Things Get “Heavy” for Saudi Arabia

The Wall Street Journal recently published an article “Facing Up to End of ‘Easy Oil’” that highlights the supply constraints I’ve discussed with you for several years. Alex Munton, an energy analyst from Wood Mackenzie, told the WSJ that “the major oil fields in the Gulf region have pumped more than half their oil—the point at which production traditionally begins to decline.”

Specifically, Saudi Arabia, the world’s second-largest oil producer, is experiencing difficulties as its oil fields mature. Known for its ample amount of easy-to-tap, high quality reserves, Saudi Arabia is now exploring the country’s heavy-oil deposits in order to maintain long-term production.

“Heavy” oil refers to a grade of oil that contains high amounts of sulfur and components which make it very dense. Heavy oil, such as Canada’s tar sands, is generally more expensive to pull out of the ground and refine into gasoline.

The U.S. Geological Survey estimates that there are 3 trillion barrels of heavy oil scattered around the earth—worth about 100 years of consumption—but only about 400 billion barrels are recoverable with today’s existing technology, according to the WSJ. You can see from the map that the Middle East, North America and South America hold the majority of these deposits. Saudi Arabia is estimated to have 78 billion barrels of recoverable heavy-oil reserves.

In order to tap those reserves, Saudi Arabia is teaming up with Chevron on a pilot program at the country’s Wafra oil field. To pull out the oil, workers “[inject] steam into the ground to heat the oil and make it less viscous, allowing it to flow to the surface…A technique that is tricky, expensive and unproven,” says the WSJ.

If successful, the difficult project will turn Wafra into a steady producer for Saudi Arabia and Chevron.

Chevron is particularly suited for the task since it has been using steam technology at its Kern oil field in California since the 1960s. Steam has successfully taken the production yield at Kern from 10 to 80 percent, the WSJ says.

The project is being watched closely by other Middle East countries and global oil companies alike. Similar partnerships have been forged between Oman and Royal Dutch Shell, Bahrain and Occidental, and Abu Dhabi and Praxair.

As long as oil prices hover at historically high levels, projects such as these remain economical. However, they could quickly be shelved if we were to see a prolonged pullback in prices.

Read the WSJ Article

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About Frank Holmes 282 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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