No.1 in oil

For the past century, the Gulf has been a watchword for nations with large oil reserves and for some of the world's top producers of ‘black gold'.

Kuwait, the United Arab Emirates and especially Saudi Arabia — once the undisputed king of oil — have all traditionally led the way in oil production and exports.

However, the tide is changing, albeit slowly. Many new sources of oil have been found across the globe, and these new discoveries have created a group of newly-powerful nations rich in hydrocarbons.

Venezuela, with oil reserves of 79 billion barrels and Nigeria with 35 billion are among two of the newer players on the oil scene.

It is Russia, though, which has made the greatest strides, and many analysts claim the country looks set to dominate global oil production and sales over the coming decades.

In 1970, the Russians started drilling Kola SG-3, an exploration well which finally reached a world record depth of 40,230 feet. Since then, Russian oil majors, including Yukos, have drilled more than 310 successful super-deep oil wells, and put them into production.

Traditionally, Saudi Arabia has been regarded as the world's undisputed primary source of oil (producing around nine million barrels a day, with reserves of 264 billion barrels) and Russia has had to settle for second place. But in recent years Russia has re-nationalised and modernised much of its industry, and that policy now appears to be paying off.

Statistics recently published by Opec show that Russia is currently extracting more oil than Saudi Arabia, making it the biggest producer in the world.

Opec statistics show that in the period since 2002, Russian companies have surpassed the Saudis as the world's biggest oil producers on an on-and-off basis.

The latest figures, however, have been hailed in Russia as evidence that such periodic production spikes are no one-offs and that Moscow really does have a right to lay claim to the number one spot.

According to a recently released Opec report, in June 2006, Russia extracted 9.236 million barrels of oil, which is 46,000 barrels more than Saudi Arabia. The statistics also showed that Russian production in the first half of this year increased to 235.8 million tonnes, a year-on-year improvement of 2.3 per cent.

With oil prices currently hovering around $60, Russia is enjoying an unprecedented boom. This year Russian oil companies, both private and state-owned, stand to earn $150 billion from oil exports, up from just $28 billion in 1998. And investors who were in gloomy mood a year ago because of the state's dismembering of the Yukos oil company have now put that episode firmly behind them. When you look at the figures, it's easy to see why the Yukos affair was so quickly forgotten.

Russia's stock market has soared 65 per cent since the start of the year, and for every $1 rise in the oil price above $25 a barrel, the government nets around $3 billion each year, while oil companies' net profits rise by $1.1 billion.

As a result, Russian budget expenditures have soared from just $34 billion in 2000 to $129.5 billion this year, while tax revenues have expanded even faster, from $40 billion, to $153 billion.

The 2006 figures for budget expenditures and tax revenues are $150 billion and $177 billion, respectively.

However, analysts say its oil industry is already working close to capacity and that it will be able to manage output increases of up to only two per cent a year between now and 2009.

There are also fears that Russia is becoming too addicted to what politicians call “the oil needle'', and is doing too little to develop future revenue streams.

Money from oil and gas accounts for 52.2 per cent of all revenues to the state treasury and more than 35 per cent of Russia's exports.

Such riches can make a country complacent, according to Alexei Kudrin, the Russian Finance Minister. “At present, we are in a dangerously carefree zone,'' he said recently.

Even Russian analysts concede that Moscow's cause is helped by the fact that Saudi Arabia is subject to Opec output restrictions. Saudi Arabia is famous for its ability to access spare capacity and raise production at short notice, and if they really wanted to reassert their leadership role, the feeling is it could easily be done.

Despite the apparent ace the Saudis have up their sleeve, worldwide oil consumption has grown faster than production over the last decade. In the late 1990s, the world consumed about 80 million barrels of oil per day and produced about 85 million, but the daily surplus of five million kept the market in check in the event of a shortage.

Today, global consumption is closer to 85 million barrels, and production levels hover near 86 million, leaving a surplus of only about one million barrels per day. The shrinking surplus has made markets much more volatile and prone to price spikes when production levels falter, as they did when refining capacity went temporarily off-line after Hurricane Katrina last year.

For the past year, the global markets have complained that Saudi Arabia can't or won't produce enough oil to keep a lid on soaring prices. Politicians around the world have criticised the kingdom for failing to produce more.

Houston investment banker Matthew R. Simmons recently grabbed the headlines with his book Twilight in the Desert, which says that Saudi production may be peaking and an oil shock bigger than the current one is on the way.

Yet, little noticed by the outside world, Saudi Arabia is making some bold moves. In recent months, Saudi Aramco, the national oil company, has been busy signing deals with drilling rig operators and oilfield contractors. Some 70 drilling rigs are now operating in the kingdom, up from 55 in 2004 and about 20 in the mid-1990s. By next year, Aramco aims to have 110 rigs drilling, although that may be unreachable because of fierce competition for equipment.

This is all part of a massive effort to add some three million barrels per day of production capacity. That would be a more than 30 per cent leap over the roughly nine million billion barrels per day Saudi Arabia is now producing, although it claims that it could get daily output up to 11 million.

The cost of hundreds of new wells and related infrastructure could exceed $14 billion. A spokesman for Saudi Aramco says the national oil company is even looking at “scenarios to bolster production to even 15 million barrels per day'' if the demand is there.

If they succeed, the tightness that has plagued the world's oil markets may ease for the medium term, taking the heat off prices. New Saudi oil would join increases from West Africa, Brazil, Central Asia, and the Gulf of Mexico. Unlike a non-Opec country such as Russia, which is likely to produce close to flat out, the Saudis may hold back on both production and expansion plans if they think a glut is developing.

The surge in demand from the US, China, and elsewhere seems to have convinced Saudi Arabia's oil chiefs that it is worth pouring money into expanding production to regain lost clout in the market.

While they are clearly happy to be earning $145 billion or so from oil this year, the Saudis don't like their lack of power over prices and the only way to regain it is by having barrels to add or subtract from the market.

“They [the Saudis] want to maintain a certain spare capacity cushion,'' says Jamal Qureshi, an analyst at PFC Energy. “The price run-ups we saw in the last few years have spooked them too.''

In a bid to win back its throne as the world's king of oil, state-owned Saudi Aramco has been paying Houston-based Rowan Cos around $100,000 per day for each of four large offshore rigs which have been used to explore for oil in the Arabian Gulf since the turn of the year. Bermuda's Nabors Industries, meanwhile, has 10 rigs being used in the kingdom.

It is not merely a question of drilling, though. Massive infrastructure needs to be built in order to separate the oil from the gas, to inject water into the fields to maintain pressure, and for piping the oil to refineries. The expansion of the Khurays field in the east of the country will require around 20 rigs at the site for three years. Nevertheless, Aramco has allocated the funds to make this happen and is clearly looking to the future.

With Russia providing serious competition and further oil wells being discovered almost monthly around the globe, it is clear Saudi Arabia has a real challenge on its hands to regain its top spot in the oil game. However, with its vast reserves, the ability to open its taps further and a desire to return to the top of the pile, Saudi Arabia could well find itself back at number one sooner rather than later.

The writer is a freelance journalist based in Paris.