The Observer: Can Saudi square the oil circle?

The world’s largest oil producer could soon find itself over a barrel, reports Tim Webb in the Gulf

Sunday November 18 2007

The dusty sign next to the landing strip reads ‘Welcome to the City of Golden Sand’. This ‘city’ of 700 oil workers and their families is one of the most remote outposts on earth.

Shaybah is on the edge of the aptly named Rub’ al-Khali (’empty quarter’) desert region in southern Saudi Arabia, hundreds of miles from the nearest town. Underneath the rolling red sand dunes lies one of Saudi Arabia’s largest oilfields. It pumps 500,000 barrels of oil per day (bpd)- about 5 per cent of Saudi Arabia’s total. Production will rise to 750,000bpd by late 2008, and according to its state owned-operator, Saudi Aramco, the field has 19bn barrels of proven reserves.

An Opec summit – only the third in the cartel’s history – concludes in the kingdom today, and the Saudi government is keen to show off the flagship project to the world. Last week, it flew in more than 100 foreign journalists.

Yet in the heart of the empty quarter to the south, Shell and other oil majors are searching in vain for new deposits. The Saudis opened up the region to overseas exploration in the 1990s when oil prices were barely in double figures. The empty quarter was hailed as one of the few big opportunities for the majors to get a foothold on the world’s largest oil producer. Yet so far the appraisal wells have come up dry. No journalists were flown out to visit this particular area last week. ‘Whether that’s a sign the Saudis don’t have as much oil as they say they do, we just don’t know,’ says Samuel Ciszuk of analyst Global Insight.

The trip to Shaybah is part of a carefully choreographed public relations offensive to convince the world the Saudis can keep it supplied. ‘Saudi Arabia is desperate to say they have things under control,’ says Ciszuk.

A lot is resting on their shoulders. Saudi Arabia is responsible for about a third of Opec’s output. It also is the only significant ‘swing producer’, having about 2mbpd of spare capacity. The Saudis also claim to have 260bn barrels of reserves, a quarter of the world’s total.

This month, the normally conservative International Energy Agency warned that the world faces an oil supply crunch over the next decade. It said that Opec, which currently produces about 40 per cent of the world’s oil, will have to provide all of the one-third increase in global demand forecast by 2030 because production in non-Opec countries has peaked. Much of this burden will fall on Saudi Arabia.

For the US in particular, the prospect of becoming even more reliant on Opec members like Saudi Arabia – with which relations are cooling – and Iran and Venezuela is unattractive. With developing nations’ thirst for the black stuff showing no signs of abating, it’s no wonder prices are poised to break the $100 mark.

As well as doubts over Opec’s reliability and rocketing prices, growing concern over climate change is spurring the development of alternatives like biofuels and renewables. The Saudis, who talk about being the world’s biggest oil producer for the next 100 years, have the most to lose if the world turns its back. Julian Lee from the Centre for Global Energy Studies (CGES) says: ‘There is a genuine degree of concern within Opec about the future market for oil. Saudi Arabia, as a long-term producer of oil, ought to be worried.’

One of the big concerns is whether Opec, and in particular Saudi Arabia, can – or will – increase production by the level needed.

Ciszuk says: ‘How much they have is kept very tightly under wraps.’ Opec countries have traditionally been extremely secretive. In Iraq, for example, it used to be a hanging offence to reveal information about the country’s reserves before the cartel introduced a production quota system in the early 1980s. Oil wealth is a matter of national security as it determines countries’ economic and military power.

It is also in members’ interests to overstate their reserves. Opec introduced mandatory quotas to limit supply and prop up prices. These quotas were based on the size of reserves, so that gave an incentive to exaggerate them. Advocates of peak oil – who say that production is in terminal decline – severely dispute these reserve figures. The trouble is, no one knows for sure.

The media trip to Shaybah was in some ways an admirable attempt by the Saudis to be more transparent. Less admirable – or convincing – was the attempt by Opec to embrace the green agenda last week. The slogan for the summit is ‘Providing petroleum, promoting prosperity and protecting the environment’. Cynics may argue that the last of the objectives is clearly in conflict with the others. Yvo de Boer, executive secretary of the UN Framework Convention on Climate Change, gave a speech saying: ‘The fight against climate change is not a fight against oil. It’s a fight against emissions.’ Opec leaders concurred.

De Boer said more investment should go into developing carbon capture and storage (CCS). Adnan Shihab-Eldin, a former secretary-general of Opec, also floated the idea of the cartel putting $1bn into a fund to research CCS, but provided few details.

Holding up CCS as a solution to global warming is disingenuous. About 70 per cent of oil production is used to fuel vehicles and aircraft. There are as yet no feasible proposals to use CCS technology to store their emissions.

There is still a tendency within Opec to be sceptical about climate change. In his speech, Shihab-Eldin outlined two scenarios. The first was that fossil fuels would continue to contribute to global warming. The other, he said somewhat optimistically, was an unspecified ‘reverse loop phenomenon’ in which ‘nature will save the day!’ If this is what Opec leaders say in public, who knows what they think privately.

Off-the-cuff comments from the then Opec secretary-general Mohammed Barkindo last October are probably a more accurate reflection. Asked about the recent Stern report on the economics of climate change, he said it had no ‘foundations in science or economics’.

This week’s Saudi-led charm offensive is unlikely to work. As Ciszuk says: ‘Opec is still not seen as a friend in the US and Europe. They are probably seen as what they are – a cartel with interests that are against those of the consumer.’

Of this attitude, Roger Higman of Friends of the Earth, said: ‘Saudi Arabia is a running sore in climate negotiations.’

In the short term, consumers in both the developed and developing world have little choice but to rely on Opec for oil. It will be a decade or longer before alternative fuels make significant inroads. Yet if Opec is not convinced about the world’s commitment to oil in the long term, it may choose not to invest the $500bn it says is earmarked to increase production. If not, oil prices could go even higher over the next decade.

Hey big spender

Uncertainties over oil have not put off the party-loving Saudi Prince Alwaleed bin Talal, pictured, from becoming the first private customer for the $319m A380 superjumbo aircraft.

But then what Forbes thinks is the world’s 13th richest man, with an estimated fortune of $20bn, could outspend most airlines. Even the small matter of seeing $2.5bn wiped off his fortune because of the slide of shares in Citigroup, in which he has a 3.6 per cent stake, did not inhibit his spending. His investment company, Saudi Arabia Kingdom Hotels, has stakes in businesses ranging from News Corporation and Canary Wharf to AOL Time Warner.

This year he floated the business on the Saudi stock exchange, valuing his majority holding at just over $16bn. The 52-year-old started out with $330,000 of loans from his father and raised against his house, brokering deals with Western companies coming to the kingdom in the 70s, later investing in property and the Saudi banking sector. But he famously made his real fortune when he paid just under $600m for his stake in Citigroup in the 1990s, when the Latin American financial crisis and bad loans from US home owners almost brought the US bank to its knees, driving down its share price. None of his fortune comes directly from oil.

The prince says he does not get involved in Saudi politics. But he advocates greater women’s rights in the kingdom, even hiring the country’s first female pilot, a radical move in a country where it is forbidden for women to drive.

Tim Webb

http://www.guardian.co.uk/business/2007/nov/18/businessandmedia13