Saturday, July 17, 2004

October Surprise?

There is a huge uncertainty hanging over this year's election--the potential for a major interruption of the oil supply. Excess production capacity has fallen to somewhere between 600,000 and 1.5 million barrels a day. This is a razor thin margin should any significant disruption occur. Furthermore there is growing speculation that production in Saudi Arabia has peaked;

Hard data has surfaced over the last two years, all of which points to an imminent acceleration in global depletion dynamics, notably in Saudi Arabia. There, Ghawar, the largest field in the world and all of Saudi Arabia's other large fields are old and tired. In recent years, the Saudis have resorted to both water injection and so-called "bottle-brush" drilling to maintain production -- techniques that tend to accelerate decline and damage reservoirs.

For a country with an allegedly huge marginal surplus of oil production, turning to such extraction techniques is likely to prove an unwise move. With bottle-brush drilling, a shaft is drilled horizontally over long distances with a number of brush-like openings. Water is then forced under pressure into the reservoir, forcing the oil upwards toward the well heads. Extraction is thereby increased. However, when the water table hits the horizontal shaft, often without warning, the whole field may go virtually dead and production will immediately drop off to virtually nothing.

Examples of what has happened in other oil producing countries when "bottle-brush" drilling was employed abound. Syria's oil production is now in terminal decline. Yemen is following, according to Ali Samsam Bakhtiari, Vice President of the National Iranian oil Company, who has long suggested that Saudi oil production might have peaked in the spring of 2003. Adds analyst William Kennedy, "For the record, Ghawar's ultimate recoverable reserves in 1975 were estimated at 60 billion barrels -- by Exxon, Mobil, Texaco and Chevron. It had produced 55 billion barrels up to the end of 2003 and is still producing at 1.8 billion per annum. That shows you how close it might be to the end. When Ghawar dies, the world is officially in decline."

In addition, Russia has frozen the assets of Yukos Oil and declared that it owes billions in back taxes. Unless some compromise is reached by the end of July, Yukos may have to shut down its 1.7 million barrels a day of production. Putin is playing a dangerous game of chicken with the word's economy.

Other potential trouble spots include Venezuela where an August recall vote of Chavez threatens to bring the kind of disorder that shut down Venezuelan exports in 2003. In Nigeria, oil workers are threatening to strike for higher wages; and Iraqi insurgents have blown holes in the pipelines so many times some engineers are beginning to fear that the integrity of the lines is in jeopardy.

A nasty surprise is possible from any number of sources that could potentially overshadow even the war in Iraq as an election issue.

Hang on to your seats....


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