The Bank of Montreal's analyst Don Coxe, working from their Chicago office, is the first mainstream number-cruncher to say that Gharwar's days are fated.

Coxe uses the phrase "Hubbert's Peak" to describe the situation. This refers to the seminal geologist M King Hubbert, who predicted the unavoidable decline of oilfields back in the 1950s.

"The combination of the news that there's no new Saudi Light coming on stream for the next seven years plus the 27% projected decline from existing fields means Hubbert's Peak has arrived in Saudi Arabia," says Coxe, referring to data compiled by the International Energy Association's (IEA) August 2004 monthly report.

Problematic effects

The Canadian bank is the latest in a line of oil opinion-makers to speak out about.

Others, notably banker Matt Simmons and the head of the Association for the study of Peak Oil (Aspo), Colin Campbell, have called into question the validity of its stated reserves, supposedly 258 billion barrels.

Some say Gharwar may have
been damaged

If Gharwar, the world's biggest field, is seen to be in decline, as Coxe says, the effects could be problematic. Markets could panic, forcing prices up, creating shortages and profoundly affecting the world economy.

"The kingdom's decline rate will be among the world's fastest as this decade wanes," predicts Coxe. "Most importantly, Hubbert's Peak must have arrived for Gharwar, the world's biggest oilfield."

Coxe dismisses Saudi claims that the country can produce extra capacity to satisfy surging demand. He notes that Saudi promises to increase production last year failed to materialise. Aramco had pledged an extra 500,000 barrels of oil immediately and an extra 5 million bpd by 2012.

He says the markets had "assumed this first flow would be a half million barrels daily of the benchmark Saudi Light, the high-end product that any oil refinery can process. Instead ... the new oil was heavy, sulphurous oil that only a few refineries had the spare capacity to use".

Continuing, he asks: "What about those 5mbpd of new production by 2012? It turned out that only 2.5 million barrels would be net additions to Saudi output: Declines from existing fields will slash production by 2.5 million bpd."

Saudi response

Saudi Aramco's chief executive officer Abd Allah Jumaa denies anything of the sort is happening.

"We have ambitious expansion plans to boost our capacity ... [and] raise our production capacity to 15 million barrels a day... We are confident that we can maintain these production rates for about half a century"

Saudi Aramco's chief executive officer Abd Allah Jumaa

"We have ambitious expansion plans to boost our capacity to 12 million bpd and also have a long-term crude development scenario that would raise our production capacity to 15 million barrels a day. We are confident that we can maintain these production rates for about half a century," he says.

However, Campbell noted that in 1990 Saudi Arabia, along with other Opec producing countries, notably Kuwait, revised their reserve estimates overnight.

This was in order to pump more oil as part of Opec's quota arrangement. The more reserves you claimed to have, the more money you made.

Same reserves

Saudi Arabia announced "a massive increase from 170 to 258gb in 1990. It had evidently decided to follow Kuwait's practice of reporting original, not remaining reserves," Campbell says.

Since that time, despite pumping around 9mbpd, Saudi Aramco says the size of its reserves have not only remained the same but increased slightly from 258gb to 259gb thanks to better extraction techniques.

However, Simmons believes Gharwar, responsible for about 5mbpd of Saudi output, may have been damaged by poor management.

Pumping large amounts of oil at the maximum rate can damage the geological structure of the field, usually referred to as "rate sensitivity". Basically the hole falls in on itself, making large amounts of oil within it un-extractable.

Lack of transparency

The rising speculation among analysts may ultimately be the fault of the Saudis. The lack of outside independent scrutiny has created space for sceptics such as Coxe to question their facts and figures.

Ali al-Nuaimi's Saudi oil ministry is
accused of not being transparent 

In 2005 alone, the OECD, the G7, the IEA and the IMF have all openly called for increased transparency over oil reserve calculations, mainly from Middle Eastern states.

The market cannot hope to understand its current position without knowing how much oil lies in reserve. This is at the heart of much of the current oil market's problems.
 
But Coxe's figures may even be on the sympathetic side. According to Saudi Aramco's own statistics, existing Saudi fields deplete by 600,000 to 800,000bpd each year. If such levels are maintained until 2012, Saudi depletion will have reached  a minimum of 4.2mbpd.

Water injection

In other words - by their own admission - Saudi Arabia will have added only 800,000bpd of supply in the next seven years. That is the best-case scenario.

To put these rates into context, the IEA predicts a year-on-year rise of 1.6mbpd by the fourth quarter of 2005.

One factor contributing to the scrutiny the Gharwar field faces is the huge amount of water injection used. Water is pumped into an ageing oilfield in order to maintain high pressure inside.

This allows the oil to be pumped out at the original constant rate. Eventually, however, the water reaches the well-head, and the field effectively dies.

Coxe goes on to ask why new Saudi fields, not just ageing ones, are also water injected.

"As if that weren't bad enough news, the Saudis claim they need at least $32 a barrel to justify new production, because ... new production ... requires water flooding. Water flooding on newborn Saudi wells? Isn't water flooding [the] Viagra of ageing wells?"

Don Coxe,
Bank of Montreal analyst

"As if that weren't bad enough news, the Saudis claim they need at least $32 a barrel to justify new production, because ... new production ... requires water flooding. Water flooding on newborn Saudi wells? Isn't water flooding [the] Viagra of ageing wells?"

Abd Allah on the other hand states that it is modern techniques, not water injection, that will let Aramco meet any future demand.

"We are confident that we can extend [our] success well into the future given continued advances in exploration and production technologies and the fact that vast relatively unexplored areas exist in the kingdom with potential hydrocarbons to be discovered."

Canada oil link

While the Bank of Montreal weighing in on the prospects of Gharwar depletion is noteworthy, it should be pointed out that the bank is financially involved with the Albertan oil sand deposits.

The Albertan "sands" are deposits of sticky oil and sand, traditionally too costly to extract, which are now receiving great attention as conventional oil prices rise.

Coxe is extremely bullish on prospects of companies working in Alberta.

"The Alberta oil sands companies aren't like other oil companies," he says.

These companies are, of course, potential alternatives to Saudi oil. But Coxe ends up painting a bleak picture.

"With Opec's excess capacity ... tapped out, oil consumers have lost their security blanket against petro-chills. Free markets ... can be messy and unpredictable, little people can get hurt."

As debate over Gharwar intensifies, pressure on Saudi Arabia to independently reveal its actual size will come from many sources.

Now, for the first time, a major bank has joined that chorus. The arguments over the world's biggest oilfield are set to stay.