Big oil's biggest monster

BUSINESS
The oil industry

Jan 6th 2005 DHAHRAN, QATIF AND RIYADH
From The Economist print edition

Saudi Arabia's Aramco, the world's biggest and most powerful oil firm, has revealed some of its secrets

“ARAMCO is a peculiar company,” says a smiling Abdullah Jumah, the chief executive of Saudi Arabia's state-run oil firm, as he greets a visitor at its stylish modern offices in the country's oil capital, Dhahran. Inside the heavily guarded compound is a tidy community of houses, schools and baseball fields that would do suburban America proud. Foreigners and locals mix freely, and the canteens serve (non-alcoholic) Budweiser beer. Women even drive cars. Suddenly this most secretive of firms is opening up in other ways, too. Having been widely blamed for last year's soaring oil prices, the embattled giant hopes to prove it can deliver on its most important promises—and survive the terrorists who seem bent on destroying it.

Aramco is not publicly listed and avoids debt, so has no need to divulge much to the financial markets. The best outside guess is that it produces 10m barrels per day (bpd) of oil—one-eighth of the world's consumption—with revenues last year of $93 billion. Not only does Aramco sit atop the world's largest reserves by far, it also enjoys the world's lowest discovery and development costs—about 50 cents per barrel, one-tenth or less of what private-sector rivals pay in Russia, the North Sea or the Gulf of Mexico. With at least 260 billion barrels of proved oil reserves left, Aramco is 20 times the size of Exxon Mobil, the largest private-sector oil firm.

Aramco may produce the kingdom's oil, but it is the Saudi government that sets output levels and tries to fix prices through the Organisation of Petroleum Exporting Countries. As oil prices soared to around $55 a barrel late last year, Aramco was lambasted by foreigners and still draws their ire, even though prices have since slipped by around one-quarter thanks mostly to slowing demand, especially from China. Why should Mr Jumah care what outsiders think, given that his only shareholder is pleased? His face turns serious: “With a quarter of global reserves, Aramco has a huge responsibility to the world.”

The Greenspan of oil

Saudi Arabia, he points out, has often come to the rescue with extra oil whenever there has been a big disruption. For example, its geologists brag that they cranked up output dramatically after the invasion of Iraq, “within 48 hours”. Aramco's big buffer of spare capacity has caused it to be known as the “central bank of oil”. That is why the oil markets were so rattled last year when Aramco appeared troubled in three areas that could interfere with its role as the swing producer. Aramco has now decided to address these concerns and change its secretive culture.

The first worry in the markets is that Aramco may no longer be maintaining its spare capacity. PFC Energy, a consultancy, reckons that global spare capacity fell from a peak of 8.7m bpd in 1985, much of it in Saudi hands, to a wafer-thin 1m bpd or so at the end of the third quarter of last year. The obvious explanation was runaway demand in China and troubles in Iraq, Venezuela and Indonesia. But cynics suspect that the Saudi government has abandoned its policy of keeping lots of spare capacity because of the demonisation of their country in America since September 11th 2001. The Saudis also dislike the recent sharp decline of the dollar, the currency in which oil is priced, and are thus delighted to see oil prices soar.

Ali Naimi, Saudi Arabia's oil minister, rejects such talk, insisting that his country still wants “a fair price” of $32-34 a barrel. (He adds, though, that this is a “moving target”.) He vows that his country will maintain spare capacity of 1.5m-2m bpd. To that end, he explains, Aramco has launched an expansion programme to keep pace with global demand. Outside contractors report a surge in drilling activity, with rig counts likely to rise from 55 to 77. On December 26th, Aramco opened a huge new facility in Qatif capable of processing 800,000 bpd of oil.

Forecasters assume that Aramco will have to double its output in the coming decades to meet expected growth in global demand. Yet some vocal outsiders doubt that it can do so. Led by Matt Simmons, a Texan investment banker, they argue that Saudi oil fields may already be facing technical difficulties. Some 90% of Saudi oil comes from just seven fields whose average age is 45-50 years. Just one, Ghawar, produces a staggering 5m bpd, at least. He claims that academic studies, as well as troubles at fields in neighbouring countries, suggest that Aramco's giant fields may soon go into decline.

As a result of such criticisms, Aramco's technical experts now openly discuss field data previously held secret. Its geologists explain how exactly they intend to maintain output of 15m bpd or higher for 50 years—even without the new oil discoveries that they insist could eventually add another 200 billion barrels of oil reserves. Far from suffering from a greater need for water injection to maintain reservoir pressure, Ghawar appears to be stable, thanks to Aramco's innovative use of technology.

Nansen Saleri, Aramco's head of reservoir management, says that “we've released more data in 2004 than we did in the previous 50 years. On a field-by-field basis, we now release more than the investor-owned companies.” The exception, of course, is Royal Dutch/Shell, which is now having all its field data audited by outsiders in the wake of last year's reserves overbooking scandal. Aramco is extremely unlikely to follow Shell's lead on outside auditors. Mr Jumah deserves credit for opening up the firm, but when asked about outside audits a glint of steel appears in his eyes: “Why should we? We have never failed to deliver a single barrel of oil promised to anyone, anywhere.”

The third worry about Aramco is its potential vulnerability to terrorism. Several unsuccessful attacks last year added a “fear premium” to the oil price, estimated at $7-15 a barrel. Such fears seemed to be waning until a new tape from Osama bin Laden surfaced in December threatening that al-Qaeda will now specifically target Saudi Arabia's oil infrastructure.

According to a new report by Nawaf Obaid, a security expert, and Anthony Cordesman, an American defence guru, Saudi Arabia has improved its security dramatically in the past two years. It spent an estimated $5.5 billion on security in 2003 and over $8 billion last year. “How many oil companies have 5,000 armed men on their payroll?” asks Mr Jumah. That does not even count the official military and counter-intelligence forces working to protect Aramco.

Yet all the hardware and military in the world cannot provide 100% certainty that the nightmare will not come to pass: a disgruntled Shia employee sneaking a “dirty bomb” into Ras Tanura, the world's largest oil-export terminal, or Abqaiq, a vital oil-processing centre.

Even as Mr Obaid recently argued over supper at a panoramic restaurant in the Faisaliah skyscraper in Riyadh that the Saudis had broken the back of the al-Qaeda cell in Saudi Arabia, two car bombs went off within line of sight of the dinner table. Oil prices jumped on cue, then fell again once markets realised the attackers had failed. But if those suicide bombers had struck where Osama bin Laden now says he wants them to, oil prices could surge to $100 a barrel—or even more.

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