The Saudi Oil Confession

What could possibly have the Saudis so spooked?

As the dominant member of OPEC, you’d think they would feel more confident about their future…

After all, OPEC can boast having about three-quarters of the world’s oil reserves under its belt — as well as 40% of global crude production.

Believe me, this isn’t some newly-found fortune, especially considering OPEC leaders like the Saudis have been in clear control for the past forty years.

A few weeks back, we briefly touched on one of the Saudis’ worst fears.

It’s true that the Saudi population is becoming just as addicted to crude oil as we are here in the United States.

Granted, it may be a drop in the bucket by comparison. But don’t forget that every year their demand grows translates to less oil available for export.

Unfortunately, the Saudis’ troubles are just beginning…

Saudi Nightmares Surface

You see, losing a few million barrels here or there to feed their own addiction isn’t the only problem they face.

What they fear the most is losing control. And that much is becoming a reality.

We already know that an overwhelming amount of the Saudis’ oil production — more than 90% — stems from about seven giant oil fields. Here are a few of those heavy producers:

• Abqaiq field

• Safaniya-Khafji field

• Berri field

• Ghawar field

If you want an even better idea of how dependent they are on these fields, just remember that the Ghawar field accounts for more than 60% of all Saudi oil produced during the last sixty-three years.

Now tack on a conservative 6.7% decline rate (some, like the Ghawar field, are declining at a rate of 8% per year), and we’re looking at a lot of new oil that must be found each year just to keep up with demand.

Losing just one of those fields would be a disaster.

It’s not a problem of the Saudis putting all of their eggs in one basket, either. There’s also a problem with the quality of that oil.

When Libyan production was shut-in over the summer, we found out just how poor the Saudis’ spare capacity was.

But we won’t be too hard on them, because we’re seeing the same thing everywhere. Last year, over 40% of the world’s oil supply was medium sour crude coming out of the Middle East, Russia, and Central Asia.

In fact, oil of the light, sweet variety is becoming harder to find, only accounting for 16% of global production.

Make no mistake; the Saudis are well aware of this shift to unconventional sources that’s taking place… and they’re scared to death of it.

OPEC expects this unconventional production surge to come from two places: Canada and the United States.

Saudi Aramco’s chief executive recently confessed that the country’s grip controlling the world’s oil supply is slipping, giving way to the new unconventional reserves being developed in North America.

By 2035, production from unconventional sources in those two countries will reach nearly seven million barrels per day.

The majority of that, of course, is coming from one place…

Alberta. It’s safe to say Canadian oil sands will dominate the share of unconventional oil production going forward.

Not entirely convinced of that?

In 25 years, production from the oil sands will make up 80% of Canada’s total production. Today it accounts for more than half.

A few years ago, a colleague joked that the oil sands would eventually be considered a conventional source of oil…

With the dismal state of conventional fields — particularly of those massive Saudi fields — he may not have been far off the mark.

And right now, we’re witnessing a fundamental shift in Alberta’s oil sands industry.

What most people don’t realize is a vast majority of this resource is far too deep to be mined. New methods need to be developed and perfected to extract the resources…

Until next time,

Keith Kohl
Editor, Energy and Capital