IEA Oil Report 2012

The latest Monthly Oil Market Report from the US IEA (International Energy Agency) forecasts the call on OPEC crude in 2012 at 30.2 million barrels per day. It also forecasts global oil demand will average 90.3 million barrels per day in 2012, an increase of 1.3 million over 2011.

However, the crude oil markets are expected to remain volatile throughout 2012, with the fundamentals of oil supply and demand continuing to take a back seat to the debt situation in Europe and tensions in the Middle East, with Iran in the driving seat.

“Given already very low European crude inventories, a spate of precautionary buying and escalating tensions surrounding the Iranian issue could sustain prompt prices at levels higher than otherwise, amid the growing concerns about the euro zone and weaker global economic activity for 2012.” the IEA said on 12th December.

Iran and Oil Supplies

Turning to oil supplies, the Iranian oil issue remains unclear, as the USA and its allies along with the EU are considering new sanctions on the Iranian oil as we know which increase fears that it will curb the oil supply, which will push oil prices to the upside strongly, and from the Iranian side, it said that if any sanctions happened, it will stop oil passing from the Strait of Hormuz.

European Debt

Back to Europe which remained for the past year the main factor that drive global markets, as the crisis is deepening and contagion risks are appearing, where many negative consequences can be noticed, however, hopes increased at the beginning of the year that serious measures would be implemented to halt the crisis’ train.

US Dollar and Oil Prices

On the other hand, the US dollar is encouraging crude oil to continue this upside journey, as it declined at the beginning of the year due to different factors. The ICE US Dollar Index opened the session at 80.27 and recorded a high of 80.29 then it declined to reach so far a low of 79.88, and is currently trading around 79.95.

In general, trading volumes remain mightily low, which give space for any minor factor to affect crude heavily and give it momentum, where fluctuations may be evident ahead of the American data which may add positive signs for the world’s largest economy.

With oil prices remaining high, with new sources of natural gas and oil being exploited around the world, and with demand for energy expected to reach new highs over the next several decades, Yergin sets out to explain the history, economics, and politics behind the world’s continuing love affair with fossil fuels and show, too, just how hard it will be to end our dependence, given the earth’s surprising, and seemingly endless, ability to enable it.

If you’re a believer in “peak oil” the idea that the world is on the verge of running out of oil you will probably want to burn this book. But if you want to truly understand today’s energy problems and opportunities, there are few better places to start than with Daniel Yergin.

His classic The Prize: The Epic Quest for Oil, Money & Power, which won a Pulitzer in 1992, is a history of much of the late 19th and the 20th century, beginning with the wildly ambitious men who first drilled for oil in northwestern Pennsylvania and ending with Iraq’s 1990 invasion of Kuwait. It reads like a historical novel with oil as the main character. The Quest is a very different book. Because it covers energy in general, its scope is far broader and more diffuse. It doesn’t have the narrative drama of The Prize or the same logical narrative and tightly constructed storytelling. But it does draw an outline that allows readers to understand the complex relationships between the pieces of the energy puzzle, from oil to electricity to renewables to climate change.

Make no mistake, Yergin is an oil man. Indeed, he is sometimes accused of being too closely aligned with the petroleum industry (he is chairman of IHS Cambridge Energy Research Associates, a consulting group that works with energy companies). His true loyalty, however, seems to be to an enduring belief that technology, politics, and economics drive our opportunities and choices in energy.

It is that belief that leads him to clash so resoundingly with advocates for the idea of peak oil. Writes Yergin: “The peak oil theory embodies an ‘end of technology/end of opportunity’ perspective, that there will be no more significant innovation in oil production, nor significant new resources that can be developed.” Such a perspective is to Yergin almost blasphemous, and he gleefully recounts how the world has worried that it was about to run out of oil at least five times, dating back to the 1880s when geologists fretted that the “amazing exhibition of oil” found in Pennsylvania was only temporary.

Yet each time new sources were found. This is happening once again, says Yergin. With oil prices driven up in the early 2000′s by increasing demand, particularly from an energy hungry China, producers once against spent heavily to find new sources of fossil fuels. Enabled by increasingly sophisticated drilling and digital technologies, they have been remarkably successful around the world at tapping into vast quantities of “unconventional” gas and oil resources that are economically viable to extract because of technological advances. The examples are numerous: deep undersea oil reserves off the coast of Brazil where one field alone holds 5 billion to 8 billion barrels of recoverable oil; oil sands in Alberta that contain an estimated 175 billion barrels of recoverable oil and an estimated 1.8 trillion barrels of oil in the ground, waiting for future technology to get them out; another 20 billion barrels of “tight oil” that is likely held in deposits scattered about the United States. And that’s just counting the Americas.

Yergin spends much of the second half of The Quest on climate change and efforts to develop and commercialize cleaner sources of energy. His descriptions of the seemingly endless international wrangling and politics over climate change are particularly fascinating. Included is a recounting of George H.W. Bush’s 1992 trip to the Earth Summit in Rio de Janeiro, where he was greeted as “Darth Vader,” and of Vice President Al Gore’s 16 hours at the Kyoto conference in 1997, where he helped break a deadlock on setting binding targets to reduce emissions an agreement that the Clinton administration then scuppered.

But it is Yergin’s recounting of President Obama’s trip to the Copenhagen conference, in 2009, that perhaps best illustrates the sausage-making aspect of international energy policy. Flying into Copenhagen for only a day and hoping to get back home before a predicted blizzard hit Washington, Obama sat through a confusing meeting before deciding he needed to speak with the Chinese premier, Wen Jiabao. The president was at first told the Chinese leader had left the conference and then that he was “somewhere in the conference center.” After tracking the premier down in a conference room and brushing past a panicked security guard, Obama “burst into a room” where the Chinese leader was meeting with the presidents of Brazil and South Africa and the prime minister of India. After much “give-and-take,” the group, now including Obama, drafted an agreement. Unsurprisingly, the agreement was received by the larger conference group “with no great enthusiasm and indeed with some irritation on the part of many of the delegations.”

The Quest is not without flaws. The concluding sections on recent advances in the development of renewable energy, in particular, cover ground that will be very familiar to many readers. And much of it lacks the insider’s storytelling at which Yergin excels. Yet even here, Yergin has valuable insight. Knowing the unpredictable history of energy, Yergin realizes that it is far too early to declare “winners” among the alternatives to oil. And, he argues, it will likely be 2030 at the earliest before alternatives begin to play a significant role. “By 2030, overall global energy consumption may be 35 or 40 percent greater than it is today. The mix will probably not be too different from what it is today…. It is really after 2030 that the energy system could start to look quite different as the cumulative effect of innovation and technological advance makes its full impact felt.”

Such declarations will be controversial. Critics, especially those who will argue we can’t wait that long to change our energy choices, will certainly challenge the conclusion.

Latest WTI Oil Price

US Light crude oil futures for August 2011 delivery was trading at $94.70 a barrel, 06.25 GMT this morning in electronic trading on the NYMEX. The contract closed yesterday’s trading session at $95.02.

Global Oil Demand Mixed

US crude oil demand in April 2011 was weaker than previously projected, with monthly oil consumption posting its first year over year drop since November 2009, the US government had reported on Wednesday.

“Demand is diminished relative to what might have been expected and it’s mainly happening in the east. They’re getting towards the peak of the maintenance season in the east, so it may be a temporary lull.” said Roy Mason, the founder of Oil Movements.

However, Japanese inland deliveries staged a strong recovery in May, totalling 3.405 million barrels per day, lower year on year by just 90 thousand barrels per day, having fallen by over 200 thousand barrels in the prior two months in the aftermath of Japan’s recent earthquake.

Oil prices are being affected by economic problems in Europe and the US, whilst the US dollar is still a big factor and driver of the price of oil. But it will be oil demand which will have the last say for oil prices as global supplies tighten and demand continues to climb.

Brent Oil Futures – Closing Price

Brent crude oil futures for June 2011 delivery ended the week’s trading session at $125.95 a barrel on the ICE Futures Exchange yesterday evening, $1.91 higher than last week’s closing price of $124.04 a barrel.

Oil Prices – Danger Zone

“We are in the danger zone now with oil prices and how the global economy is responding. The US is not the country which sets the tone for global oil demand growth. We need more oil.” said Fatih Birol, head economist at the IEA.

In an interview with Dow Jones Newswires, Birol said that world oil demand is set to increase by as much as three million barrels a day over the next few months, and oil prices could march higher unless major producers pump more oil.

Oil demand in China, Brazil and other regions continues to march higher. Birol said the strength of oil demand in these regions, and not the US, is crucial in determining future oil prices.

Brent Crude Oil Price

According to Birol, Brent crude oil futures, Europe’s main benchmark for oil trading, more accurately reflects the cost of oil worldwide, as supply issues depress the value of US NYMEX traded WTI oil futures (West Texas Intermediate) crude.

The IEA and Peak Oil

The IEA is an independent agency formed out of the wake of the 1973 oil crisis. It forecasts global oil production, monitors the international oil market and other energy sectors.

Only five years ago the IEA confidently stated that world oil production was set to rise to 120 million barrels a day by 2030.

But IEA chief economist Fatih Birol says the world’s crude oil production peaked in 2006 and says that oil prices are likely to rise 30 percent over the next three years. That would mean Brent oil prices would be trading at $164 a barrel in 2014.

Anyone Seen 4 New Saudi Arabia’s?

“The existing oilfields are declining so sharply that in order to stay where we are in terms of production levels in the next 25 years, we have to find and develop four new Saudi Arabias.” commented Birol, and says one of the conclusions the IEA has come to is that the age of cheap oil prices are over.

Latest WTI Oil Price

US Light crude oil futures for May 2011 delivery was trading at $109.03 a barrel, 06.50 GMT this morning in electronic trading on the NYMEX. The May WTI oil futures contract expires today.

Saudi Arabia’s oil minister reportedly said the country cut its oil output by around 800,000 barrels a day in March, due to over supply, while April oil production was expected to rise slightly from March levels, according to the reports.

Last month, Saudi Arabia’s output reached 8.292 million barrels a day, down from 9.125 million in February. Some major oil consuming nations had hoped Saudi output could help push currently high oil prices lower.

“Spare capacity is still falling, and the very limited movement along the demand curve in response to higher prices has thus far been an order of magnitude less than the supply side outages.” analysts at Barclays Capital said in a research note.

Saudi Arabia apparently has the capacity to pump 12.5 million barrels of oil per day, but this number has never been tested. The kingdom is the world’s second largest oil exporter after Russia.

Latest WTI Oil Price

US Light crude oil futures for May 2011 delivery was trading at $111.22 a barrel, 06.50 GMT this morning in electronic trading on the NYMEX. WTI oil futures closed yesterday’s trading session at $110.29, a new 2011 high.

The new analysis by the IMF (International Monetary Fund) said that market tensions were increasing between growing demand for oil from fast growing emerging market economies, like China, and production constraints due to maturing oil fields.

“There is a risk that the tensions between oil demand and supply trends could intensify again and prices could rise rapidly.” said Thomas Helbling, an advisor to the IMF’s Research Department and author of the report.

“The increases in the trend component of oil prices suggest that the global oil market has entered a period of increased scarcity.” the IMF said in initial chapters of its World Economic Outlook report, which will be released in full on Monday.

IMF Warns on $150 Plus Oil Prices

The IMF said if tensions between oil demand and supply factors intensified there could be price spikes rivaling the 2008 price surge that drove crude oil futures to nearly $150 a barrel.

Basically, the IMF report suggests that oil demand is going to be higher than oil supply, otherwise know a the peak oil theory.

OPEC oil production slipped 363,000 barrels, or 1.2 percent, to an average 29.022 million barrels a day, the lowest level since September, according to the survey of oil companies, producers and analysts.

Daily crude oil output by OPEC member countries with quotas, all except Iraq, decreased 353,000 barrels to 26.437 million, 1.592 million above their target.

Higher Oil Exports from Saudi Arabia to “Take a While”

“The numbers show that it will take a while before the Saudi’s and others make up for Libya’s missing barrels. We should see the total rise in April. This explains why Brent is above $115.” said Rick Mueller, director of oil markets at Energy Security Analysis, Massachusetts.

Saudi Arabia, OPEC’s biggest producer, increased output by 300,000 barrels, or 3.4 percent, to 9 million barrels a day in March, the highest level since October 2008. Saudi Arabia exceeded its oil export quota by 949,000 barrels.

Saudi Arabian Oil Co. Chief Executive Officer Khalid Al-Falih said last month that the kingdom is “ready to supply incremental change in demand,” to cover any shortfall from Libya.

Saudi Arabia apparently has about 3.5 million barrels of spare daily oil production capacity, al-Naimi said this month and could increase oil output by 2.5 million barrels within 30 days. This high target remains “too high” in the eyes of many experts who believe that Saudi Arabia’s oil production is nearly maxed out.

The United Arab Emirates bolstered output by 160,000 barrels to 2.51 million barrels a day, the second biggest increase this month.

Meanwhile, Mexico’s Energy Minister Jose Meade said oil shortages caused by the Libyan crisis, could be covered by production in other OPEC nations and existing inventories.

If conflict does not spread to other Middle Eastern nations, oil prices should fall back to levels seen before fighting erupted in major oil producer Libya, Meade told the Reuters Latin American Investment Summit.

He said that current high oil prices will benefit Mexico as the world’s number 7 oil producer but a strengthening peso will limit gains for the country’s state run oil company Pemex.

Latest WTI Oil Price

US Light crude oil futures for May 2011 delivery was trading at $104.68 a barrel, 05.55 GMT this morning in electronic trading on the NYMEX.

US crude oil inventories rose a more than expected 2.95 million barrels last week and stocks at Cushing, the US delivery point for WTI crude oil jumped to a record high, according to the US EIA’s (Energy Information Administration) weekly report.

“Crude oil stocks rose more than many analysts were expecting and while gasoline stocks are drawing due to exports and the switch from winter to summer grade fuel, demand is not strong.” said Andy Lebow, a trader with MF Global, New York.

US Cushing Oil Stockpiles near Capacity

The EIA reported that crude oil stockpiles last week hit a record 41.9 million barrels in Cushing. Storage in the area is near capacity, a situation that has weighed on WTI oil futures even as Brent crude oil, Europe’s benchmark, is pulled higher by events in the Middle East and North Africa.

US Plans to Cut Oil Imports

Meanwhile, US President Barack Obama called Wednesday for cutting oil imports by one third over the next decade during a speech at Georgetown University.

Obama outlined plans for ensuring energy security amid record high oil prices during the address, in which he noted that at the time of his inauguration just over two years ago the US imported 11 million barrels of oil each day.

Last year, US oil production reached its highest level since 2003 and for the first time in a decade imported oil represented less than half of US consumption of liquid fuels.

To that end, the president stressed the importance of “finding and producing more oil at home. The US is sitting on supplies of American energy just waiting to be tapped.”

Saudi Arabian state run oil giant Aramco met with leading oil service companies and announced plans to quickly expand its oil rig count to ensure it has extra production capacity, and in turn, exports.

“The rig count leap is likely imminent, and expected to accelerate in the second half of 2011 and into 2012. The risk premium in the Middle East has risen. Also, with Libyan production falling, Saudi Arabia may feel it has to be ready for higher oil production capacity.” according to Simmons & Co analyst Bill Herbert.

Herbert wrote that Saudi Arabia is targeting a 30 percent increase in the rig count, to 118 from a current number around 92. He confirmed details of the Saudi meetings with oil service companies from Halliburton and Baker Hughes and called the Saudi plans manifestly positive for large service companies active in Saudi Arabia.

Saudi Arabia is currently believed to be pumping more than 9 million barrels of oil per day after lifting crude oil output amid a slowdown in Libya’s oil exports, while unrest in the Middle could play a part in OPEC’s future oil output targets.

Saudi Arabia – Oil Exports

Saudi Arabia’s stated oil exports are estimated to be 12 million barrels of oil per day, although many analysts believe that Saudi Arabia’s real exporting capacity is much lower than this figure.

During the oil price spike of 2008, Saudi Arabia managed to raise crude oil exports to around 9 million barrels per day, from around 8 million barrels per day earlier on in the year.

Latest Brent Oil Price

In London, Brent crude oil futures for April 2011 delivery was trading at $117.38 a barrel, 07.40 GMT this morning on the ICE Futures Exchange.

Oil Supply Concerns

Libya, one of the largest oil exporters in North Africa typically exports 1.6 million barrels of oil per day, however since the country’s unrest, this figure has been halved.

While other major producers like Saudi Arabia have stepped in to replace the lost output from Libya, analysts know that the redistribution of the different varieties of crudes will take some time to achieve.

“Despite additional volumes being offered to refiners, we note that increased supplies do not yet appear to be fully offsetting the Libyan outages. Crude supplies have improved slightly, but are far from ample globally, and the refining system is still struggling to either process new crudes, or get sufficient supplies.” said JP Morgan analysts in a note.

Short Term Oil Price Forecast

Both Brent and WTI oil contracts are being driven higher by the ongoing situation in the Middle East and North Africa. The recent unrest is set to increase, and with it, oil prices will rise, but, by how much?

Well that’s the million dollar question. At least, for the short term, expect oil prices to continue a steady climb higher each trading day and watch the situation in Saudi Arabia closely.

Oil Output – The World Leaders

Outside club OPEC, the world’s leading oil exporter is in fact Russia, not Saudi Arabia. With oil prices well over $100 a barrel, Russia stands to gain a great deal from this latest situation (in terms of oil revenue) and this can be seen in the value of the Russian Ruble, which has seen recent gains on the global currency markets.

Just take a look at the last 10 years of oil output data from Russia (data: EIA):

Then, compare that to the last 10 years oil output from Saudi Arabia (data: EIA):

The charts seem to paint their own picture of what’s going on for the oil exporting giants as of late. As for Russia, oil exports have seen a steady increase, while with Saudi Arabia, it seems that even in the oil price shocker of 2008, Saudi Arabia only managed to increase oil output by around a million barrels, to around 9 million barrels per day (which is the current stated output for the country).

WikiLeaks – Saudi Arabia Reserves Overstated by 40 Percent?

In Febraury 2011, WikiLeaks released a set of cables which contained details that Saudi Arabia’s crude oil reserves may have been overstated by as much as 300bn barrels, or nearly 40 percent.

According to the cables, which date between 2007 and 2009, geologist and former head of exploration at the Saudi oil monopoly Aramco Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then, possibly as early as 2012, global oil production would have hit its highest point. This crunch point is known as “peak oil”.

Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment.

In the last two years, other senior energy analysts have backed Husseini. Fatih Birol, chief economist to the IEA commented to reporters last year that conventional crude output could plateau in 2020, a development that was “not good news” for a world still heavily dependent on petroleum.

Russia Taking the Lead for Oil Output

Meanwhile Russia has kept crude oil output near a post Soviet record in February, at 10.23 million barrels a day, 0.2 percent higher than a month earlier and 1.5 percent higher than the same month last year, according to statistics from the Energy Ministry’s CDU-TEK data unit.

Russian crude oil exports advanced to 5.28 million barrels a day, rising 2 percent from the previous month and 1.1 percent from February of last year, according to the statistics.

Prime Minister Vladimir Putin pledged that Russia’s oil production will remain above 10 million barrels a day for at least a decade, after reaching a post-Soviet high of 10.27 million in October. Putin ordered the government to create tax incentives so that companies will invest in new projects.

Russia’s Soviet era crude oil output peaked at 11.48 million barrels a day in 1987, according to BP data.

Can Saudi Arabia Boost Oil Output Further?

With protests planned in Saudi Arabia for Friday 11th March and beyond, it’s going to be an important marker to see if Saudi forces can contain any unrest that could develop in the country.

Saudi Arabia produces and exports over 10 percent of daily crude oil usage globally, hence firstly, the country needs to ensure that current oil output is unharmed, then maybe look to see if they indeed have the resources to increase oil supply from there.

The cables urge Washington to take seriously a warning from a senior Saudi government oil executive that the Saudi Arabia’s crude oil reserves may have been overstated by as much as 300 billion barrels – nearly 40 percent.

According to Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, between 2007 and 2009, Saudi Arabia could have reached an output of 12 million barrels a day in 10 years, but before then, possibly as early as 2012, global oil production would have hit its highest point. This crunch point is known as “peak oil”.

Husseini said at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment.

He argued that Aramco had badly underestimated the time needed to bring new oil on tap.

“According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi Arabian oil reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray.”

In the past two years, other senior energy analysts have backed Husseini.

Fatih Birol, chief economist at the IEA, said last year that conventional crude oil output could plateau in 2020, a development that was “not good news” for a world still heavily dependent on petroleum.

The Actual Cable

Cable dated:2007-12-10T05:54:00
C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 002441
SIPDIS
SIPDIS
DHAHRAN SENDS DEPT OF ENERGY PASS TO MWILLIAMSON, GPERSON, AHEGBURG, AND JHART CIA PASS TO TCOYNE
E.O. 12958: DECL: 12/10/2017
TAGS: EPET, ENRG, ECON, SA
SUBJECT: FORMER ARAMCO INSIDER SPECULATES SAUDIS WILL MISS 12.5 MBD IN 2009
REF: RIYADH 1950
Classified By: Consul General John Kincannon for reasons 1.4 b, d and e .

1. (C) SUMMARY: On November 20, 2007, CG and Econoff met with Dr. Sadad al-Husseini, former Executive Vice President for Exploration and Production at Saudi Aramco. Al-Husseini, who maintains close ties to Aramco executives, believes that the Saudi oil company has oversold its ability to increase production and will be unable to reach the stated goal of 12.5 million b/d of sustainable capacity by 2009. While stating that he does not subscribe to the theory of “peak oil,” the former Aramco board member does believe that a global output plateau will be reached in the next 5 to 10 years and will last some 15 years, until world oil production begins to decline. Additionally, al-Husseini expressed the view that the recent surge in oil prices reflects the underlying reality that global demand has met supply, and is not due to artificial market distortions. END SUMMARY.

——————————————— ——-

SAUDI ARABIA WILL BE UNABLE TO MEET PRODUCTION GOALS ——————————————— ——-

2. (C) Dr. Sadad al-Husseini met with CG and EconOff on November 20 to discuss current trends in the international energy market, as well as his thoughts on the Saudi energy sector. Al-Husseini served as Executive Vice President for Exploration and Production from 1992 until his retirement in 2004. He also served as a member of the Aramco Board of Directors from 1996 to retirement. (COMMENT: Al-Husseini retired in the midst of an executive dispute, supposedly caused when he unsuccessfully attempted to engineer his ascension to the position of CEO. Although he continues to live at Aramco’s main camp and has close interpersonal relationships with key Aramco executives, many of al-Husseini’s views on Aramco are shaped by the perception that the company would be better off if he were running it. END COMMENT). It is al-Husseini’s belief that while Aramco can reach 12 million b/d within the next 10 years, it will be unable to meet the goal of 12.5 million b/d by 2009. The former EVP added that sustaining 12 million b/d output will only be possible for a limited period of time, and even then, only with a massive investment program.

3. (C) According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described and the timeline for their production not as unrestrained as Aramco executives and energy optimists would like to portray. In a December 1 presentation at an Aramco Drilling Symposium, Abdallah al-Saif, current Aramco Senior Vice President for Exploration and Production, reported that Aramco has 716 billion barrels (bbls) of total reserves, of which 51 percent are recoverable. He then offered the promising forecast – based on historical trends – that in 20 years, Aramco will have over 900 billion barrels of total reserves, and future technology will allow for 70 percent recovery.

4. (C) Al-Husseini disagrees with this analysis, as he believes that Aramco’s reserves are overstated by as much as 300 billion bbls of “speculative resources.” He instead focuses on original proven reserves, oil that has already been produced or which is available for exploitation based on current technology. All parties estimate this amount to be approximately 360 billion bbls. In al-Husseini’s view, once 50 percent depletion of original proven reserves has been reached and the 180 billion bbls threshold crossed, a slow but steady output decline will ensue and no amount of effort will be able to stop it. By al-Husseini’s calculations, approximately 116 billion barrels of oil have been produced by Saudi Arabia, meaning only 64 billion barrels remain before reaching this crucial point of inflection. At 12 million b/d production, this inflection point will arrive in 14 years. Thus, while Aramco will likely be able to surpass 12 million b/d in the next decade, soon after reaching that threshold the company will have to expend maximum effort to simply fend off impending output declines. Al-Husseini believes that what will result is a plateau in total output that will last approximately 15 years, followed by decreasing output.

5. (C) Al-Husseini elaborated that oil field depletion rates also play a significant role in determining the Aramco – and

RIYADH 00002441 002 OF 003 12.5 MBD IN 2009

global – production timeline. Increasing output is not simply a function of adding new capacity to already existing operations. Instead, due to depletion rates, new reserves must be brought online to both replace depleted production and satisfy growth in consumption. The International Energy Agency (IEA) has estimated global depletion rates at 4 percent, while a 2006 Aramco statement has estimated Saudi Arabia’s overall depletion rate at 2 percent. Al-Husseini estimates that moving forward, satisfying increases in global demand will require bringing online annually at least 6 million b/d of worldwide output, 2 million to satisfy increased demand and 4 million to compensate for declining production in existing fields.

6. (C) The second issue that will limit any proposed Aramco output expansion can be broadly defined as a lack of supporting resources. For example, in al-Husseini’s estimation, it is not the amount of oil available that will prevent Aramco from reaching 12.5 million b/d by 2009, but rather issues such as a lack of available skilled engineers, a shortage of experienced construction companies, insufficient refining capacity, underdeveloped industrial infrastructure, and a need for production management (if too much oil is extracted from a well without proper planning and technique, a well’s potential output will be significantly damaged). As previously reported by post (Reftel), the Eastern Province economy is facing severe industrial expansion limits, and despite Aramco’s willingness to invest up to 50 billion USD to achieve the 2009 goal, availability of labor, materials and housing may end up as determinative factors.

—————————————–

GLOBAL OIL PRICES: DEMAND HAS MET SUPPLY —————————————–

7. (C) Considering the rapidly growing global demand for energy – led by China, India and internal growth in oil-exporting countries – and in light of the above mentioned constraints on expanding current capacity, al-Husseini believes that the recent oil price increases are not market distortions but instead reflect the underlying reality that demand has met supply (global energy supply having remained relatively stagnant over the past years at approximately 85 million barrels/day). He estimates that the current floor price of oil, removing all geopolitical instability and financial speculation, is approximately 70 – 75 USD/barrel. Due to the longer-term constraints on expanding global output, al-Husseini judges that demand will continue to outpace supply and that for every million b/d shortfall that exists between demand and supply, the floor price of oil will increase 12 USD. Al-Husseini added that new oil discoveries are insufficient relative to the decline of the super-fields, such as Ghawar, that have long been the lynchpin of the global market.

8. (C) COMMENT: While al-Husseini believes that Saudi officials overstate capabilities in the interest of spurring foreign investment, he is also critical of international expectations. He stated that the IEA’s expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of over 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this “inconvenient truth.” Al-Husseini was clear to add that he does not view himself as part of the “peak oil camp,” and does not agree with analysts such as Matthew Simmons. He considers himself optimistic about the future of energy, but pragmatic with regards to what resources are available and what level of production is possible. While he fundamentally contradicts the Aramco company line, al-Husseini is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered. END COMMENT.

—————–

BIOGRAPHICAL DATA

—————–

9. (U) Dr. Sadad Ibrahim al-Husseini was born in Syria but raised in Saudi Arabia, his father a Saudi government official. He received a BS in Geology from the American University of Beirut in 1968, as well as an MS and Ph.D. in geological sciences from Brown University in 1970 and 1972, respectively. Al-Husseini also attended a Professional Management Program at Harvard Business School in 1982.

RIYADH 00002441 003 OF 003 12.5 MBD IN 2009

Joining Aramco in 1972, al-Husseini quickly advanced, becoming Senior Vice President for Exploration and Production in 1986. He was given the title Executive Vice President in 1992. Al-Husseini served on Aramco’s Management Committee from 1986 until 2004, and sat on the Aramco Board of Directors from 1996 – 2004. He retired on March 1, 2004. XXXXXXXXXXXX

The deal will see both BP and Rosneft exchange expertise in exploring the Arctic region for new oil reserves and as part of the deal Rosneft will take 5% of BP’s shares in exchange for approximately 9.5% of Rosneft’s company shares. The deal follows a meeting between BP’s boss Bob Dudley and Russian PM Vladmir Putin on Friday.

Oil exploration will be split into in three areas known as EPNZ 1,2,3 – on the Russian Arctic continental shelf, the areas cover 125,000 square kilometres in an area of the South Kara Sea.

“Our future joint venture will utilise the experience and expertise of BP, one of the leaders in the global oil and gas industry. This project is unique in its complexity and scale both for Russia and the global oil and gas industry.” said Rosneft’s President, Eduard Khudainatov.

New Arctic Technology Centre in Russia

BP and Rosneft have also agreed to set up an Arctic technology centre in Russia which will work with Russian and international research institutes to develop technologies for the extraction of hydrocarbon resources from the Arctic shelf.

5 Billion Tonnes of Oil Resources – Putin

“The resources of oil in question stand at 5 billion tonnes. These are serious figures that need further confirmation, but they are quite realistic and I hope that these estimated resources will become proven reserves.” said Prime Minister Vladimir Putin.

Russia is already the world’s largest oil exporter and is currently not an official member of OPEC.

Rosneft is the leader of the Russian oil industry and one of the largest public oil and gas companies worldwide.