It seems to be one of the most consequential numbers for the global economy. It has attracted great attention and debate. The long-awaited independent audit of Saudi oil reserves confirms what we already thought we knew, but still leaves the pivotal questions unanswered.
The evaluation, performed by DeGolyer and MacNaughton (D&M), a leading specialist reserves auditor, was first initiated as part of Saudi Aramco’s preparations for its initial public offering, now delayed – to 2021, Saudi oil minister Khalid Al Falih suggested. It would have needed to report reserves had it listed on the New York or London exchanges.
Saudi Arabia’s reserves at the end of 2017 stood officially at 266.3 billion barrels (bbl) of oil and 307.9 trillion cubic feet (Tcf) of gas. The new report assesses this at 268.5 billion bbl and 325.1 Tcf, of which 5.4 billion bbl and 5.6 Tcf is in the kingdom’s share of the Neutral Zone (held with Kuwait). D&M assessed about 80 per cent of Saudi Aramco’s oil reservoirs and 60 percent of its gas reservoirs, and slightly upgraded the company’s internal estimates.
The change may appear tiny – though another 2.2 billion barrels of oil is more than the entire reserves of Opec members Congo, Equatorial Guinea or Gabon, and the gain of 17.2 Tcf is more gas than all of Brazil.
Why would the figures change now, albeit only a little? Aramco has long calculated its oil and gas holdings internally, but with standard industry methodology. Though reserves estimation to international standards follows strict rules, it is still not an exact science.
Based on possibly only a few wells, with some rock samples and measurements, and seismic data derived from sound-waves, geologists calculate the size of structures that may be 4 kilometres or more below the surface. Reservoir engineers estimate how much of the hydrocarbons in the rock can be recovered with a technically feasible development - perhaps a few percent, up to 60 per cent or even more. Of course, the big Saudi fields are geologically well known, have long production histories and are simulated with the world’s most sophisticated computer models.
Finally, this is subject to an economic test – is the required development viable at current oil and gas prices and the applicable taxation system? And for reserves to be considered “proved”, the highest standard, they have to be already producing or have a firm development plan within a few years. Mr Al Falih mentioned that Aramco’s production cost was $4 per barrel, without elaborating on what this includes, and what new fields might be expected to cost.
The exact size of Saudi reserves has long been a subject of debate outside, if not inside, the kingdom. Most of the big Opec producers upgraded their reserves dramatically in the 1980s: Saudi Arabia went from 170 billion bbl in 1987 to 255 billion bbl in 1988, and has maintained almost the same level ever since, despite producing up to 4 billion barrels every year. In 1986, the UAE’s reserves tripled, Iran’s almost doubled, and Venezuela, Kuwait, Iraq and Qatar recorded similar big gains at various points.
Critics saw this as part of attempts to justify higher national Opec quotas; the countries would maintain they were simply correcting past under-estimates by international companies, and allowing for new exploration and field extensions, plus improvements in technology which allow higher recovery.
Late investment banker Matthew Simmons achieved notoriety with his 2005 book “Sunset in the Desert”, claiming that Saudi reserves were greatly overestimated and that production was about to collapse – a prediction yet to bear fruit.
Wikileaks released cables of a conversation in November 2007 where former Aramco head of exploration, Sadad Al Husseini, reportedly disagreed with the company’s analysis that it had 700 billion bbl of reserves – but he later clarified that this was a figure for “oil in place”, not all of which can be economically recovered. Norwegian consultancy Rystad put the figure at 212 billion bbl in 2016, of which only 70 billion bbl was considered proved.
These estimates all fed into the “peak oil supply” narrative, the now-discredited idea that world oil supply would imminently start falling as limited reserves were exhausted. The rise of US shale oil has helped dispel this concern, but so has the ability of Saudi Arabia and several other leading Middle Eastern producers to keep raising output.
The official statement calls the figures “full reserve life”. The country produces about 3.6 billion barrels annually, so it has 75 years’ worth. The current audit therefore must include fields and reservoirs that are undeveloped today and will not produce for decades to come. These would not generally be classified as proved reserves under the US system.
If reserves had turned out to be well below the official figure, it would have cast doubt on Aramco’s ability to sustain production, not immediately but after two or three decades. That would have had some negative impact on its valuation in an eventual IPO. More oil reserves, though, will eventually give Riyadh even more leverage in Opec, but hardly add to the company’s value, since they will be produced many years from now.
The gas is more useful, since the kingdom has to raise gas output to meet domestic demand for power and petrochemicals. It is unclear, though, how much of this is associated – a by-product of oil output – which can only grow if oil production is expanded, versus “non-associated” gas which can be extracted independently. Both oil and gas reserves can grow much more with enhanced recovery techniques, new exploration, and the exploitation of the kingdom’s own shale resources.
In themselves, these figures do not change the picture much – that would require more data on production costs and, particularly, plans for future expansion of output. And of course, to value the company accurately, we need to know something that Aramco influences but does not control, and which no audit can reveal: the future oil price.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis