Oil Production Capacity Expansion Costs for the Persian Gulf

January 1, 1996

Countries surrounding the Persian Gulf supply 27 percent of world oil demand and 22 percent of U.S. imports. The Energy Information Administration’s International Energy Outlook projects that, by the year 2010, these countries will be asked to supply 39 percent of the world’s thirst for oil. U.S. imports are expected to grow 48 percent over the same time period. Persian Gulf oil supplies will increase in importance to both the global and U.S. oil markets. Persian Gulf countries will need to invest large sums to increase production capacity to meet the demand.

Persian Gulf oil development, production, and operating costs have received the attention of industry analysts in recent years . Concerns range from the revenue available for the local economy, to the investment necessary to meet the expected growth in oil demand. The total cost of the projected capacity expansion is a relatively small percentage of the gross revenue. However, oil export revenues provide the vast majority of government income in the Persian Gulf countries. Typically, national oil companies have to compete with defense spending, social programs, and other government services for investment funds from their governments. Other options are for the government/company to borrow the investment funds or allow foreign companies to acquire equity positions. The advantages and disadvantages of these funding options vary among the Persian Gulf countries. Before the year 2010, the Persian Gulf countries will have to develop between 38 and 251 billion barrels of oil at a cost of 31 to 371 billion dollars to meet the expected demand for Persian Gulf oil.

This report attempts to quantify the cost of expanding oil production capacity using individual geologic plays in the countries surrounding the Persian Gulf through the year 2010. The countries included in this report are Iran, Iraq, Kuwait, Qatar, Saudi Arabia, Abu Dhabi, and Dubai

Petroconsultants' Estimator database and software were used to define eight geologic plays in formations of Mesozoic and Tertiary ages, both onshore and offshore. (Data for Saudi Arabia and Kuwait are not available in this database, but the surrounding plays are assumed to be representative for these countries.) Development and operating cost scenarios based on the three field sizes provided by Estimator for each play were defined yielding low-, mid-, and high-case values. Because this analysis is focused on oil, all gas production is assumed to be flared so that all costs are for oil production only. (In practice, the flaring of gas has been curtailed and normally is done only at remote locations.) All costs are in constant 1994 dollars (no inflation or discounting was used).

Costs for the eight plays and three field sizes were calculated and averaged for each of the three cases (low, mid, and high field sizes) to yield low-, mid-, and high-case cost estimates for the Persian Gulf area. The following summary table defines the investment cost in two ways: 1) the cost of increasing production capacity, 2) the cost of developing reserves. Also shown are the production operating expense and a peak daily production yield per developed reserves.

The currently reported remaining oil reserves for the Persian Gulf countries of Iran, Iraq, Kuwait, Qatar, Saudi Arabia, Abu Dhabi, and Dubai are about 585 billion barrels (World Oil, August 1994). Current production is about 19 million barrels per day (assuming Iraqi production at pre-embargo rates). This yields an annual reserves-to-production (R/P) ratio of about 83. A country may more prudently develop its oil reserves at an R/P ratio near 20. Developing reserves that will not be produced for many years is economically unwise. Applying an annual R/P ratio of 20 to the current production rate yields an estimate of developed reserves of about 140 billion barrels. This leaves about 445 billion barrels of remaining undeveloped (or non-producing) oil reserves for the Persian Gulf area. (In addition, the U.S. Geological Survey estimates undiscovered resources of about 112 billion barrels for these same countries.)

The Energy Information Administration (EIA) forecasts oilproduction capacity from Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates to grow to from about 20 million barrels per day currently to 30.0 to 36.6 million barrels per day in the year 2010 (International EnergyOutlook 1995). Applying the mid-case values from the summary table above to the projected production capacity requires additional developed reserves of 54 to 83 billion barrels at a cost of 34 to 53 billion dollars by the year 2010. This assumes current capacity can be maintained without replacing produced reserves from an equal quantity of undeveloped reserves. The undeveloped reserves determined above (445 billion barrels) are more than adequate to support the projected demand. This scenario does not include the replacement of produced reserves by the development of undeveloped reserves. Currently, the replacement of produced reserves is minor, but will grow to significant levels in the future (exact timing is unknown). (Appendix A contains tables and graphs that address the replacement of produced reserves using the same costs as used for adding capacity. If the replacement of production is included, the comparable volume of undeveloped reserves to be developed is 194 to 248 billion barrels at a cost of 127 to 161 billion dollars through 2010 (mid-case). The actual costs will likely be somewhere between those associated with no replacement of produced reserves and those associated with total replacement of produced reserves.)

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