[Mb-civic] Big Oil's Biggest Monster Economist

Sun Jan 9 17:08:42 PST 2005

   Click here to find out more!

Economist.com      

The oil industry

Big oil's biggest monster
Jan 6th 2005 | DHAHRAN, QATIF AND RIYADH
>From The Economist print edition

Saudi Arabia's Aramco, the world's biggest and most powerful oil firm, has
revealed some of its secrets

³ARAMCO is a peculiar company,² says a smiling Abdullah Jumah, the chief
executive of Saudi Arabia's state-run oil firm, as he greets a visitor at
its stylish modern offices in the country's oil capital, Dhahran. Inside the
heavily guarded compound is a tidy community of houses, schools and baseball
fields that would do suburban America proud. Foreigners and locals mix
freely, and the canteens serve (non-alcoholic) Budweiser beer. Women even
drive cars. Suddenly this most secretive of firms is opening up in other
ways, too. Having been widely blamed for last year's soaring oil prices, the
embattled giant hopes to prove it can deliver on its most important
promises‹and survive the terrorists who seem bent on destroying it.

Aramco is not publicly listed and avoids debt, so has no need to divulge
much to the financial markets. The best outside guess is that it produces
10m barrels per day (bpd) of oil‹one-eighth of the world's consumption‹with
revenues last year of $93 billion. Not only does Aramco sit atop the world's
largest reserves by far, it also enjoys the world's lowest discovery and
development costs‹about 50 cents per barrel, one-tenth or less of what
private-sector rivals pay in Russia, the North Sea or the Gulf of Mexico.
With at least 260 billion barrels of proved oil reserves left, Aramco is 20
times the size of Exxon Mobil, the largest private-sector oil firm.

Aramco may produce the kingdom's oil, but it is the Saudi government that
sets output levels and tries to fix prices through the Organisation of
Petroleum Exporting Countries. As oil prices soared to around $55 a barrel
late last year, Aramco was lambasted by foreigners and still draws their
ire, even though prices have since slipped by around one-quarter thanks
mostly to slowing demand, especially from China. Why should Mr Jumah care
what outsiders think, given that his only shareholder is pleased? His face
turns serious: ³With a quarter of global reserves, Aramco has a huge
responsibility to the world.²

The Greenspan of oil

Saudi Arabia, he points out, has often come to the rescue with extra oil
whenever there has been a big disruption. For example, its geologists brag
that they cranked up output dramatically after the invasion of Iraq, ³within
48 hours². Aramco's big buffer of spare capacity has caused it to be known
as the ³central bank of oil². That is why the oil markets were so rattled
last year when Aramco appeared troubled in three areas that could interfere
with its role as the swing producer. Aramco has now decided to address these
concerns and change its secretive culture.

The first worry in the markets is that Aramco may no longer be maintaining
its spare capacity. PFC Energy, a consultancy, reckons that global spare
capacity fell from a peak of 8.7m bpd in 1985, much of it in Saudi hands, to
a wafer-thin 1m bpd or so at the end of the third quarter of last year. The
obvious explanation was runaway demand in China and troubles in Iraq,
Venezuela and Indonesia. But cynics suspect that the Saudi government has
abandoned its policy of keeping lots of spare capacity because of the
demonisation of their country in America since September 11th 2001. The
Saudis also dislike the recent sharp decline of the dollar, the currency in
which oil is priced, and are thus delighted to see oil prices soar.

Ali Naimi, Saudi Arabia's oil minister, rejects such talk, insisting that
his country still wants ³a fair price² of $32-34 a barrel. (He adds, though,
that this is a ³moving target².) He vows that his country will maintain
spare capacity of 1.5m-2m bpd. To that end, he explains, Aramco has launched
an expansion programme to keep pace with global demand. Outside contractors
report a surge in drilling activity, with rig counts likely to rise from 55
to 77. On December 26th, Aramco opened a huge new facility in Qatif capable
of processing 800,000 bpd of oil.

Forecasters assume that Aramco will have to double its output in the coming
decades to meet expected growth in global demand. Yet some vocal outsiders
doubt that it can do so. Led by Matt Simmons, a Texan investment banker,
they argue that Saudi oil fields may already be facing technical
difficulties. Some 90% of Saudi oil comes from just seven fields whose
average age is 45-50 years. Just one, Ghawar, produces a staggering 5m bpd,
at least. He claims that academic studies, as well as troubles at fields in
neighbouring countries, suggest that Aramco's giant fields may soon go into
decline.

As a result of such criticisms, Aramco's technical experts now openly
discuss field data previously held secret. Its geologists explain how
exactly they intend to maintain output of 15m bpd or higher for 50
years‹even without the new oil discoveries that they insist could eventually
add another 200 billion barrels of oil reserves. Far from suffering from a
greater need for water injection to maintain reservoir pressure, Ghawar
appears to be stable, thanks to Aramco's innovative use of technology.

Nansen Saleri, Aramco's head of reservoir management, says that ³we've
released more data in 2004 than we did in the previous 50 years. On a
field-by-field basis, we now release more than the investor-owned
companies.² The exception, of course, is Royal Dutch/Shell, which is now
having all its field data audited by outsiders in the wake of last year's
reserves overbooking scandal. Aramco is extremely unlikely to follow Shell's
lead on outside auditors. Mr Jumah deserves credit for opening up the firm,
but when asked about outside audits a glint of steel appears in his eyes:
³Why should we? We have never failed to deliver a single barrel of oil
promised to anyone, anywhere.²

The third worry about Aramco is its potential vulnerability to terrorism.
Several unsuccessful attacks last year added a ³fear premium² to the oil
price, estimated at $7-15 a barrel. Such fears seemed to be waning until a
new tape from Osama bin Laden surfaced in December threatening that al-Qaeda
will now specifically target Saudi Arabia's oil infrastructure.

According to a new report by Nawaf Obaid, a security expert, and Anthony
Cordesman, an American defence guru, Saudi Arabia has improved its security
dramatically in the past two years. It spent an estimated $5.5 billion on
security in 2003 and over $8 billion last year. ³How many oil companies have
5,000 armed men on their payroll?² asks Mr Jumah. That does not even count
the official military and counter-intelligence forces working to protect
Aramco.

Yet all the hardware and military in the world cannot provide 100% certainty
that the nightmare will not come to pass: a disgruntled Shia employee
sneaking a ³dirty bomb² into Ras Tanura, the world's largest oil-export
terminal, or Abqaiq, a vital oil-processing centre.

Even as Mr Obaid recently argued over supper at a panoramic restaurant in
the Faisaliah skyscraper in Riyadh that the Saudis had broken the back of
the al-Qaeda cell in Saudi Arabia, two car bombs went off within line of
sight of the dinner table. Oil prices jumped on cue, then fell again once
markets realised the attackers had failed. But if those suicide bombers had
struck where Osama bin Laden now says he wants them to, oil prices could
surge to $100 a barrel‹or even more.