Saudi Arabia, the world's biggest oil exporter, is burning close to 750,000 barrels per day (bpd) of its finest quality crude oil to make electricity for its own domestic market.
Gulf exporters will need to make a clean break
Saudi Arabia, the world's biggest oil exporter, is burning close to 750,000 barrels per day (bpd) of its finest quality crude oil to make electricity for its own domestic market. The image is arresting. Quite simply, Saudi Arabia is producing more of its most valuable export commodity than it can sell. The kingdom's crude output has been rising of late. It is still pumping less crude than a year ago, but not due to dwindling oil reserves or difficulties in maintaining output from ageing fields, as "peak oil" theorists had earlier predicted. In fact, the national petroleum company, Saudi Aramco, has just completed the biggest oil development programme in its history, which has had the effect of more than doubling Saudi spare production capacity to about 4 million bpd.
In view of slumping world oil demand, that is a problem for the kingdom. So for the moment, OPEC production targets and the Saudi king's firm views about leaving oil in the ground for future generations are taking a back seat to immediate economic concerns. This summer, Riyadh cancelled seasonal fuel-oil imports in favour of burning more crude to run air conditioners. It was a simple business decision that speaks volumes. The international market price of the best quality Saudi crude had fallen below the price of refinery dregs. So why pay to maintain bigger reserves of a commodity for which the world had lost its appetite?
By June, according to the International Energy Agency (IEA), domestic Saudi crude-burning had jumped to 715,000 bpd from 150,000 bpd in the first quarter. With the Arabian summer progressing to its sweltering climax, it has probably increased further. By now, after raising production by 70,000 bpd last month, the kingdom may be burning more crude in its power plants than its western neighbour, Egypt, pumps in total.
Saudi Arabia's situation starkly illustrates the dilemma facing all Gulf exporters pondering the outlook for world oil demand as a devastating global recession draws to a close. Should they prepare for a return to "business as usual" by investing in new production capacity to accommodate resurgent demand, or should they brace for a new world order in which oil consumption recovers slowly, or not at all, as consumers make a permanent switch to more fuel-efficient vehicles and cleaner power sources?
There is a huge financial penalty for making the wrong choice. Oil development is not cheap. The cost of maintaining idle wells and empty pipelines is also high. But allowing shrinking spare capacity to trigger another oil price shock could unleash a consumer backlash from which the petroleum industry might never recover. The IEA, which advises 28 industrialised nations on energy, is already hinting that a new price spike may not be far off.
Lately, these matters have been troubling OPEC economists, who have put a price of US$250 billion (Dh918.25bn) on the "uncertainty gap" for the upstream oil investment requirements of OPEC members in the next decade. They estimate that by 2020, demand for OPEC crude could either reach 37 million bpd or stay close to the current level of about 29 million bpd. There is a "real prospect of wasting resources on unneeded capacity", said Mohamed Hamel, a senior OPEC adviser.
OPEC had a sufficient resource base, he said. But key supply issues now included "uncertainties surrounding the extent to which increases in the demand for crude will actually materialise". Even before the recession took hold, Abu Dhabi was seeking advice from international oil companies on how to extend the life of petroleum as a transportation fuel. Last September, Malcolm Brinded, the Royal Dutch Shell executive director of exploration and production, gave a presentation on ways to counter competition from electric cars and hostility from environmentalists.
Mr Brinded said Abu Dhabi should recognise the benefits of blending biofuels with petrol to reduce carbon emissions, and should promote carbon capture and storage (CCS) to "leave more carbon space for oil in transport". Otherwise, he said, "the world may be forced to conclude that climate pressures are so strong that there is no option but to decarbonise transport, whatever the cost and convenience advantages of oil".
Abu Dhabi has been doing both. The emirate may never be an agricultural powerhouse, but Masdar, its renewable energy flagship, has been exploring the biofuel potential of crops grown to reverse desertification. Algal biofuel developments are a stronger possibility, and ExxonMobil, which holds an Abu Dhabi offshore oil concession, has recently run advertising here featuring its new algal research initiative.
CCS projects are a more natural fit because they draw on the oil and gas industry's core competencies. Masdar has teamed up with BP, Rio Tinto and Abu Dhabi National Oil Company to develop an ambitious CCS network for Abu Dhabi. This is not mere "greenwash". The long-term future of petroleum-based transportation fuels may lie in supplementing cleaner power sources that have drawbacks related to reliability or convenience. Examples are hybrid cars that run on electricity and petrol, and ships designed to run on solar power and diesel.
To win their customers' trust in future, Gulf oil exporters will need to be viewed as partners in the transition to a lower carbon economy, and should embrace the resulting business opportunities. They will not benefit commercially from trying to hold back the tide. @Email:email@example.com