Former head of Saudi Aramco: oil has peaked (transcript)

transcribed by Barry Silver

David Strahan: Sadad al-Huseini, thanks for talking to me. You're about to give a presentation at the oil and money conference. What are you going to tell them about the future direction of the oil price?

Sadad al-Huseini: Well, every indication is that the increasing prices that we've been seeing are part of a trend, and the factors that caused the prices to rise are unlikely to go away. So, we're going to have a sustained price increase as long as the factors that drive prices persist.

DS: How much do you think prices are going to go up over the next few years?

SAH: Well, you can't put a control on the ceiling because the ceiling is a function of political events and other factors: emotional, speculation, etc. But you can predict that the floor on oil prices, and based on what we've seen so far, I would guess, in the next four to five years, the floor will keep rising at twelve - maybe a little bit more - dollars per barrel per year.

DS: So, where would you see prices in 2010, say?

SAH: 2010, we may well be - the floor on prices - may well be above $100. That's three years times twelve - thirty-six - plus where we are, $70 - $106 - as a floor.

DS: So, where is the technical floor, now, as you see it?

SAH: Now, the technical floor should have been around $70/$72. But, of course, the global hedging related to the dollar being soft - and commodities, and so on - has driven prices higher - but that's not because of the basic structural elements of the industry, it's because of the financial markets.

DS: So, what you're saying really is that in 2010, it's unlikely - rather unlikely - that oil prices will be less than $110 a barrel?

SAH: Absolutely. That's the whole point - that if your persist the way we do with demand as it is, the economy, globally, growing as it is, and the supplies being as constrained as they are - no question the dollar value - current dollar value - of oil would be well above $100.

DS: And where do you think it could be - in terms of its maximum? I know you say you can't put a constraint on that - but what's your guess?

SAH: We've seen fluctuations - it's a volatile market - and we've seen fluctuations of plus or minus maybe 20% - so it could be as high as $120/$125.

DS: Isn't there a counter argument here, though. Traditional economics would tell you that if the price of oil goes up - and goes up strongly - then it would either bring on additional supplies and/or depress demand. And, either way, mightn't that rather suggest that the oil price is going to head south, rather than going further north?

SAH: Yes. I mean, the point that you're making is that you would have demand destruction, and demand destruction would result in excess capacity, and, therefore, prices would come down. But, the reality is, what we've seen is there's a momentum to demand. This momentum is basically GDP. Unless you have a global recession that actually brings GDP down to zero, you're always going to have some incremental demand. And what we're seeing is there's no spare capacity of any significance, and, therefore, the factors that are driving prices up will persist. Now, the only way for reversing this is a introduction of alternative energies - in very short order - which is unrealistic; as I said, a global recession which we don't see materializing; or alternative fuels, which again, are a problem to deliver in the short term. Based on all of that, we can only expect prices to go up. Now, there's also the question of who's going to buy the oil? There are economies in the world that can afford it, and so they will bid the price up, and there are countries and economies that cannot afford it, and they will unfortunately be hurt by this price trend.

DS: But the other side of the traditional economics equation would suggest also that additional supplies would come on stream if the price goes strongly upwards. Isn't that going to happen?

SAH: What we've seen is that although the price of oil has almost quadrupled - or more - in the last few years, the supply has not. The non-OPEC, non-former Soviet Union countries - and that includes countries like Mexico, North Sea, and others - have, in fact, gone down, even though the prices have increased four-fold or five-fold. We're also seeing that OPEC and non-OPEC former Soviet Union are levelling off. So, the normal economic theory is not working in this case, and that's because of course there's - there are ceilings in the industry that don't allow the normal equation to work.

DS: What are those ceilings - are they geopolitical, resource nationalism, or are we rubbing up, do you think, against some fairly fundamental geological constraints?

SAH: I think it's the latter. There's no question that there are giant fields left in the world, and there are major reserves left in the world, but they are all maturing oil fields - large fields, but maturing. The additional discoveries that are happening are very complex fields - smaller, less durable, less sustainable. The demand on resources, both human and equipment, is increasing to the point where their isn't any additional resource - human or mechanical. All these factors put together have created a structural ceiling - it's not politics, it's not a negative strategy by OPEC or any of the major produces - these are the realities of the industry.

DS: Is it peak oil?

SAH: I don't call it peak because I believe that with increasing prices you will be able to sustain some demand. But it's maybe more appropriately a plateau, a ceiling that is very hard to go above. It's sustainable. My guess is for another ten to fifteen years. Now, beyond that it's pretty hard to predict. But, certainly, the resources will be very severely depleted by then.

DS: So, from what you say, you seem to think that we are on this plateau already?

SAH: The evidence is that in spite of the increases - very large increases - in oil prices over the last four years, we haven't been able to match that with increasing capacity. So, essentially, we are on a plateau.

DS: And this point - fifteen years from now - is when you foresee production actually starting to fall?

SAH: In my own modelling of the resources, I cannot see additional reserves coming online fast enough to sustain the plateau - but as far as I can see with any clarity. Now, there may be other solutions. The Department of Energy in the U.S., the IEA, both believe that there will be some additional fuels, perhaps unconventional fuels, extra-heavy crudes, Gas to Liquids - perhaps - but as far as the conventional oil resources, I can't see that they would be sustainable beyond that time frame.

DS: And, in your own mind, do you think that those non-conventional - slightly non-conventional - sources of fuel like the Gas to Liquids and the oil sands, and so forth - can you see them making up the decline of conventional crude?

SAH: By 2030, with my model, they would have to be producing something like 24 million barrels a day to meet the demand, and also increase capacity to the levels as are anticipated by some of these international agencies. That's a very substantial volume, and it requires a very early start in investments, which we still don't see.

DS: So, do you think it's credible that they could provide 24 million barrels a day by 2030?

SAH: It's a stretch. You need to see a lot more activity on a international level to believe in that.

DS: You've talked about the maturity of the giant fields - which, of course, are the mainstay of global production. There's - in the outside world - obviously an intense debate about Ghawar, and Saudi production, more generally - an intense debate as to whether Ghawar has already gone into decline, and whether or not the Saudi cutbacks over the last couple of years - at least - were voluntary or involuntary. It's fair to say, I think, that everybody in the outside world is working pretty much in the dark about this - can you shed any light on it?

SAH: Well, Saudi Arabia has a large number of very giant fields, and its policy has always been to be very prudent in how they're managed, and to sustain their capacity over the long haul. I don't have a concern about Saudi Arabia's production. I think the confusion is that many of these international organizations have assumed that Saudi Arabia will double - or more - its capacity; in other words, produce 20/20 plus million barrels a day. That's the unrealistic aspect of these forecasts. But, as far as Saudi Arabia sustaining its capacity, it's doing very well, and can sustain its capacity. The problem is nobody else seems to be doing anything, whether in the Gulf region or internationally - whether it's Russia or Mexico or any of the others - so it's a bit of an unfair burden to assume that Saudi Arabia will pull everybody's chestnuts out of the fire.

DS: A Saudi official said, recently, I think that Saudi capacity would rise to some 12 million barrels a day by 2012. Is that achievable, do you think?

SAH: Certainly, the investments are being made. The total capital program that has been announced since, say, 2003 through 2011, is over $80 billion. Something like $55 billion is into the oil capacity. So, certainly, the investments are being made. How the reservoirs will respond - some of these are new fields - will be determined as they start producing. But the investments are definitely being made. It's an achievable number.

DS: And what about beyond that? Because Saudi officials have also said, I think, that Saudi would have no trouble in producing some 15 million barrels a day for 50 years, or for decades. Is that credible, do you think?

SAH: I haven't heard that myself. What I have read and seen is that the capital program is intended to reach 12.5, and what I've read is that the government officials in Saudi Arabia and in the oil companies - Saudi Aramco - have said that they intend to wait and see - once they've reached that level - what to do next. So those numbers, I believe, are achievable. Beyond that, I haven't heard of an official strategy to go higher.

DS: As you say, the international agencies and the energy departments of the big consuming nations do assume in their forecasts that Saudi Arabia and the Middle East "Big Five" are going to continue to make good all the demand growth in the future, and you've cast doubt on that today. How safe are those assumptions, then? It's a rhetorical question, I guess, but how safe do you think those assumptions are?

SAH: Some of those assumptions, for example, assume that OPEC will go from about 30 million barrels a day - which is what it produces now - to well over 45 or 47 million barrels a day. Other companies - oil companies - have even shown a high of 60 million barrels a day. That's what I'm calling unrealistic. Staying at 30 million barrels a day is not a small feat - that's a lot of oil - that's half of the exported (sold) oil in the markets today, and to stay there requires a sustained investment program which is quite massive, and a lot of resources. I think that's realistic - staying at 30. But going to some of these numbers - 47, 48, 60 million barrels a day - I think that's quite unrealistic.

DS: So what risks do you think Western consuming nations run by sticking to those assumptions?

SAH: I think, perhaps, they're just not looking realistically at prices because the equation has three factors: supply, demand, and price. If you assume that you have a endless supply to meet demand, then price would stay reasonably low. If you assume supply is constrained - which is what I'm saying - and has a ceiling, then the only way to balance the equation is to assume that prices will increase significantly, and I think that's a more prudent and realistic outlook.

DS: Sadad al-Huseini, thank you very much for talking to me.