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Vol. 10, No. 37 Week of September 11, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Saudi oil shock ahead

Simmons pokes holes in image of unlimited Middle East oil; prepare for worst

Rose Ragsdale

Petroleum News Contributing Writer

As Congress turns to legislation that could open a new era of Alaska Arctic oil production, one highly regarded energy analyst says he’s convinced the move is critical to the success of a national energy strategy.

Matthew R. Simmons, author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” (John Wiley & Sons Inc., 2005), says crude from the Arctic National Wildlife Refuge’s 1.5-million-acre coastal plain could play a valuable role in the nation’s energy policy.

Simmons, an investment banker who holds an MBA from Harvard University, is chairman and chief executive officer of Houston-based Simmons & Co. International, which specializes in the energy industry. He serves on the boards of Brown-Forman Corp. and The Atlantic Council of The United States. He’s also a member of the National Petroleum Council and The Council of Foreign Relations.

Simmons recently shared his views with Petroleum News on Alaska’s oil and gas industry. He has been busy promoting his book with appearances on several talk shows, including a recent radio interview with Jim Puplava, host of Financial Sense Newshour. “Twilight in the Desert” hit the bookstores in the spring and is generating considerable comment in energy, economic and political circles.

Dearth of energy data

Simmons’ book is the culmination of years of research, including scrutiny of 200 technical papers, published by the Society of Petroleum Engineers, on problems encountered by professionals working in Saudi Arabia’s oil fields. The papers, combined with transcripts from little-noticed U.S. Senate hearings in the 1970s and Simmons’ discovery that little actual public and verifiable data exists on Saudi oil reserves, form the backbone of observations and conclusions in the book.

While most energy economists start with the assumption that Middle East oil reserves are plentiful, Simmons questioned that assumption after he found that no one had ever compiled a verifiable list of the world’s largest oil fields and the reserves they hold.

His questions first surfaced at a Washington, D.C., workshop, conducted by CIA energy analysts, where top energy experts gathered several years ago.

“We’d spend a day doing a discussion of all the key countries, and how much oil capacity they had in place over the course of the coming three years,” Simmons recalled. “And I basically said, ‘How do you all even know that? What are the three or four top fields in China?’ And no one had any answers.

“So I decided it would be interesting and educational to see if you could actually put together a list of the top 20 oil fields by name,” he added.

Saudi oil reserves finite

That exercise revealed that Saudi Arabia, like most of the other Middle East countries, extracted 90 percent of its oil production from five huge fields, and the biggest of the fields, Ghawar, had been producing oil for more than 50 years.

“What I also found is that the top 14 fields that still produce over 500,000 barrels per day each, were 20 percent of the world’s oil supply, and on average they were 53 years old,” he observed.

Historically, oil field discoveries fit a pattern that Simmons likens to the nobility of a European country or the pieces on a chessboard. In each of the world’s great oil basins, explorers have found a large field first, most often the “queen” field but sometimes the “king.” Next explorers typically find another large field, usually the other half of the royal pair. After that, oil basins typically yield several moderate-sized fields, or “lords.” Beyond that, only small pools of crude reserves or “peasants” typically remain, he said.

In “Twilight in the Desert,” Simmons not only documents the history of Saudi Arabia and its oil fields, he also questions the Middle East country’s claims that it still has plentiful oil reserves. He notes that Ghawar is the “king” field and is flanked by a score of lesser fields, ranging from “queen” size in Abqaiq to much smaller pools.

Simmons also suggests that Saudi production is very near its peak. But the feedback he has received from technical people who have read the book, leads him now to believe that Saudi Arabia has “actually exceeded sustainable peak production already.”

“And I think at the current rates they are producing these old fields, each of the fields risks entering into a rapid production collapse,” he said.

People don’t understand peak oil

Simmons said energy economists are reluctant to even entertain the notion that Saudi oil output is past its peak because they really don’t understand the difference between oil supply peaking and running out of oil.

“I continue to remind people that the difference is as profound as someone saying, ‘I’m getting a little bit hungry,’ and someone saying, ‘I have about two more minutes to live before I starve to death,’” Simmons said. “… We will never run out of oil, in our lifetime, our children’s lifetime, our grandchildren’s lifetime. But by 2030 we could easily have a world that can only produce 10 or 15 or 20 million barrels per day, and the shortfall from what we thought we were going to produce is only a modest 100 million barrels per day. So this is really a major, major, major global issue.”

Compounding the problem is that every energy supply model used by economists today starts with the assumption that Saudi oil is plentiful, Simmons said. “What’s interesting is that we’ve based all of this assumption on no data,” he explained.

Saudi oil shock is imminent

Meanwhile, as the world’s thirst for oil grows, Saudi Arabia and other oil-producing countries will be unable to keep pace. Some analysts say Saudi Arabia is capable of producing 20 million to 25 million bpd, but Simmons says that level of production is “impossible.”

“And I also believe that — Ghawar, for instance, which is really the whole nine yards, because that is 60 percent of their production — that North Ghawar, which is the top 20 percent of the field, has a productivity index that is about 25 times the productivity index of the rest of Ghawar, and that’s the area that is almost depleted now,” Simmons observed. “And when that drops, you could basically see Ghawar go from 5 million down to 2 million bpd in a very short period of time.”

Cupboard nearly bare

Until now, Simmons said the United States has been lucky because Saudi oil production was 3 million bpd when U.S. oil production peaked in 1971. Saudi output soared and today ranges from 9 million bpd to 11 million bpd.

Elsewhere, explorers discovered the last three great provinces of brand new oil in the last three years of the 1960s — Prudhoe Bay in Alaska in 1967-68; Siberian oil fields in the same period of time; and oil in the North Sea in 1969.

“And Siberia, Alaska, and North Sea oil, effectively combined to produce: the North Sea peaked in 1999 at a little over 6 million bpd, it’s already down 25 percent; Alaska oil peaked in the 1990s at 2 million bpd; it’s now at about 900,000 bpd; and Siberia oil peaked at about 9 million bpd; and it’s about 5 million bpd,” Simmons said. “And we haven’t basically found another province since the late ‘60s.”

To meet growing demand from existing customers as well as a new surge in demand from emerging countries such as China and India, Simmons said producers have continued to pull more and more oil out of the North Sea. “And then we found deep water which was a fabulous last shot from the basins (in which) we already had shallow water production. And we took the Middle East oil back up to unsustainably high levels of production,” he said. “So probably, we’re sweeping the cupboard bare. People looked at the way we were able to do this and thought, ‘Wow! This is actually easy,’ without realizing what we were actually doing was totally non-sustainable.”

ANWR may hold ‘queen’

America needs more oil sources and Alaska is a good place to look, Simmons said. As for ANWR, he said it’s ludicrous for people, whether geologists or environmentalists, to make definitive statements about the quantity of oil reserves in the refuge.

“Drilling on the (North) Slope has been tricky. Otherwise, it would not have been so hard to find the ‘king,’ Prudhoe Bay, or we would never have drilled Mukluk,” he said. “So we shall never know whether ANWR is a series of dry holes or where the missing ‘queen’ of the slope lies until an intense drilling is done. A few dry holes does not mean much either.”

The environmental community’s claim that ANWR contains only a six months supply of oil is a calculation that assumes the nation has no other source of oil when ANWR oil comes on line, Simmons said.

“On that standard, we end any new energy development, period,” Simmons said. “What is very important about the urgent need to find more oil at ANWR, the Naval Reserve or somewhere else on the slope is the inevitable decline of North Slope oil, and the fast decline that will happen if a gas pipeline is built and the gas caps (are) blown down.”

Moreover, it would not take 10 years to get a big oil find in ANWR into production since the infrastructure is in place, Simmons observed.

“At some point, the oil that flows through the 2 million bpd pipeline must fall to a level insufficient to get oil over the Brooks Range other than by shutting in for part of a month so the oil can be batched,” he explained. “If all ANWR does is extend the life of the pipeline, it has filled a very valuable role.

“If a ‘lord’ is found, let alone a ‘queen,’ it is a home run,” he added.

As for the rest of Alaska, Simmons said he has no idea whether the state contains other large pools of oil. “The only way oil is ever found (and gas, too) is to drill wells,” he said.

Oil is still cheap!

Though the world needs more oil sources, Simmons does not see additional reserves curbing prices in the long term.

While others lament the high price of oil, the investment banker says crude oil at current prices of 18-20 cents a pint is “cheap.”

“Obviously it’s cheap. I don’t know what’s the next cheapest liquid we actually sell in any bulk is, that has any value. I suspect there are places around the United States where municipal water costs more than 18 cents a pint,” he observed. “And yet for some reason, we created a society built on a belief that oil prices in a normal range were some place in the $15-20 level. It turns out $15 per barrel, which is the average price of oil — in 2004 dollars — it sold for, for the last 140 years, is less than 4 cents a pint. So we’ve basically used up the vast majority of the world’s high flow rate, high quality sweet oil at prices that were effectively so cheap, you basically couldn’t sustain an industry. And now we’re left with lots of oil. But it’s heavy, gunky, dirty, sour, contaminated-with-various-things oil. It doesn’t come out of the ground very fast, is very energy intensive to get out of the ground, and we’re going to pay a fortune for it.”

Problems ahead

Simmons predicted we would encounter problems with oil supplies this year, nearly a month before Hurricane Katrina struck the Gulf Coast.

He said we must operate the nation’s refineries at 100 percent, or we have major product shocks, and we have to import oil at a rate of 10 million to 11 million bpd, or we lose crude oil stocks. We have to basically create almost 3 million bpd of finished product imports and we have to run the system 24/7, all summer long, and we still liquidate stocks, he said.

“So we have actually now created a pending domestic embargo, and we’re going to be lucky to get through the summer without some periodic shortages,” he told Financial Sense Newshour the week of Aug. 6. “We probably will, but the odds are probably as high we will have some shortages, and then if we get through the summer we have a fabulous respite from Labor Day to Thanksgiving, until we hunker to try to figure out how the world gets through the Winter of 2005 and 2006 because oil demand globally could easily go to 86-88 million bpd during the winter, and that could easily exceed supply by 2 million to 5 million bpd.”

In a worst case scenario, Simmons said oil prices could easily soar past $100 a barrel without slowing down.

Such high prices would simply be a sticker shock, not an end to driving, he said. “At $3.20 a gallon, gasoline costs 20 cents a cup. A cup of gasoline can take a full car of people about 1 1/2 miles. If you think this is expensive, try and hire a rickshaw or a horse-drawn wagon and pay only 20 cents to go a mile and half. After haggling price for an hour or so, you pay about $5 to $6 for the ride and thank the person for not making you walk.”

Curing our energy addiction

To cope with the coming oil shock and much higher oil prices, Simmons told Financial Sense Newshour, the world, led by the United States, will have to become drastically energy efficient virtually overnight. A series of changes, including transporting all goods that currently travel by truck, by rail or water, could cut oil consumption 20-40 percent, he said.

“So by getting trucks off our highway system we have a major impact on removing traffic congestion. And traffic congestion is public enemy number 1 through 5 on passenger car fuel efficiency. So it’s a real win, win, win,” he observed.

He also suggested returning to a system of growing most foods close to where they will be consumed and using technology to allow people to work at home or in their village rather than requiring them to commute to a central location.

Simmons also advocates jumpstarting the largest energy R&D program ever envisioned, and “just pray that over 5-7 years it has the same impact as when people got serious about developing radar, and developing nuclear power, so that we could actually win World War II.”

“But if we don’t do these things, then this really ends up being a very dark world — no pun intended,” he added.

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