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  1. Analysis
June 26, 2008

Saudi Secrets Lie Behind Oil Promises

Oil producers and consumers recently met in Jeddah to discuss oil price rises. Saudi's King Abdullah condemned oil 'speculators' on the spiralling price of crude and called for greater 'transparency' in market dealings. Ozge Ibrahim investigates the story behind Saudi Arabia’s oil stocks.

By cms admin

As Saudi Arabian ministers promised to increase output to ease supply worries and surging fuel costs, the real story behind the level of oil stocks in the kingdom still remains shrouded in mystery.

At the Jeddah Energy Meeting, Saudi Oil Minister Ali al-Nuaimi announced production would be boosted by 12.5 million barrels a day, an increase of three million barrels a day, by the end of 2009. He also said Saudi Arabia could add another 2.5 million barrels a day should demand warrant.

Saudi Arabia would also invest $129bn in the energy sector over the next five years, spanning the upstream and downstream sectors both at home and abroad, according to Nuaimi.

CAN IT BE DONE?

While the announcement of increased output and investment may have been welcomed by the US, with infrastructure so vital to producing large amounts of crude, Saudi’s ability to produce at this level remains unclear.

According to Oil Depletion Analysis Centre (ODAC) peak oil analyst Dr Richard Miller, Saudi Arabia should be able to commit to its first promise. But he stresses at least one million barrels are Arab heavy crude, which is notoriously difficult to refine and requires specialist refineries.

“They can get the first three million barrels but if they want to crank it up another 2.5 it’s a step too far in the short-term, which can’t be done”, said Dr Miller.

“Saudi Arabia would also invest $129bn in the energy sector over the next five years.”

Even with increased investment in the energy sector, Miller believes the country lacks the necessary infrastructure, with much of the information on new developments kept out of the public domain.

“There is a lack of clarity. There are a number of projects out there but I have to say, reports on whether those projects are on track are quite hard to track down,” Miller said.

“If you read the statement that came out of the meeting, they are asking for transparency of oil trading markets and financial markets, could they also give us some transparency on supply and supply prospects and reserves?”

Ultimately, Miller believes the amount Saudi is going to produce “will just about match the global decline from current fields”.

SPECULATION AND SUPPLY

European leaders, including UK Prime Minister Gordon Brown, speaking at the Jeddah summit, said production shortages and speculation of oil prices have to be studied further.

Arguably, supply shortages remain the most important issue, but how this can be studied, particularly in light of the ambiguous nature of Saudi oil deals? One answer offered by summit members is improved communication and cooperation between oil producers and consumers.

The Kingdom of Saudi Arabia and the secretariats of the International Energy Agency, the International Energy Forum and OPEC have asked for “enhanced cooperation among international, national and service companies from all producing and consuming countries in investment, technology and human resource development”.

While this is a good start for the future, right now heavy engineering is required to get the oil out of the ground. While analysts like Miller believe global stocks are dwindling as the world reaches a plateau, they also know that increased investment and political will is necessary to guarantee future supply.

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