Demand may outpace Saudi oil capacity

by Jim Krane

Remarkably, even Saudis, who control over a quarter of the world's known oil, are calling for relief from relentless consumption.
"The current out-of-control demand is not good for us," Ghazi Al-Rawi, head of private equity at Gulf One Investment Bank, said recently. "When you have this kind of demand, you're forced to supply beyond the optimal rate. That's not a positive thing."

Most urgently needed is energy conservation, especially in the United States, which now burns up a quarter of the oil sold to the world, said Saddad al-Husseini, the former head of production at state-owned Saudi Aramco. Also critical is the development of fuels from oil-rich sands or natural gas that can act as substitutes for oil. Other producing countries -- especially OPEC's No. 2 and 3 leaders Iran and Iraq -- could ease the crunch by boosting exports to handle a greater share of the surging demand in China and India, Saudi experts said.
"We need some help," said Nawaf Obaid, a Saudi petroleum adviser with close ties to the government.

If such help doesn't materialize and Saudi Arabia maxes its output -- cranking out perhaps 35 % more oil than it does today -- the kingdom's proven reserves might only sustain those gushing flows for a couple of decades before starting to dwindle, al-Husseini said.
"Can (global consumers) afford to keep increasing demand by almost 2 mm bpd each year? Is it Saudi Arabia's role to meet that demand?" asked al-Husseini, who retired in 2004 after working 32 years in the kingdom's oil sector. "You're leading yourself to having to find an alternative source of energy very quickly."

Few analysts believe oil worldwide is actually running out. But experts differ on whether the current soaring oil demand will outstrip the current supplies, and how quickly. Many blame today's tight market on 20 years of low oil prices that stifled investment in new wells, refining and exports.
Keeping prices high is the best way to meet demand over the next decade or two, said Leonardo Maugeri, an executive with the Italian energy company ENI. High prices give investors incentive to spend the billions needed to boost oil production and develop alternate fuels, Maugeri wrote in the current issue of Foreign Affairs. But Maugeri also wrote that it takes six to eight years for oil from a new well to reach consumers. Developing oil sands or natural gas-based diesel fuel is even slower and more expensive.

Saudis worry that consumer demand could overwhelm the slow progress in bringing new energies to market.
"If this continues, you'll have demand outstripping supply over the next five years by a wide margin," said Obaid.

Others, like Sharif Ghalib of Energy Intelligence Research in New York, say the world's cushion of excess oil production capacity -- a safety margin that keeps a lid on prices -- is so low that demand could outstrip supplies now. All it would take is a single oil producer going off-line for any reason.
"The crunch is already here. It's not five years down the road," Ghalib said. "There is no thought being given in the US to raising gasoline taxes or increasing mileage on US cars. In China, automobile use is skyrocketing."

For now, Saudi Arabia is bent on meeting this demand by drilling wells and laying pipe. In March, state-owned Saudi Aramco and Japan's Sumitomo Chemical Co. broke ground on a $ 10 bn oil refinery and petrochemical plant that will be one of the world's largest when finished in 2008. The refinery, one of two planned in the kingdom, is aimed at opening bottlenecks on delivery of refined products like gasoline and diesel. The plant will boost Riyadh's output because it can refine heavy sulphurous crude that the kingdom is now unable to sell.
Saudi Arabia and its partners plan to invest a further $ 28 bn in three more huge refineries, in China, India and Texas, Obaid said.

Also in April, Saudi Arabia began opening valves on a 300,000 bpd expansion in output from the world's largest oilfield. By summer, the full flow of the black oil is supposed to be under way. These are just the latest instalments of what experts describe as the world's largest oil expansion effort, which will boost Saudi Arabia's output capacity by 2009 by almost 14 % -- from 11 to 12.5 mm bpd.
If demand warrants, the Petroleum Ministry could decide to invest another $ 8.5 bn in a further boost of 800,000 bpd by 2013, bringing sustainable capacity to 13.05 mm bpd, Obaid said.

Saudi Oil Minister Ali al-Naimi has said the kingdom could reach and sustain 15 mm bpd in output if needed. But even leaping to those frantic levels won't satisfy spiralling world demand for long, analysts say.
"The Saudis can't do it alone," said Ehsan Ul-Haq, chief analyst of Vienna-based energy broker PVM Oil Associates.
And pumping at 15 mm bpd, the lifespan of Saudi's 260 bn barrels of proven oil reserves would be shortened by 30 %, with output dwindling about two decades from now "within our lifetimes," al-Husseini said.

The kingdom has already used up 100 bn barrels. Production typically declines when a country has produced half of its reserves. That's 180 bn barrels in Riyadh's case, al-Husseini said.
"If instead of reliable oil production lasting 20 years, it were to last for 40 years, then we would all be ahead," he said. "That's why there is a need to supplement conventional oil with other sources of energy."

Energy demand heats up far more readily than it cools off. Only steep and painful price increases have much effect on oil consumption, said Dalton Garis, an oil economist at the Petroleum Institute in Abu Dhabi. Prices could also drop, however, Garis said, if Saudi Arabia's expansion is met by slowing demand.
That is starting to happen. In two years, the increase in world demand has slipped from a high of 2.7 mm bpd in 2004 to an expected 1.6 mm bpd in 2006, Ul-Haq said.

Overall, Ul-Haq said he expected global demand to grow yearly by 2 mm bpd in the next few years, with most of the growth coming from Asia.
"We're really not going to change our consumption behaviour until oil hits $ 80 a barrel," Garis said.
 

Source: www.forbes.com