This interview was filmed in London by ASPO-USA’s Dave Bowden, with Steve Andrews along on his own time and dime to ask some questions.
Sadad: I’m a geologist by training and a reservoir engineer—production engineer—by actual work experience. I started with Aramco back in 1970 and retired in 2004. Most of my time was spent with exploration and production activities but also in project management. I’ve carried on after that as a consultant.
Question: Assume for the moment that declines in demand have flattened and that we resume modest growth in demand in a year or so. Are there adequate new oil projects in the pipeline to meet rising demand for a few more years?
Sadad: I’ve been tracking the number of projects, globally, for a long time both in the Middle East and elsewhere—Russia, Brazil, west coast of Africa, and others. A lot of this information is in the public domain, so there is no mystery there. The International Energy Agency recently reported on the same numbers. The bottom line is that there are not enough projects. There is not enough new capacity coming on line, within say the next five to six years, to make up for global declines. And that’s assuming a very moderate level of declines—6% to 6.5% for non-OPEC, perhaps a 3.5% to 4% decline rate for OPEC.
Even at these modest decline rates, we are basically going to see a shortage of capacity within two to three years. We’re being lulled by this current excess capacity, which has more to do with lower demand than anything to do with supply. So we do have a problem in the near term. In the longer term it’s even worse because in the longer term the lead time to discover, develop and put on line production runs into 10 years. And there isn’t enough being done in the long term as well. So it’s both a short and a long-term problem.
Question: In Saudi Arabia, is 12.5 million barrels a day now sustainable and is there a plan to expand capacity beyond that?
Sadad: Saudi Arabia has a very credible and professional record in terms of declaring capacity and meeting its production targets. When the Kingdom announced a target of 12.5 million barrels of capacity, they actually committed funds to develop that capacity and we’ve seen them now commissioning those: 250,000 additional barrels in Shaybah; 1.2 million barrels in Khurais; 500,000 in Khursaniyah; 900,000 coming on stream in a couple of years in Manifa. So these are real projects and real capacities. I don’t think there is an issue that Saudi Arabia can deliver the oil it says it can deliver. The question is, what about the rest of the world? Is the rest of the world able to make up the difference? If we’re looking at 85 to 90 million barrels a day, and Saudi Arabia delivers 12.5 million, who’s going to deliver the rest and how much effort is going into that? And with decline rates of 7% to 8%, that’s four or five million barrels a year of net new capacity that has to come from new projects. So that’s where the challenge is. I don’t think the problem is Saudi Arabia. I think the problem is the rest of the world.
Question: Why do you think there is so much denial that world oil production is approaching or has reached a plateau?
Sadad: There is a push-back to the notion that there is a plateau in world oil supplies which is largely based on lack of information or lack of research. In fact, if you look at published information—for example, British Petroleum’s annual statistical report—it very clearly shows that from 2003 forward, oil production has hardly increased. So the information is there. If you look at some of the advertising that Chevron has been putting out for years now, they clearly say we’re half-way through the world’s reserves. The information is there. The facts are there. Oil prices did not jump four-fold over a three- or four-year period for any reason other than a shortage of supply. Yes, there may have been some recent volatility in 2008, but the price trend started climbing way back in 2002-2003. So, these are realities and the push-back is a sense that somehow the market is not able to deal with these realities, that somehow people can’t cope with these realities.
On the other hand, if you don’t talk about them, you never will fix the situation. This is not going to get any better. This is going to get worse because you have population growth all over the world, you have a standard of living that is improving all over the world, you have aspirations across the globe for a better quality of life, and people want energy, so it’s actually important to talk about the facts and come up with solutions rather than act as if these issues don’t exist and then wait for some solution to materialize out of nowhere. That’s a role of government—to highlight these issues and to fix them, or at least take a stand and try to fix them. So I think the push-back is probably ill-advised.
Question: What are your views about the roles of unconventional oil supplies going forward?
Sadad: I think it’s very important to understand the difference between conventional oil projects and unconventional oil projects—let’s say, the extra-heavy crudes. The IEA put out their report in 2008 on the long term. They listed a whole lot of projects. If you look at the conventional oil projects, which I have, and plot the cumulative capacity against cumulative cost, what you come up with is $30,000 to $32,000 per barrel of capacity for conventional oil. That’s for projects coming on-stream between 2008 and 2015. If you look at the unconventional—that’s the Canadian extra-heavy, and I included two Qatari gas-to-liquids projects—the cost per barrel of capacity is $92,000 per barrel. It’s three times the cost of conventional oil. That means that if you want 100,000 barrels of unconventional oil (syncrude), you’ve got to invest $9 billion. And those are just at current costs. For the conventional oil, when you can find it, it’s $3 billion per 100,000 barrels/day. But even the conventional has gotten very expensive. If you look at the Tengiz and the Kashagans, they’re running $40 billion to $50 billion to get 500,000 to 600,000 barrels of oil/day. So everything is getting far more expensive and slower to develop.
I think, yes, we will have synthetic crude oil. The Germans ran their World War II machine on coal-to-liquids, but that was a very expensive solution; we can’t replace 80 million barrels a day with coal-to-liquids. So they will be important supplements but not replacements.
Question: Will the net energy penalty associated with unconventional oil resources be a large drag on their development?
Sadad: There no doubt that the energy that goes into extracting extra-heavy crudes—be it in the form of fuels such as natural gas to heat the bitumens to get them to flow, be it in terms of the surface process of mining two tons of sand for one barrel of oil, then the cracking and refining to convert them to synthetic crudes—these are very high penalties. The same thing goes with gas-to-liquids; basically it takes one-third of the gas to deliver the other two-thirds as a liquid. So these have diminishing returns. Yes, you will be able to deliver, I think everybody forecasts 4 or 5 million a day from unconventional crudes, maybe going to 8 or even 10 million barrels by 2030. But that 8 million a day is only 10 percent of total consumption. It’s not a solution.
Question: There have recently been a lot of fairly recent announcements about new oil discoveries. Can you put those in context for us? How and when will they contribute to the world’s oil supply?
Sadad: There has been a regular number of discoveries in the last, say, five to ten years, in terms of major fields and even giant fields, in the ultra-deep-water in the Gulf of Mexico, for example. But these are very tight formations and very expensive. When you drill a well that costs you $80 million to $90 million, that one well doesn’t tell you what the reserves are so you have to go drill four or five additional wells to delineate the accumulation. And then you have to look at how you are going to stimulate and fracture what is basically source rock at that depth. These become very expensive accumulations to develop. The West African fields, say in Angola, are a tremendous exploration success, but they’ve now moved from the shelf to the deep continental shelf, and they’re running out of concession area, out of acreage. In Brazil, Tupi is a fantastic discovery; in a geophysical sense the seismic has been superb, the clarity of delineation is wonderful. These are formations that should have plenty of permeability.
On the other hand, [with some of these new finds] you do have issues of paraffinic crudes, of very sour gases that have to be separated from the production gas and reinjected into the reservoir. You have salt zones that are very plastic and may be an issue in terms of maintaining well integrity. So there are a lot of challenges that come with these fields that need technology breakthroughs in their own rights. So yes, we have had discoveries, they are important, they are slow to evolve. If the Tupi discovery, which happened a couple of years ago, is going to take until 2017 or 2018 to be online,
that’s a long time to wait. What’s the target? A million barrels a day. Declines will have overcome that rate a long time earlier, certainly in Brazil itself. So we’re basically staying even.