Providing coverage of Alaska and northern Canada's oil and gas industry
August 2004

Vol. 9, No. 31 Week of August 01, 2004

Simmons hopes he’s wrong

Leading energy analyst believes Saudi Arabia’s crude oil supply near peak; calls for greater global reserve transparency to anticipate ‘cataclysm’

F. Jay Schempf

Petroleum News Contributing Writer (Houston)

Matt Simmons hopes he is wrong.

But if he’s right in his belief that Saudi Arabia’s giant oil fields might already have peaked and could start into rapid decline in as few as three years, somebody better have a “Plan B” ready or there’s no way, he says — absolutely no way — to avoid a world energy cataclysm.

Pretty strong words. Stronger, perhaps, than any uttered before about energy. Simmons spoke them, and more, at a July 9 Washington, D.C., presentation made at a meeting on Saudi Arabia’s future. The Hudson Institute sponsored the meeting.

Simmons asked for anybody, including the Saudis themselves, to refute his claim. But so far, in his view, nobody’s stepped up. He acknowledges, however, that the Saudis recently have been more forthcoming about their ability to supply all the extra oil the world will require from Saudi fields. But still, it appears that nobody is willing to counter his specific charges.

Simmons knows whereof he speaks. He views the world oil supply picture from the vantage point of 30 years’ experience as founder of Simmons & Company International, Houston, which today is one of the world’s largest energy investment banking groups. Since opening the company’s first office in Houston back in 1974, Simmons and his group have guided a broad client base to complete more than 500 oil and gas investment banking projects with a combined dollar value of some $58 billion. The company now has additional offices in Boston, London and Aberdeen, Scotland.

A few fields produce almost all Saudi oil

But all the investment capital in the world won’t be much help if, as Simmons suspects, Saudi Arabia can no longer open the tap wider at its key oil fields as the world’s “plug” producer in meeting steadily increasing world oil demand. Contrary to widespread opinion, the “gift” to the world of Saudi Arabia’s oil, in Simmons’ view at least, is not one that will keep on giving.

Despite recent comment by Saudi Aramco that it has discovered 85 oil fields in the country and has so far developed just 23 of them, Simmons says only a handful of fields account for virtually all Saudi Arabian oil production. The largest, Ghawar — the world’s single largest oil field — has accounted for about 60 percent of all the oil the country ever produced, he said. Today, he added, Ghawar still produces about 5 million barrels per day of the current Saudi oil output of 7.5 to 8 million bpd. Five other fields produce the remainder, he said: Abqaiq, Safaniyah, Zuluf, Berri and Shaybah.

But all six of these fields, he noted, are more than 30 years old. Abqaiq was discovered in 1940, Ghawar in 1948, and Safaniyah in 1951. The last three were discovered in the mid-1960s.

There’s no Act 2

Normally, Simmons said in a July 23 interview with Petroleum News, Saudi fields would be subject to the same decline curves as those experienced by any of the world’s oil fields, once reservoir pressure begins to dwindle. The difference is, he said, Saudi Aramco doubled up to catch up, almost from the start, by keeping reservoir pressures — and individual well flow rates — as high as possible, seemingly for as long as possible.

In simple terms, says Simmons, the Saudis have produced their fields under simultaneous primary and secondary recovery, having instituted huge waterflooding programs relatively soon after completing field development.

“All of these fields are old,” he pointed out, “but Saudi Aramco has managed them in a ‘gold standard’ fashion by instituting careful and rigorous water injection to maintain very high reservoir pressures. They’re effectively sweeping the reservoirs until the easily recoverable oil is gone. In so doing, they have defied the standard decline curves. With water injection, they’ve maintained reservoir pressures above the bubble point. The trouble is, once they finally finish the sweep, they’ve done both primary and secondary depletion. There isn’t any Act 2.”

Apparently, detailed knowledge of this double dipping has not been common. Saudi production figures and field statistics have been regarded largely as state secrets since the 1980s. Nevertheless, said Simmons, most world oil supply studies assume that Saudi production is nearly inexhaustible and can be increased almost effortlessly by whatever world demand dictates.

No new giant oil fields in Saudi Arabia

But according to Simmons, enough data exists in the public domain today that, when combined and analyzed, reveals a much different picture.

During the past decade or so, he said, the lack of hard field data from most producing countries, particularly from OPEC member countries and even more particularly from Saudi Arabia, made it extremely difficult for his company to plan various energy investment scenarios for its clients.

So, Simmons instituted a 12-month study of technical presentations on Saudi Arabian oilfield activity made before various meetings around the world of the Society of Petroleum Engineers, beginning in 1961 and going through 2003. The study amassed more than 200 such tech papers, he said, delivered largely by oilfield service companies and dealing with highly technical aspects in all six of the Saudi giant fields.

“Each individual paper doesn’t tell you a lot,” he said. “But, by going through this incredible stack and then going back and isolating each by the specific field they dealt with, chronologically, you could see the history of what had been going on in Saudi Arabia during that time.”

While the study revealed a “whole litany” of surprises, said Simmons, the most important one is that while the six Saudi Arabian giant fields have accounted for everything Saudi Arabia has produced so far, there is sufficient evidence to argue that once those fields are in decline, the Saudis won’t have much else in the way of new oil from which to draw.

Saudi Aramco has explored the country thoroughly, Simmons said, and no new ‘giant’ fields have resulted.

“Meanwhile, Saudi Aramco’s senior management are adamant that their existing oil fields are in great shape and can reliably produce as much as 15 million bpd for another 50 years,” said Simmons. “They also insist that their proved reserves are actually conservative and there are still another 200 billion barrels of oil yet to be found in various unexplored pockets of Saudi Arabia.” The world has only the company’s word on this, said Simmons.

New technology won’t do it

He added that Saudi Aramco senior managers also believe “with some passion” that the technological tools they are now employing would contain the rise of water in existing fields. Such tools, he noted, include horizontal and extended-reach wells and multi-lateral well completions, among others.

“My worry is that too many other oil companies around the world also believed these same tools would allow them to steadily grow their production from a reduced amount of wells drilled,” he said. “Instead, it turned out that virtually every key oil producer using these same tools sadly ended up seeing their production growth peter out.”

While the tools did extract more oil per well, he explained, they also accelerated the recovery of economical oil. In turn, this created decline rates never seen before in existing production.

Simmons has taken his study’s findings and conclusions and currently is writing a book, which he plans to self-publish late this coming fall.

Calls for mandatory oil reserves transparency

But regardless of who’s right or who’s wrong, Simmons said, the solution to determining whether Saudi fields can meet ever-climbing demand is a simple one: Adopt a far higher standard of petroleum data transparency and begin reporting timely field-by-field production statistics, supported by the average number of producing wells in each field, and have it verified by a reliable third party.

“I’d also like to see them update their estimates, by field, of original oil in place, by estimated ultimate recovery, and by cumulative production,” he said. “Once you have those data, any analysts can determine in one day whether everything’s fine in Saudi Arabia, or whether its ‘Katy, bar the door! This field is just about to go into very steep decline.”

He noted that a mandatory requirement for greater oil reserves transparency should be ordered on a global basis. However, so far only the Paris-based International Energy Agency currently is working to set up such a program. Though voluntary, the program at least calls for greater transparency from oil producing nations, he said.

Nevertheless, without such information and without it being handed over quickly, the world could be in for a huge surprise, said Simmons. In his opinion, great crises come out of ignoring great problems, and the sooner the world is aware of a problem, the sooner a solution — “Plan B” — can be reached. He said that with greater oil supply transparency, the current oil price probably would not gyrate the way it has in the past. “The increased knowledge of what’s really going on in the energy business versus the perception of what we thought was going on will help people understand that we need to get used to high energy prices and that $40 per barrel oil is not dangerous,” said Simmons.

What’s dangerous, he said, is $40 per barrel oil being too cheap.

Difference can’t be filled from elsewhere

But the outlook is still extremely grave, he said.

“If I’m correct about my concerns, Saudi Arabia is now producing more than they should to sustain their oil output,” he deadpanned. “The harder you pull a field in its production, the faster you bring on the end of its reservoir pressure. So, I could argue that for the well-being of the world, Saudi Arabia probably ought to back off and start producing 3 to 4 million bpd so that their oil might last another 30 to 50 years. However, they may already have peaked in their ability to grow oil production, and if that’s so, the world has peaked, as well.”

Could the difference be made up from other world oil-producing areas? Again, Simmons is dubious. Not from West Africa, he said. Not from Russia, either. And currently, alternative fuels won’t do it, either. Not natural gas, the available global supply statistics on which are even murkier than those for oil. Not hydrogen fuels, since they require a basic energy feedstock. Not even nuclear power, which he said would take decades to add, with scarcely a clue as to how much uranium remains throughout the world.

“There isn’t any case you could make, by any stretch of the imagination, based on anything we know, that you could go elsewhere to make up the difference,” said Simmons. “This could become the biggest energy issue the world has ever faced.”

Among all the ramifications of a worldwide energy shortage, Simmons said, the geopolitical implications are perhaps the most severe, particularly since the United States imports 25 percent of Saudi Arabia’s total oil exports, which average about 6 million bpd.

“I have oftentimes said that I would not want to be part of any energy delegation charged with the responsibility of having to tell the leaders of either India, or particularly of China, that their exciting emergence into prosperity is over because we have no spare energy to fuel their great dreams.”

Meanwhile, Matt Simmons is waiting — and hoping — for someone to prove him wrong.

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