apart from Iraq and Kuwait, almost all OPEC member countries produce at full capacity.

In the high oil price environment of the 1970s and the first half of the 1980s, OPEC member countries collected reasonable oil revenue and consequently invested part of this revenue in both the upstream and downstream sectors with fruitful results. In the upstream sector, exploration activities added considerable new proved oil reserves.

It is worth noting that during the 1980s almost all world reserves additions (more than 98%) came from OPEC and only a small fraction from the rest of the world. These huge reserve additions in the OPEC region during the 1980s amounted to more than 60% of the total reserves added during the period 1960-1990.

The added OPEC reserves have not matched increases in oil production. On the contrary, OPEC oil production fell considerably during the 1980s and is still, even now, much below the production levels of the 1970s and early 1980s. But, non-OPEC supplies in spite of few reserve additions during the 1980s, continued their unchecked climb from much less than OPEC to about twice OPEC's production by the end of the 1980s (Fig. 2). The difference in reserves-to-production ratios (R/P) between OPEC and non-OPEC regions has grown wider during the 1980S.

Another important point to note in non-OPEC countries is that R/P has been stable at about 19 years over the past 2 decades. Of course, this is not the case for OPEC which has seen the R/P almost double, from 47 in 1970 to 90 in 1992.

CAPACITY EXPANSION

OPEC members naturally want to develop and produce the substantial reserves added during the past decade. These reserves additions are from discovering new oil fields, upward revisions in existing fields, or a combination of both.

International oil companies normally draw up a development plan for a new discovery and put it on stream as soon as possible.

This, however, is not always the case in some OPEC countries, and in these countries a huge imbalance exists between production and reserves (Fig. 3).

The R/P ratios for OPEC members in 1991 ranged between 17 and 147 years, or an average of 92 years. For the main non-OPEC producers, however, R/P ranged between 6 and 53 years or an average of only 17 years.

Besides the R/P ratio, the other justifications for capacity expansion in OPEC countries are:

• Oil is the prime source of income for OPEC members. Their economy is not diversified and depends solely on oil. Therefore, to safeguard OPEC producers, their oil industry has to be continuously developed and improved.

• Non-OPEC supplies are dwindling and are in a decline in some major non-OPEC countries, such as the former Soviet Union and the U.S. (Fig. 4).

• The world economy is forecast to substantially grow. This growth requires energy, particularly oil. Oil has to come primarily from the OPEC region.

• Spare capacity in OPEC countries has stabilized oil prices during crises and consequently protects the world economy from serious shocks.

Because of these reasons, capacity and capacity expansion programs are considered by many OPEC members to be strategic and highly confidential. However, some OPEC members have started to produce at capacity because of the Gulf crisis and loss of production from Iraq and Kuwait, and to stabilize world oil prices.

Furthermore, because of the large resource base and capacity expansion dependence on investment allocated to it, production capacities of OPEC members have changed over time, particularly since the Gulf crisis (Table 1).

Member countries, with the exception of Iraq, whose oil has been embargoed, accelerated their production capacity since the Gulf crisis from about 27 million b/d just before the Gulf crisis to about 28 million b/d at the end of 1992. This capacity expansion is still much lower than the level in the late 1970s and early 1980s.

The rate of capacity utilization has also improved in the aftermath of the Gulf crisis from about 80% in 1989 to more than 91% at the end of 1991. Thus, OPEC spare capacity has been reduced from more than 5 million b/d in the year preceding the Gulf crisis to only about 2 million b/d at the end of 1991, and about 4 million b/d at the end of 1992 (Fig. 5). The last 2 years include an idle, embargoed, capacity from Iraq estimated at 1.5 million b/d and 2 million b/d, respectively.

OPEC's ability to expand production capacities differs from one country to the other and depends on oil reserves, development cost, capital availability, and technology required. The OPEC Middle East members, such as Saudi Arabia, Iraq, Iran, Kuwait, and United Arab Emirates (U.A.E.), have huge oil reserves that can be exploited at relatively low costs. Therefore, it is convenient to subdivide OPEC members into two groups: Middle East OPEC and nonMiddle East OPEC.

The Middle East OPEC include Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and U.A.E. The non-Middle East OPEC countries will be discussed in the concluding part of this series.

IRAN

Iran, in October 1992, tested oil production for about a week to confirm a capacity of 4 million b/d or 3.58 million b/d from onshore and 0.40 million b/d from offshore. Furthermore, Iran targeted 4.5 million b/d (4 million b/d from onshore and 0.50 million b/d from offshore) by the end of March 1993 (Table 2).

Officials from the Iranian Oil Ministry have, on more than one occasion, stressed that production capacity will reach 5 million b/d by March 1994 and this level could be maintained through 2000.

This additional increase is thought to come primarily from offshore fields. Prior to the first Gulf war (19801988), offshore produced about 600,000 b/d. By 1987, offshore production fell to about 40,000 b/d. The Forozan field was the only Iranian offshore field to escape destruction.

Iran is seeking contracts with foreign companies for the development of offshore oil fields. Foreign technical and financial support could enable Iran to produce over 1 million b/d from offshore fields before 2000. Offshore projects open to international companies include Abuzar, Sirri E&A, and the Bahregansar/Hendijan oil fields.

Contractors will not be given access to equity crude, because this is forbidden under the Iranian constitution. Instead, companies will receive a negotiable rate of return on investment plus interest. These investments may be financed by a third party.

A certain percentage of produced crude (either in cash or oil) will be set aside to make repayments (including profit margin and interest) under a new formula that Iran has been trying to negotiate with foreign partners for over 2 years.

The remaining recoverable crude oil reserves in Iranian waters could be as much as 9.5 billion bbl, 4 billion bbl at fields already developed, another 4 billion bbl recoverable with gas injection from Doroud, Soroush, and Salman oil fields, and 1.5 billion bbl from undeveloped reserves at Sirri E&A and Balal.

Iran also aims to increase its offshore production capacity by about 500,000 b/d by March 1994 through an interim program of gas injection. At the Karanj field, gas injection in the field and neighboring Parsi field is expected to double production by 1994. About 14 million cu m/d of gas are required for injection.

Gas injection of 10 million cu m/d in the Marun field has increased recoverable reserves by 2.6 billion bbl. In the onshore Gashsaran field, gas injection prevents reservoir pressure decline and also improves production. Gas is injected at about 43 million cu m/d. The plan calls for increasing production of Gashsaran from the current 0.60 million b/d to about 1.23 million b/d.

Of note is that gas injection has not been used in Iranian offshore fields. However, some studies show that gas injection could recover an extra 2 billion bbl of crude from the Doroud field alone.

Some old onshore oil fields are nearing depletion and because of the reservoir complexity, any new gas injection may not attain or maintain sufficient pressure to significantly produce more oil.

Iran will have to invest about $12 billion by 2000 to maintain production from mature fields and to enhance and expand production from other fields. During 1992-1993, Iran allocated $4 billion for upstream activities to boost oil output. However, Iran may not achieve its objectives if the current low price environment persists.

IRAQ

Iraq, in spite of the imposed sanctions, has an ambitious program to rehabilitate war-damaged oil facilities and export terminals. Iraq's sustainable production capacity just before the Gulf crisis (mid-1990) was estimated at 3.7-4.0 million b/d. There is no doubt that the Gulf war caused severe damage to the Iraqi oil industry not only in the production sector but also in refining, transportation, and distribution.

Official announcements and media reports indicate that the rehabilitation program has gone a long way to restore the operability, of all sectors of the oil industry. Official sources from Iraq tin late 1992 announced that more than 80% of Iraq's production capacity had been restored.

The oil industry of Iraq, developed over the last 65 years, has an elaborate network and many production centers with a lot of flexibility and interchangeability. This has made the process of restoring the facilities somewhat faster than originally believed.

Almost two thirds of Iraq's crude oil production, prior to the Gulf crisis, came from two "super giant" fields: Kirkuk and Rumaila.

The Kirkuk field, discovered in 1927, was put on stream in 1934. By mid-1990, its production capacity exceeded 1 million b/d, and estimated remaining recoverable reserves were more than 10 billion bbl.

The Rumaila oil field, discovered in 1953, still has remaining recoverable reserves of more than 11 billion bbl. Its production capacity also exceeded 1 million b/d just prior to the Gulf crisis. Producing oil wells just before the Gulf conflict: were about 820 wells out of a total of 1,500 wells. Average production rate is, therefore, above 4,000 b/d/well, one of the highest rates in the world.

The "super giant" or "giant" new oil fields awaiting development are Majnoon, West Qurna, East Baghdad, Nahr Umr, Halfaya, Hemrin, Khabbaz, Khormal, Suba, and others (Table 2).

The super giant Majnoon field, discovered in 1975, has estimated recoverable reserves of more than 10 billion bbl. Oil is found in five reservoirs.

The super giant West Qurna field, discovered in 1973, also has recoverable oil reserves of more than 10 billion bbl. just before the Gulf crisis, the first phase of its development was put on stream at 200,000 b/d. Further development should increase production to about 1 million b/d.

The super giant East Baghdad field, discovered in 1982, has estimated recoverable oil reserves of 11 billion bbl. Initial test rate in 1989 was 20,000 b/d and by 1990 production was about 40,000 b/d.

Nahr Umr field, discovered in 1949 by Basrah Petroleum Co, (BPC), initially was thought too small but later appraisals showed that the field was much larger with estimated recoverable oil reserves of over 1 billion bbl.

Halfaya field, discovered in 1977, has recoverable oil reserves of about 1 billion bbl.

Table 2 lists several other important new fields that await development.

Iraq has recently invited oil company help for developing its vast production-capacity potential once the embargo is lifted. Reports indicate that numerous oil companies have shown interest. According to official announcements and given the size of the fields under consideration, production capacity could reach 6 million b/d before 2000.

About $11 billion is estimated to be needed for expanding Iraq's production capacity during 1990-2000 by 1.5 million b/d from the pre-Gulf war level of around 4.0 million b/d. The Gulf war damage to the oil installation has been put at $6 billion. Because of Iraq's lack of capital, foreign firms will be needed for developing a number of fields.

Because of the prolongation of the embargo and the low price of oil, Iraq may find it difficult to reach these objectives. A lower objective of about 5 million b/d that requires investment of about $8 billion could be more manageable.

KUWAIT

The reconstruction program of Kuwait's oil production facilities, damaged in the Gulf war, has restored production capacity to about 2 million b/d.

The rapid return of oil production rates has concerned some oil field specialists from foreign oil companies who claim that the high production rates could seriously lower reservoir pressure and cause water influx to damage the reservoirs. However, officials from the Kuwaiti Oil Ministry have, on several occasions, denied such reservoir damage.

Also, the officials claim that the extent of the damages and reconstruction costs are not as great as originally thought. They estimate oil lost by well fires was not more than 3% of proved recoverable reserves and rehabilitation of the hydrocarbon sector, both upstream and downstream, will be about $8.5-10 billion. If warnings about water incursion or reservoir damage prove to be correct, the cost of increasing Kuwait's oil production capacity would be higher.

Santa Fe International and KOC had 11 drilling rigs in operation by May 1991. This increased to 19 rigs during 1992. Santa Fe International program was to drill about 250 new wells during May 1991 to December 1993. By the end of 1991, 26 new wells were drilled and put on production. By mid-1992 another 80 wells were drilled and put on stream. Another 100 new wells were expected to be producing by mid-1993. The rest of the new wells should be completed before November 1993.

The average drilling cost is estimated at about $2 million/new well. Total cost for 250 wells is, therefore, about $500 million. Repair of all damaged wells has been estimated at less than $300 million.

Prior to the Gulf crisis, the Kuwaiti production capacity was estimated at about 2.50 million b/d. Almost 65% of this production comes from the Burgan field, and about 90% comes from only three fields.

If the upstream activity continues at the same pace as now, production capacity in a few years possibly could approach the levels planned before Gulf crisis (Table 2). Kuwait's production capacity plan had aimed at reaching a sustainable 3 million b/d before 2000. The cost was forecast to be about $5 billion. Because of the damages caused by the Gulf war, $9 billion may be needed to reach 3 million b/d.

QATAR

Qatar's proved recoverable oil reserves of 4.5 billion bbl are much lower than its OPEC Middle East neighbors. But its natural gas reserves are some of the largest in OPEC.

Qatar's current producing capacity is 0.44 million b/d. About 45% of the production comes from the onshore Dukhan field. The offshore fields are estimated to contribute 50% (Table 2).

Qatar's oil production in 1992 increased by 110,000 b/d, from 0.33 million b/d in January to 0.44 million b/d at year end. This increase is Attributed to the development, in 1990, of the Diyab formation in the onshore Dukhan field. The average for 1993 was 0.42 million b/d.

Future increases in production will come from the offshore Idd el-Shargi field with 40,000-50,000 b/d, and from Al-Bunduq, shared with the U.A.E., with about 30,000 b/d.

Qatar's focus is on expanding the world's largest gas field, North Dome. Additional natural gas liquids (NGLs) and condensates, from North Dome, will substantially replace future production decline in other fields.

For the rest of the decade, Qatar's strategy will concentrate on countering declines in existing fields and bringing on stream new ones to sustain a capacity of about 500,000 b/d through the decade.

Water injection facilities will be installed at Diyab to improve production. The cost of maintaining and expanding production from the above fields, excluding the development of the North Dome, could amount to $2 billion.

SAUDI ARABIA

Saudi Arabia is forging ahead with its expansion program to increase production to more than 10 million b/d before 2000. Some of the additional capacity will counter declines in older oil fields such as the super-giant Ghawar complex.

Saudi Aramco has under way ambitious oil field development and expansion programs to raise production capacity to 10 million b/d by early, 1995. Work is focused on several key oil fields, such as the onshore Hawiyah field, in the southern Ghawar configuration. This project was planned to be completed in late 1993 or early 1994 and is expected to add about 500,000 b/d of Arab light (34 API).

Expansion of the northern offshore Marjan field was expected to add another 500,000 b/d in the first half of 1993 of Arab medium (31 API). An additional 700,000 b/d of Arab medium is expected from the offshore Zuluf field by early 1994.

The new Hawtah fields in central Saudi Arabia, light crude (49 API), are planned to be on stream by the first quarter of 1995. Production is estimated at 170,000 b/d. This development involves several fields: the main one, Hawtah, and smaller ones such as Hazmiyah, Ghinah, and Naeem. Recoverable oil reserves of these fields are estimated at 1-2 billion bbl.

Saudi Aramco also plans to expand capacity of Arab extra light at the Abqaiq field by 165,000 b/d during the middle of this decade (Table 2).

After 1995, planned oil field developments include the Shaybah field, which is very close to the U.A.E. border (known in U.A.E. as the Zarara field). Envisioned production is about 350,000600,000 b/d by 1997 of light crude (42 API). The field, discovered in the early 1970s, is estimated to contain about 7 billion bbl of proved oil reserves. The remote desert location is the reason given for not developing the field previously.

Another 300,000 b/d may also come from the offshore Manifa field. Other Saudi development and expansion programs could involve fields such as Haradh, Qatif, Khurais, and Abu Jifan. Haradh is part of Ghawar configuration and could add up to 300,000 b/d of oil at the end of 1995 or early 1996. Completion of the expansion of Qatif, Khurais, and Abu jifan fields is planned for the second half of the 1990s.

Saudi Arabia's current production capacity is estimated at 8.56 million b/d, the additional capacity expansion, Table 2, will increase it to about 11.3 million b/d by 2000. However, part of this additional capacity will offset the production decline from the old fields, particularly the super-giant Ghawar complex. Therefore, the sustainable capacity could stabilize at about 1 million b/d by 2000, if oil prices are sufficient to stimulate this capacity expansion.

Saudi Aramco's capacity expansion program seems to concentrate on fields that contain only light crude. This is because the price differential between light and heavy crudes has increased with time and consequently more revenue per volume is collected from light crudes.

The original plan, in the first half of 1990, called for the investment of around $36 billion during 1990-2000. The aim was to develop new discoveries of light crude in central Saudi Arabia, as well as to provide for the expansion and upgrading of production facilities at existing fields. It also involved the installation of new, state-of-the-art production systems.

These objectives were somewhat modified because of the Gulf crisis. Saudi Aramco decided to bring new capacity into operation as quickly as possible, with total project cost of about $13 billion. The total cost required to achieve the above objectives by 2000, therefore, could be as much as $20 billion. The cost of developing the Shaybah field alone could amount to $3-5 billion.

The recent fall in oil prices has impacted Saudi's capacity expansion program. The target now is la million b/d by 2000 The development of several fields, such as Shaybah and others, has been postponed.

UNITED ARAB EMIRATES

Almost 90% of U.A.E.'s proved oil reserves are located in Abu Dhabi and hence nearly all upstream activities are concentrated there. Current U.A.E. production capacity is estimated at 2.45 million b/d, of which 2.03 million b/d is produced from Abu Dhabi and the rest from Dubai, Sharjah, and Ras Al Khaimah (Table 2).

The Abu Dhabi Co. for onshore oil operations (ADCO) has stepped up its upstream activities since 1991 by starting field development projects to substantially increase production capacity by the mid-1990s.

The company added two new drilling rigs in 1991, bringing the total operating rigs to eight. The company drilled 27 production wells in 1991 as compared to 17 in 1990 and worked over 38 wells as compared to 26 during that time. The total footage drilled in 1991 rose to 319,812 ft compared to 202,000 ft in the previous year. Of this, 29,365 ft were in exploration and appraisal wells and 319,812 ft were in development drilling.

Development drilling included 154,255 ft in Bab, 125,331 ft in Bu Hasa, 36,155 ft in Sahil, and 4,071 ft in Asab. Horizontal drilling was introduced in 1991.

Production operations concentrated on maximizing crude oil output by water injection in existing oil fields. No major new oil fields were developed (Table 2).

Water injection to maintain reservoir pressure in Bu Hasa, Asab, and Bab fields increased oil production by about 250,000 b/d. Also, a gas injection pilot in Bu Hasa will determine ways to recover more oil from the field.

Water injection facilities in Asab and Bab were expected to be completed at the end of 1993. By the mid-1990s, these operations should boost oil production in Bu Hasa from the current 450,000 b/d to 550,000 b/d, and in Bab from 100,000 b/d to 250,000 b/d.

In the offshore oil fields, work is being carried out to recover more oil. Phase 2 of the development program on Upper Zakum field was expected to increase production from 370,000 b/d to 450,000 b/d by 1993, when the development program was completed. The work involved drilling 100 wells and installing five production platforms, gas-lift facilities, and water injection wells. The gas for injection is piped from the nearby Abu Bukhoosh field.

Improved oil recovery techniques, water/gas injection in the Lower Zakum field, have the potential of increasing production by 100,000 b/d by 1993. Improved oil recovery from the offshore Umm Shaif field has the potential of increasing production from 250,000 b/d to 350,000 b/d by 1993. Similar techniques, mainly water/gas injection, will also improve production from other fields.

The cost of these upstream projects through the 1990s is expected to average about $6-8 billion. Some reports indicate that steeply rising costs could seriously hinder Abu Dhabi's future capacity-expansion programs. However, according to government officials, operating costs have been substantially decreased since 1987.

In spite of the recent oil price decline, U.A.E. is continuing its capacity expansion plans without major revision.

Editor's note: The views expressed in this article are those of the author and may not necessarily represent the view of OPEC.