Flying across the Gwahar oil field in Saudi Arabia is a startling reminder of just how vast and impressive the oil industry is. Wells are dotted everywhere, huge pipes run across the desert and towers belch fire as the excess gas is flamed off. Gwahar is the largest oil field in the world and seen at sunset from above, it looks beautiful.
The enormity of an operation such as Gwahar can make us complacent about the scarcity of the world's supplies of oil but, as we all know, this is a finite resource and it will not last for ever. Dubai is already moving to a non-oil economy and many other countries [the UK not least] will have to do the same in the coming years.
This has led to the concept of "peak oil" – the point at which there is less oil left in the ground than the amount we have taken out. There are plenty of theories about when peak oil will be reached: two years ago, next year, five years… take your pick.
Despite the rather pessimistic view generated by the concept of peak oil, new fields are being discovered all the time. One pops up and then another, and another. Each new discovery pushes peak oil just a bit further away and leaves us wondering whether the panic over declining oil reserves is just another bit of eco-hype.
In the past couple of weeks alone we have had a 8.8 billion barrel discovery announced at the Soussangerd field in Iran and BP revealed a five billion- barrel find at the Tiber field in the Gulf of Mexico.
There have also been some huge discoveries off the coast of Brazil and when modern geological processes are brought to Iraq, Iran, Libya and a host of other countries, we are likely to see a significant jump in known reserves. Improved technology may also mean that older fields nearing their retirement date can be given additional life through more efficient extraction methods.
However, before we get complacent and rush out to swap the Toyota Prius for a thirsty Land Rover, none of this new development is going to be easy to exploit. The days of oil bubbling out of the ground, as it used to do in Saudi and Bahrain, are long gone and the new fields are often extremely hard to tap.
Take the BP find in the Gulf of Mexico. Its drill hole is a staggering 10,685 metres deep – this is nearly two kilometres more than the height of Mount Everest. The well is also in deep water, which will make it much more expensive to construct a drilling platform and pipeline to shore.
Analysts were estimating last week that BP's cost of production from the Tiber field could be as high as $40 (Dh146.92) a barrel, which given that we have seen oil as low as $33 this year may not be very attractive to shareholders. Also, while there may be five billion barrels of oil in the field the chances of BP getting anywhere near that amount out of the ground is zero.
Indeed, the company might be lucky to get five per cent to 15 per cent of the total, which would turn Tiber into a pretty mediocre find rather than an exceptional one. It is also worth remembering that while the recent discoveries sound spectacular, they only partially sate the massive demand that exists for oil. Evolution Securities in London said last week that BP would need to find three Tibers a year just to maintain its existing reserves, which demonstrates just how big the challenge is facing the oil industry.
The debate about peak oil is, therefore, misleading. We are not about to run out of oil any time soon, but we are going to have to pay a great deal more to get it out of the ground. We should be focussing on cost of production rather than some mythical tipping point at which we start to run out of oil.
Forget bankers and their mega-bonuses, the superstars of the coming decades should be our geologists and petroleum engineers because we are going to need them more than ever.
- The writer is a Business Correspondent of The Times of London
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