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Why It Matters How Much Oil Saudi Arabia Has

Category: Energy & Environment,Finance

263.2 billion barrels of oil. This does not include Saudi Arabia's share of oil reserves in the neutral zone, an area shared between Saudi Arabia and Kuwait. With the neutral zone, Saudi Arabia's reserves rise to 268.5 billion barrels of oil.

The sun sets beyond crude oil storage tanks at the Juaymah tank farm at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Ras Tanura, Saudi Arabia. (Simon Dawson/Bloomberg)© 2018 Bloomberg Finance LP

The independent audit was conducted by the U.S. firm DeGolyer and MacNaughton. This firm has a long history of working with Saudi Arabia. In fact, it was first contracted by the kingdom in the early 1950s to determine how Saudi Arabia's oil should be priced.

Saudi energy minister Khalid al Falih also said that the audit determined that Aramco, Saudi Arabia's national oil company, has the lowest cost of production of any oil company, at about $4 per barrel. This makes Saudi oil the most profitable in the world.

Beyond plans for the Aramco IPO, which are currently on hold pending Aramco's acquisition of Saudi petrochemicals giant SABIC, the result of the audit may have finally put to rest the controversy which has plagued Saudi Arabia since the 2005 publication of the book, Twilight in the Desert by Matthew R. Simmons. Simmons, an investment banker, culled information from technical papers presented to the Society of Petroleum Engineers about Aramco and Saudi Arabia's oil fields. He concluded, based almost entirely on this data, that Saudi Arabia's fields were ready to collapse and asserted that Saudi Arabia actually had much less oil than they led people to believe.

Saudi Arabia refuted Simmons' claim but didn't allow third parties to review data on its reserves, which it considers a matter of national security. The feared collapse of Saudi Arabia's oil fields not materialize as Simmons predicted, but many analysts remained skeptical. This skepticism has been fueled by Aramco's insistence that the reserve numbers barely change from year to year despite the company's production of almost four billion barrels a year.

Saudi Arabia says that the audit reveals an increase in Saudi oil reserves of 2.2 billion barrels of oil from the 2018 number. However, the increase is actually more than that, because Saudi Arabia has been producing oil all this time, meaning it is extracting oil from the ground. According to monthly production numbers from S&P Global Platts, Saudi Arabia produced 3.8 billion barrels of oil and condensate in 2018. When you add that to the 2.2 billion barrels "added" to the reserves, Saudi Arabia actually gained a total of 6 billion barrels of reserves on the books.

Actually, when viewed in relation to previous years reserves numbers, the increase announced today does not look altogether surprising or impressive . If you consider that Saudi Arabia's production numbers must be deducted from the previous year's reserve numbers, then Aramco can be said to have found between 3.2 and 4.5 billion barrels of oil and condensate reserves each year between 2014 and 2018. In this case "found" means reserves that are in addition to the previous year's numbers, where the increase comes either from discovery of new oil, new efficiencies or new recoverability technology.

The most interesting part of all of this is that when the world thinks Saudi Arabia has less oil, that oil is actually more valuable. When Simmons' claims were en vogue, the price of oil skyrocketed. Saudi Arabia was arguing it has plenty of oil, but the belief that it did not, pushed up oil prices and made Saudi Arabia even richer. Now, Saudi Arabia is demonstrating that is has more oil than people expected, but that only serves to make its oil a little less valuable for now.

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Today, Saudi Arabia announced the official results of a third party audit of its oil and gas reserves. The number is 263.2 billion barrels of oil. This does not include Saudi Arabia's share of oil reserves in the neutral zone, an area shared between Saudi Arabia and Kuwait. With the neutral zone, Saudi Arabia's reserves rise to 268.5 billion barrels of oil.

The sun sets beyond crude oil storage tanks at the Juaymah tank farm at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Ras Tanura, Saudi Arabia. (Simon Dawson/Bloomberg)© 2018 Bloomberg Finance LP

The independent audit was conducted by the U.S. firm DeGolyer and MacNaughton. This firm has a long history of working with Saudi Arabia. In fact, it was first contracted by the kingdom in the early 1950s to determine how Saudi Arabia's oil should be priced.

Saudi energy minister Khalid al Falih also said that the audit determined that Aramco, Saudi Arabia's national oil company, has the lowest cost of production of any oil company, at about $4 per barrel. This makes Saudi oil the most profitable in the world.

Beyond plans for the Aramco IPO, which are currently on hold pending Aramco's acquisition of Saudi petrochemicals giant SABIC, the result of the audit may have finally put to rest the controversy which has plagued Saudi Arabia since the 2005 publication of the book, Twilight in the Desert by Matthew R. Simmons. Simmons, an investment banker, culled information from technical papers presented to the Society of Petroleum Engineers about Aramco and Saudi Arabia's oil fields. He concluded, based almost entirely on this data, that Saudi Arabia's fields were ready to collapse and asserted that Saudi Arabia actually had much less oil than they led people to believe.

Saudi Arabia refuted Simmons' claim but didn't allow third parties to review data on its reserves, which it considers a matter of national security. The feared collapse of Saudi Arabia's oil fields not materialize as Simmons predicted, but many analysts remained skeptical. This skepticism has been fueled by Aramco's insistence that the reserve numbers barely change from year to year despite the company's production of almost four billion barrels a year.

Saudi Arabia says that the audit reveals an increase in Saudi oil reserves of 2.2 billion barrels of oil from the 2018 number. However, the increase is actually more than that, because Saudi Arabia has been producing oil all this time, meaning it is extracting oil from the ground. According to monthly production numbers from S&P Global Platts, Saudi Arabia produced 3.8 billion barrels of oil and condensate in 2018. When you add that to the 2.2 billion barrels "added" to the reserves, Saudi Arabia actually gained a total of 6 billion barrels of reserves on the books.

Actually, when viewed in relation to previous years reserves numbers, the increase announced today does not look altogether surprising or impressive . If you consider that Saudi Arabia's production numbers must be deducted from the previous year's reserve numbers, then Aramco can be said to have found between 3.2 and 4.5 billion barrels of oil and condensate reserves each year between 2014 and 2018. In this case "found" means reserves that are in addition to the previous year's numbers, where the increase comes either from discovery of new oil, new efficiencies or new recoverability technology.

The most interesting part of all of this is that when the world thinks Saudi Arabia has less oil, that oil is actually more valuable. When Simmons' claims were en vogue, the price of oil skyrocketed. Saudi Arabia was arguing it has plenty of oil, but the belief that it did not, pushed up oil prices and made Saudi Arabia even richer. Now, Saudi Arabia is demonstrating that is has more oil than people expected, but that only serves to make its oil a little less valuable for now.


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