Meeting energy demand: a holistic view

Abdallah S. Jum'ah, Saudi Aramco President and Chief Executive Officer, outlines the pivotal role global oil resources will play in meeting the world’s energy needs.

We live in a time when global energy issues have reached unprecedented levels of significance, both for nations and the consuming public. As you know, however, concerns over energy security are nothing new. Back in 1972, an interdisciplinary research group known as the Club of Rome issued The Limits to Growth, a landmark study that predicted the rapid depletion of natural resources leading to worldwide socioeconomic chaos. Fortunately, the dates predicted for the exhaustion of these various resources have come and gone without the dire consequences of societal collapse and economic misery envisioned in the report.

The same holds true for most of the oil forecasts made during the last three decades. In the 1970s, many forecasters said we would reach the oil supply peak by the year 2000. A number of predictions made during the 1990s pushed that date back to 2010 or so, while some forecasts issued during this decade – already past the first predicted peak oil date – locate the turning point sometime in the decade to come. Forecasts of ultimate recovery from conventional oil resources have indicated a positive trend, steadily increasing from less than a trillion barrels in the 1940s to four trillion barrels or more today.

My point is that forecasting the future isn’t easy, and when it comes to predictions related to oil, the record is rather chequered. In general, we have grossly underestimated mankind’s ability to find new reserves of petroleum, as well as our capacity to raise recovery rates and tap fields once thought inaccessible or impossible to produce. On balance, I am confident that this growth trend will continue. But confidence is no excuse for complacency, and I also believe we must take a hard look at the Earth’s total endowment of liquid fuels, and realistically assess our ability to meet future demand for energy.

Let me begin by looking at liquid energy resources in place, since they represent the basic petroleum building blocks we have to work with. Here it’s important to go beyond conventional oil and include non-conventional liquids such as condensates, natural gas liquids, tar sands, bitumen, extra heavy oil, oil shales, gas-to-liquids, coal-to-liquids and even bio fuels, since any and all of these resources can – and over the long term will – contribute to global supplies of petroleum and service the same end-user applications.

I would like to postulate two distinct scenarios when it comes to the world’s endowment of liquid fuels: a conservative scenario based on extra-cautious assumptions of resources, reserves and supplies; and a target scenario that many in the industry believe can be achieved, given an enabling policy environment, favourable economics and sustained R&D programs centred on liquid fuels. In fact, at Saudi Aramco we present this scenario as a challenge to our own earth scientists, engineers and R&D professionals, and believe it can serve as a shared goal for other companies, institutions and policymakers.

Resources in place
The amount of conventional oil-in-place is somewhere between six and eight trillion barrels, depending on whether you go with the conservative or target scenario, though again this number has continually grown over time. The volume of non-conventional oil-in-place is rather murkier, with a conservative scenario figure of seven trillion barrels and a target scenario number of roughly eight trillion barrels or higher. A key area of contention is oil shales, since the characteristics of their accumulations – especially the degree of resource richness – vary so much, and their development has been perennially impacted by overwhelming challenges involving technology, economics, water and land impacts and environmental concerns. But let us also remember that we basically know where these non-conventional liquids are located, and that there is little or no exploration work to be done when it comes to these resources.

Taking conventional and non-conventional resources together, total in-place liquids range between 13 trillion barrels in the conservative scenario and close to 16 trillion barrels in the target scenario. To put those figures in perspective, to date we have consumed only 1.1 trillion barrels of oil, or seven to nine percent of resources in place. Nearly all of that was conventional oil, and for the next several decades oil production will continue to be centred in the Eastern Hemisphere where most of these resources are located. In the long-term, however, the vast non-conventional resources located primarily in the Western Hemisphere – think of Canada’s tar sands, extra heavy oil in Venezuela’s Orinoco Belt and the oil shales of the Rockies – will play a greater role in meeting energy demand. That means regions beyond what is usually thought of as the ‘oil patch’ have a huge stake in the future of petroleum, and in harnessing both conventional and non-conventional resources.

But that development will only happen if the world’s energy enterprises and institutions pursue R&D initiatives focusing on the more effective recovery of oil in all its forms, and work to create new technologies that enable oil to be used in a more environmentally sensitive and economically efficient manner. Conversely, if attention is focused on other options, at the expense of oil, I fear we will not have the tools needed to tap these vast resources at a time when more energy is needed to fuel and feed a growing global population and to sustain the higher standards of living the world’s people have come to expect, and which most of us gathered here already enjoy.

This brings us to the issue of the recoverable part of liquid resources, which is what we can ultimately capture from the overall resources-in-place. Let’s remember that our ability to translate the total endowment of resources into actual supplies is impacted by the complex interaction of factors such as technology, certainty of demand and its growth, levels of financial investment, economics, geopolitics, policies pursued by both consuming and producing governments, environmental considerations, and adequacy of people and equipment. Furthermore, let us keep in mind that this is a story that will unfold over many decades, and that assumptions about how various trends will play out over time can also significantly alter our projections.

In simple terms, the recoverable part of conventional resources comprises three components: proven reserves, growth in existing fields and new discoveries.

Concerning proven recoverable reserves of conventional oil, there is relatively less difference of opinion. So, in the conservative scenario, I have chosen numbers at around 1.2 trillion barrels, while the target scenario estimates the figure to be in excess of 1.3 trillion barrels. As I noted earlier, though, this number has continued to grow over time. In 1980, for example, the world’s proven reserves were estimated at about 667 billion barrels. Since then, roughly 668 billion barrels have been produced – meaning we should have exhausted all of our oil by now. Instead, proven reserves have actually doubled during the last quarter-century, despite growing production. These additions have come from two areas: known fields and new discoveries.

Growth in already discovered fields is the result of increased recovery rates made possible by technology, better data and improved economic conditions, as well as new zones and field extensions. To appreciate the importance of this phenomenon, consider that a one percent improvement in recovery can represent an increase of some 80 billion barrels of conventional oil reserves, roughly equivalent to all of the OECD countries’ current proven reserves. Despite recent advances, average recovery in the world’s conventional fields remains at only about 35 percent, leaving 65 percent of discovered resources stuck in the ground. With technological advancements and aggressive targets for oil recovery improvement, under the target scenario, the world as a whole could add up to a trillion barrels of additional reserves from known fields, a challenge that I have placed in front of the world’s earth scientists. Even under much more conservative assumptions made by some analysts in the conservative scenario, there will be another 200 billion barrels of conventional recoverable oil resources to be tapped from already discovered fields.

When it comes to new oil fields, most are expected to be found in the Middle East region, where the size of new discoveries is also generally larger than in other parts of the globe. Depending on just how conservative their assumptions are, analysts believe there are between 250 billion and one trillion barrels of conventional crude oil reserves still waiting to be found. Again, I urge our scientists to accept the challenge of a trillion barrels in new discoveries.

Taking currently proven reserves, reserves growth in known fields and new discoveries together, we arrive at a conservative estimate of 1.7 trillion barrels of total conventional recoverable resources yet to be produced. In the target scenario, that number rises to more than three trillion barrels – a number I believe the world’s petroleum industry can reach and therefore should pursue with all due diligence. Unfortunately, much of the debate around oil resources and the issue of scarcity stops there – before we take into account the immense potential of non-conventional resources. This not only distorts the conclusions of many studies, but may also lead to sub-optimal energy policies and infrastructure investment decisions.

Opportunities and challenges
So what is at stake when it comes to non-conventional resources and reserves? First, there are great opportunities to improve the recovery rates associated with bitumen and extra-heavy oil. Here, the recoverable part of global resources ranges between one trillion and more than two trillion barrels, depending on whether we opt for the conservative or target numbers. The technical, economic and environmental challenges associated with oil shales are even greater and admittedly difficult, though the massive scale of these resources presents a tremendous target for producers. Given these challenges, the estimates of recoverable resources from shale vary more widely, from less than 300 million barrels to more than 700 million barrels. I believe that recovery rates for oil shale will fluctuate over time, but that the world’s need for liquid fuel supplies over the very long-term, coupled with continued advances in technology, mean oil shales will eventually be viable for future generations. The conservative scenario estimates the recoverable non-conventional oil resources at roughly one-and-a-half trillion barrels, while the target scenario envisages close to three trillion barrels to be ultimately recovered.

Based on the projections I’ve cited, the world seems to have over three trillion barrels of recoverable conventional and non-conventional liquid fuel resources if we opt for extra-conservative assumptions, and about six trillion barrels if we adopt the target scenario. What we ultimately achieve in terms of recovery will depend to a large extent on whether we can make sufficient technological advances on both the conventional and non-conventional sides of the oil equation. So far, our industry’s track record is excellent, and the application of advanced monitoring, drilling, completion and reservoir technologies have already significantly improved reservoir management and boosted recovery rates. New technologies such as 3D seismic have also helped to increase success rates in finding new oil and gas accumulations, in addition to enhancing recovery of hydrocarbons from known fields. Though it will be challenging, I believe we can continue to realize such technological progress in the form of both steady, incremental improvements and breakthrough applications, techniques and concepts.

Now, let me turn to some of the major implications that stem from the character and distribution of the world’s liquid fuel resources. Let’s first consider the different portfolios that international and national oil companies – or IOCs and NOCs – maintain in terms of these resources. When it comes to conventional oil, the pie is cut roughly in half between IOCs and NOCs. According to the International Energy Agency, IOCs have concession rights to about 30 percent of proven reserves, and production sharing rights to an additional 11 percent. Another nine percent of the world’s proven reserves are located in Iraq, where IOCs may assume an active role once conditions allow. The other 50 percent of proven conventional reserves are managed by national oil companies. The picture is very different when it comes to non-conventional resources, however. Here, access to virtually all of these resources is in the hands of the multinational firms.

Given these patterns of access, it should come as no surprise that IOCs and NOCs are pursuing different technology development strategies and programs, albeit with a considerable degree of overlap. NOCs are generally more focused on the discovery and recovery of conventional oil, which accounts for virtually all of their reserve bases, while IOCs are targeting non-conventional resources to a larger extent. IOCs are also pushing the envelope when it comes to niche opportunities like ultra-deep water and Arctic plays. There are exceptions, though, as NOCs strive to meet their unique needs, including PDVSA’s work on the Orinoco’s heavy oil deposits, Statoil’s pioneering activities in regions of severe cold, and Petrobras’ advances in deepsea technologies. Of course, that simply underscores the range of possibilities that exist for greater R&D cooperation among NOCs, IOCs, service companies, technology developers, and research and academic institutions – cooperation that I believe will be increasingly important in the years and decades to come.

Predicting the future
As I noted a moment ago, the development of conventional and non-conventional liquid fuel resources will take place over many decades, and I will exercise caution in trying to stake out exact timetables. However, I believe there will be a predictable sequence to this development, as dictated by both technology and economics.

In terms of supply growth, conventional oil will increase most strongly during the early part of the next half-century, given its abundance and accessibility, its lower production costs, and the distinctly lighter environmental footprint of the production and processing activities associated with these conventional resources. In other words, as it has for the last century, conventional oil will continue to play the major role in fuelling greater prosperity for the world’s population.

Growth in heavier oil resources will be more restrained early on due to their high development costs, the large quantities of water and natural gas consumed in their production, as well as the greater environmental and especially carbon impacts that these production activities entail. However, the economics of heavy oil should improve in a strong oil market, while technological advances will assist in overcoming or tempering production and environmental issues. Given the relatively more difficult challenges associated with oil shales, growth in these resources will be even slower, and will come much later in the development cycle.

The joker in the deck among non-conventional liquid resources is biofuels, since their growth will be a function primarily of government policies and incentives, rather than market fundamentals. Leaving aside questions of economics and energy efficiency, when food crops are used to produce biofuels there is also greater pressure on both arable land and on food supplies needed to feed a growing global population. In addition, the resulting increase in the use of pesticides and fertilizers is expected to have its own environmental implications. Frankly, there are huge uncertainties associated with biofuels, and I think it is therefore difficult to predict with any degree of certainty their ultimate contribution to the global energy mix.

The environment is inextricably bound up with the future energy debate. Broadly speaking, there are four major ways we can tackle such concerns: first, improved efficiency of energy use; second, research and development efforts leading to new fuel formulations; third, the greater use of alternative energy sources; and fourth, restrictions on the level of energy use in the future. In my view, the first two approaches – improved efficiency and a focus on new technology – offer the most pragmatic and least disruptive ways of lightening the environmental impact of energy use and consumption.

Improving the efficiency of energy use, such as doubling or even tripling the mileage efficiency of vehicles, appears to be the most desirable method of reducing emissions, and offers an opportunity to dramatically improve the environmental performance of our primary fuel sources. Then there are the options of more strongly promoting smaller vehicles and greater emphasis on car pooling and mass transit. Similarly, research into producing cleaner and greener fuels could further improve that performance, including sizable reductions in greenhouse gas emissions.

By contrast, alternative energy sources have some way to go before they can make substantial contributions to the world’s future energy mix, given the current state of their development and the various hurdles they still face. We must also remember that many of these alternatives, such as nuclear or renewables, or even conventional sources such as coal, may be able to meet additional demand in power generation and possibly industry but not in transportation, which of course is a key sector of oil utilization.

Alternatives and their contributions to meeting steadily rising energy demand are needed and welcome, and eventually these fuel sources will become a more important component of global energy supplies. But we must be realistic about the pace of their future development, and understand that for the foreseeable future, their significance in the energy supply mix will continue to be limited.

The fourth option, curtailing the use of energy, not only faces pragmatic difficulties and political challenges – how would such cuts be apportioned and how would they be enforced, for example – but also, in my opinion, raises grave ethical problems. Restricting access to energy would seriously undermine the aspirations of billions of people in the developing world to raise their living standards and to realise a brighter future for their sons, daughters and grandchildren after them. Such a step would also open developed nations to the charge that they climbed the ladder first and simply pulled it up after them, denying the same opportunities for a better life to the half of the world’s population that continues to live on less than two dollars a day.

Improved efficiency is the key
None of these choices are perfect, and none of them are easy. If they were, we would not be having the kind of debates we are engaged in today. But I strongly believe that improving the efficiency of the ways in which we use energy and pursuing opportunities to make our primary energy sources more environmentally friendly should be at the top of our shared energy agenda, whether we are producers, consumers, policymakers or regulators.

Based on the total global reserves of both conventional and non-conventional oil and the world’s current demand for oil of some 86 million barrels per day, we still have almost a century’s worth of oil under the conservative scenario I outlined earlier, and nearly 200 years’ worth under the target scenario. As a result, I do not believe the world has to worry about ‘peak oil’ for a very long time. What we do need to worry about is ignoring liquid fuels in our energy policies and investment decisions, and discouraging their development and growth on various pretexts. Such steps would, without a doubt, stunt the development of new technologies, undermine efforts to produce more environmentally friendly and cleaner liquid fuels, and block some of the available liquid resources from being converted into economic supplies to meet the world’s growing need for energy.

We ought to create an environment that facilitates the achievement of what I believe are two of the most critical energy imperatives for the world: getting as close as possible to the target scenario of the in-place and recoverable resources and even exceeding it; and turning the massive resources into supplies. Petroleum is too important to the global economy to be subjected to superficial analyses, doom and gloom prophecies or simplistic assumptions. Rather, oil deserves to be the topic of a rational and realistic dialogue, and I hope I have contributed to that discussion this afternoon.

Major fields

Ghawar Field: Discovered in 1948, it is considered the biggest oil field in the world. It is located 200km east of Riyadh city, and remaining oil reserves amount to about 67 billion barrels.
Safaniya Field: Discovered in 1951. It is considered the largest offshore oil field in the world, with reserves amounting to around 37 billion barrels of oil and 5360 billion cubic feet of natural gas.
Hawtah Field: Discovered in 1989. Located 180km south of Riyadh, it produces 200MB/D of Arabian Super Light Oil with 49-degree gravity.
Shaybah Field: Reserves amount to 15 billion barrels of crude oil and 25 trillion cubic meters of gas, and it produces 500,000B/D. It has a 640km pipeline that runs from Shay bah to Abqaiq.