Gulf oil -how important is it anyway ?
By Daniel Yergin
Financial Times; Mar 22, 2003
[ I don’t have a link to this – it was in an email from a friend – I see a sentence or two that have been cut off.
Personally I would like to see some sort of oil dividend being paid directly to Iraqi Nationals something similar to that paid to Alaskans.]
> In the midst of the second world war, Franklin D. Roosevelt dispatched
America's most eminent geologist, Everette Lee DeGolyer, to the Middle East.
DeGolyer spoke with unique authority. As a young man at the beginning of the
20th century, he had discovered the huge well that inaugurated the "golden age"
of Mexican oil; then, in the 1920s, he had been such a relentless promoter of
the new seismic exploration technology that he was said to be "crazy with
dynamite".
Roosevelt wanted DeGolyer to answer a fundamental question "how important are
Persian Gulf oil reserves to the future of the world?" That same question is
with us once again, starkly posed by war with Iraq. It is all the more
important because of the widespread belief that the Iraq crisis is not about
weapons of mass destruction but, rather, in some murky way, about oil. Yet such
assertions are often made in isolation, without an understanding of the overall
world oil scene.
Of course, while the question may have been the same, the starting point for
DeGolyer's mission in 1943 was very different from today. It was only 16 years
earlier, in 1927, that oil had been discovered in Iraq. Found near Kirkuk, in
the Kurdish part of Iraq, it still counts as the first commercial find of oil
in any Arab country, and it opened up the Arab world to petroleum development.
It would take another decade, until 1938, for oil to be found in neighbouring
Saudi Arabia and Kuwait.
Then came the second world war. Exploration efforts were suspended and wells
were capped in fear of a Nazi advance. As it turned out, Rommel and the Afrika
Korps were stopped at the Battle of El Alamein in late 1942. But the war left
no doubt of the importance of oil. The U-boats had come very close to cutting
the tanker pipeline from the US to Europe. Hitler's forces almost made it to
Baku, on the Caspian Sea, the main source of Soviet oil. Japan, with its oil
supplies dwindling, turned to kamikaze attacks, which, among other things did
not require fuel for a return trip. Rommel himself had written what would prove
to be the epitaph for the German oil position during the war: "Shortage of
petrol! It's enough to make one weep."
For his part, Roosevelt knew that the US was sitting on a great arsenal in the
form of the nation's own oil supplies. The US oil fields, particularly along
the Gulf Coast and in the south west, were mobilised for the war effort, and
they supplied six out of the seven billion barrels the Allies were to use in
the war. In the course of his 1943 trip DeGolyer visited Saudi Arabia, Kuwait,
Iraq and Iran to analyse their respective potentials. The conclusion he
delivered when he returned to Washington was startling: "The centre of gravity
of world oil production is shifting from the Gulf-Caribbean area to the Middle
East and the Persian Gulf area, is likely to continue to shift until it is
firmly established in that area." But even DeGolyer could not have imagined by
how much. Today, the Persian Gulf supplies 20m barrels a day more than three
times what the US produces.
That the Gulfs resources, among the cheapest to produce in the world, are of
central importance to the health of the world economy can hardly be doubted.
Altogether, the region provides almost a quarter of the world's oil, most of it
flowing to Europe and increasingly, Asia.
Yet, at the same time, these resources exist in a much larger and more diverse
network of global oil production. Losing sight of that is to lose sight of the
context. Some of today's highly charged rhetoric would have once believe that
Iraq is uniquely important to world oil supply. That simply is not true. It
amounts to just 3 per cent of total world supply, and technology is making
available new supplies in ways that most people do not realise. Moreover, in
terms of consum
In contrast to today's crisis, the 1990-91 Gull crisis was more directly about
oil and Iraq's drive to dominate the region. In 1990 Iran invaded Kuwait and
sought to annihilate it as an independent nation. Saddam's objective was, as it
had been when he invaded Iran a decade earlier, to control, directly or
indirectly, a large part of Persian Gulf supplies and bend them to his
political and military purposes.
By contrast, the central focus this time is on weapons of mass destruction and
Iraq's failure to comply with more than half a dozen UN resolutions going back
to 1991. There is an oil dimension but it is not about "oil protectorates", It
is about geopolitics and the security and the stability of the Gulfs supplies.
Certainly, a Saddam Hussein regime, equipped with these weapons, would be in a
position to intimidate the region and to manipulate supply and threaten the
security of the world economy.
Such a threat becomes all the more critical when one realises that world demand
continues to grow. A decade from now the world will likely be consuming 20 per
cent more oil than today. What this means is that today's 77m barrels a day
will be over 90m barrels a day by 2013.
The main growth will come from the developing world and, in particular, China
and India. As China continues on its remarkable course of economic growth, so
its oil consumption continues to increase. Today it uses twice as much oil as
it did a decade ago. It's the third largest consumer after Japan, and soon will
overtake Japan to become the second largest in the world. For decades, China,
inspired by "the heroic spirit" of the workers in its great oil field at
Daqing, in Manchuria, was committed to self-sufficiency. That changed in 1993
in what turns out, in oil terms, to have been a very significant year. For that
was the year that China no matter how heroic the spirit - simply could not do
it on its own any more not with an economy that was growing 8 per cent a year.
It became a net importer. And its imports have continued to grow.
Walk into the headquarters in Beijing of any of (China's three national oil
companies and you will see how China is responding. In the lobbies of
PetroChina, Sinopec, and CNOOC three companies created to reform, make more
efficient and partially privatise China's oil industry there are flashing signs
that tell you each company's share price on the world stock market at that
moment. This is not exactly what you would expect to see in what used to be
known as a centrally planned economy.
These scenes vividly capture the shift from state control to markets. Breaking
up the old state monopoly and subjecting the newly born oil companies to the
discipline of capital markets is one of the most important ways that China has
sought to cope with the country's growing oil demand. But where will the new
supplies come from? That brings us back to the Gulf. After all, the region has
been credited with holding two-thirds of the world's total oil reserves. But
reserves are not necessarily a guide to production. Iran, hobbled by
technological and organisational problems and by political discord, has seen
its production decline by 40 per cent over the past 25 years. Iraq's capacity
has declined by 20 per cent over the past 10 years, and it is now estimated
that it will take two to three years, and up to $5bn (£3.2bn), to get back to
where Iraq was a decade ago and several years more to begin to significantly
ramp up production beyond that.
This contrasts starkly with Saudi Arabia, which has kept itself at the
forefront of technology. It normally produces about 8m barrels per day. It also
maintains at least an additional 2.5m barrels per day of "spare" capacity that
it can bring into production as a stabiliser, as it has been doing, first in
the face of the disruption of Venezuelan supply and now to meet the shut-down
of lraqi production.
But what is striking is the diversification of supply sources on a global
basis. In 1975, the Persian Gulf produced 40 per cent of world output of 52m
barrels per day. Today, world consumption is 77m barrels per day. Yet the
Persian Gulf's output has grown only slightly, with the result that its output
has declined to 30 per cent of total world output.
Over the years, many new supply sources have come in, beginning with the North
Sea and the Alaskan North Slope after the 1973 oil crisis. It's never easy.
Every year, oil companies spend tens of billions of dollars to find and develop
new reserves to replace the barrels they have produced in previous years. Much
of this work is governed by the "law of long lead times"; it can take up to a
decade to bring a major new oil field into operation. For the companies, it
always seems an uphill struggle.
Right now, the most dramatic expansion is unfolding in the Russian oil
industry, in what my colleague Thane Gustafson calls "the miracle in the
Russian oil fields". Over the past three years, Russian output has increased 25
per cent. Today Russia is the world's second largest exporter, exceeded only by
Saudi Arabia. The 1990s collapse in output that resulted from the implosion of
the Soviet Union has been reversed. There are many reasons: a reformed
industry, largely privatised, working towards world standards, introducing new
technology. But the heart of the matter was summed up a few weeks ago by
Mikhail Khodorkovsky, CEO of the Russian oil major, Yukos. "We now apply an
economic test to every stage of what we do."
A signal of the change was the announcement last month by BP and one of the
other Russian oil majors, TNK, that they are establishing a multi billion
dollar joint venture to accelerate development of Russian production. The thing
to look for over the next year or two is the firming up of plans by Moscow for
new pipelines that will carry Russian oil to China or elsewhere in Asia and,
even more dramatically, to Murmansk, the icefree port on the Arctic Ocean.
During the second world war, Murmansk is where the American freighters
delivered the Lend-Lease goods that supported the Soviet battle against Hitler.
A half-dozen years from now, the tankers may be sailing in the other direction.
A similar resurgence is taking place to the south, in the Caspian Sea and
Central Asia. Output is increasing in Kazakhstan and Azerbaijan. As with
Russia, the key is transportation. Railway tank cars will not suffice for the
future volumes, and new pipelines are critical. Recently, Heidar Aliyev, the
president of Azerbaljan, stood up in the ballroom of a hotel in Washington D.C.
to tell the story of how it has taken eight years to get plans to gel for a
pipeline to transport Azeri and possibly Kazakh oil to the world markets. But
now one leg is built and the Japanese-made pipe is being welded for the next
segments of a huge pipeline that will move almost a million barrels a day from
Baku through Georgia, down through Turkey, to the Mediterranean port of Ceyhan,
which is accessible to super tankers.
This new Baku-Ceyhan pipeline will be one of the linchpins of world supply and
energy security in the years ahead.
Another growing source of oil will be West Africa, which by 2006 will overtake
the North Sea in terms of output. But the real competition for market share
looks to be between Russia and the Caspian on one side, and the Middle East on
the other. The race will be affected by everything from governments' investment
policies to local activism. At this point, it looks as though Russia and the
Caspian will be about even with the Middle East, each adding 4m-5m barrels a
day People sometimes seem to think of "reserves" as a fixed amount of oil, laid
down by nature. In fact, reserves are a more elastic concept, determined not
only by geology, but also by the interaction of economics, politics and
technology. After the first world war, fear of an "oil famine" gripped the
world. But then fresh areas for exploration opened up, including the new nation
of Iraq, which was cobbled together at the Versailles Conferences out of the
three eastern provinces of the old Ottoman Turkish Empire. At the same time,
the industry applied new technology. Building upon techniques used during the
first world war for detecting enemy gun emplacements, it developed the seismic
exploration championed by DeGolyer. This quickly became a critical tool for new
oil exploration.
Today, a major technological revolution is unfolding, known as "Doff" - the
"digital oil field of the future". This brings together a panoply of
information and control technologies, remote sensing mechanisms, "intelligent
drilling", and highly accurate measurement tools to make exploration and
production far more exact and targeted. The consequence will be to
substantially lower costs. As a result, physical supplies that were previously
too expensive or too difficult to produce will now become economically
feasible.
The impact of Doff will be enormous. Over five years, Doff could expand world
oil reserves by 125bn barrels - more than the entire currently proved reserves
of Iraq. That is still in the future. In the meantime, although almost
completely overlooked, something very important has just happened to supply.
This past year saw the first major increase in world oil reserves since the mid
1980s when all the major Persian Gulf countries, with a stroke of the pen,
announced that they were increasing their proven reserves by more than 50 per
cent.
The new increase is some 175bn barrels. This is a lot of oil 50 per cent more
than Iraq's proven reserves and two-thirds that of Saudi Arabia's. These new
reserves, however, are not in the Middle East but in Canada.
Advances in the technology for handling the oil sand deposits in the province
of Alberta have, by cutting production costs almost in half, moved this
enormous volume of potential supply into the economically recoverable "proven
reserves column. For the first time since Everette DeGolyer's report to
President Roosevelt, there has been a significant decline in the Persian Gulf's
share of total world oil reserves from 66 to 57 per cent.
The point here is that world oil supplies are not some finite constant sum
Rather, the picture is dynamic and changing. The reserve Picture will continue
to shift. It's altogether possible that if and when a "new" Iraq sorts out its
arrangements and reintegrates into the world economy, new exploration will
substantially increase its reserves, once again pushing up the Persian Gulf's
share of the total.
What Everette DeGolyer foresaw 60 years ago is true - the resources of the
Persian Gulf are a tremendous strategic asset for the world economy, one of the
foundations for the standard of living in the developed world and a critical
fuel for economic growth in the developing world. But what is also true is that
if one is looking for oil, there are lots of other places to go. How much from
where? That will be determined not just by nature's endowment, but also by
technology, economics and, more so than most recognise, by the political
choices that countries make about how they want to develop their resources and
what they want to earn from the world economy.
Daniel Yergin is chairman of Cambridge Energy Research Associates. His
television series, Commanding Heights: the Battle for the World Economy, based
on the book of the same name, is now running on BBC Four at 8:30pm on
Thursdays, and will be on PBS in May. |
