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Saudi Aramco - A good investment or not?

Feb 14, 2005
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On the subject of reserves, the most obvious issue is that official published reserves are implausible.

I state that as fact for the very simple reason that the never go down. Now whilst it's certainly possible that over x years they discover more than they've extracted in that time, it's incredibly unlikely that literally every single year sees discovery match or exceed production. Exactly matching it, as happens frequently in all the OPEC members, really stretches the bounds of credibility.

Or in simpler terms, it's a bit like someone telling you they earn exactly the average wage and each year it goes up by exactly the average increase. They also have exactly the average height, weight and use the average amount of water down to the litre. At some point all that precision and being right bang on the expected results becomes suspicious to say the least and especially so when you've done it for decades.

So we don't know for sure and can only make guesses based on observed actions.

If they can pump 12.5 million barrels per day then realistically they've got at least 75 billion barrels of recoverable oil in the ground. That's just applying the minimum reserves to production ratio that most countries with comparably graded oil can achieve and assuming the Saudi's don't have any magic there.

Note in that context that oil seeps through porous rock, it's not some great big lake underground with a straw stuck into it, it's more like draining a sponge. Slowly and steady - trying to go too fast causes all sorts of technical problems and tends to end rather badly.

So their reserves are somewhere upwards of 75 billion barrels that seems almost certain.

Another thing we can observe is that they don't aim to maximise volume since they are openly aiming to hold prices up. As such, in a hypothetical scenario of unlimited resources, the cost of oil for use within Saudi Arabia is the cost of producing it, not the market price, since they'll just set exports at the desired level and then adjust production according to exports + local consumption.

That's the same as a lot of things. Sand for example might cost a fair bit on a building site in Sydney but it's almost free if you're in the middle of nowhere with an effectively unlimited resource and stuff all cost of transport. Same in any situation where the resource greatly exceeds what you're willing or able to sell to the market.

Which brings up the point that the Saudi's are shifting heavily toward gas for their own energy needs. What this tells me is that either:

*Their oil production costs at the margin now exceed the cost of producing gas and building gas infrastructure. If so then that is an indication that whilst they may have plenty of oil, they don't have an abundance of oil that's very cheap to produce. Cost going up is the first concrete sign of an impending peak in any oil producing region.

*They are in fact concerned about reserves versus future export potential and are thus assigning market value to oil produced for their own consumption.

*Environmental reasons etc.

Assuming they haven't gone "green", and they're not known for being of that view generally, then it's going to be one of the first two reasons. They've concluded that either total reserves are somewhat limited relative to future consumption or costs for oil production are increasing as lesser quality / harder to develop fields are needed to keep production up.

Now another point is that Aramco have themselves said that Ghawar, their and the world's largest oil field, has a present capacity of 3.8 million barrels per day. Sounds impressive until you realise that it used to be over 5 million - there's the smoking gun if anyone's looking for it.

Their and the world's largest field has peaked, at least their recently released data says it has, which leaves the debate as being about the rest in terms of reserves, flow rate and cost.

That doesn't tell us what their reserves are but it's a bit like not knowing someone's age but you do know that their hair is starting to go grey and they've got a few wrinkles appearing. It doesn't tell you that they're about to drop dead but it does tell you they're not young anymore. Much the same with Saudi oil really. :2twocents

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