- © Copyright 2004, From The Wilderness Publications,
www.copvcia.com. All Rights Reserved. May be reprinted, distributed or
posted on an Internet web site for non-profit purposes only.
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- ( FTW ) -- The new millennium has not exactly been one
of 'irrational exuberance' for many industries, and particularly not for
the oil industry, despite high oil prices. Major oil discoveries have declined
every year so that 2003 saw no new field over 500 million barrels, and
in 2001 and 2002 the top ten non-state oil companies spent more on exploration
than they discovered in value, a new and alarming record. It is well over
twenty years since more oil was found than consumed in a year. From the
outset of 2004, large reserve write-downs, starting with Shell, and including
El Paso and BP, have shaken the confidence of the financial community,
set in motion an official SEC enquiry, and may yet be just the tip of the
iceberg.
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- Comforting then to know that the Middle East, producer
of last resort and future saviour of the world oil system, still has nearly
700 billion barrels of reserves, and is publicly confident that it can
deliver the required doubling of output to 40 million barrels a day by
2025. Even more reassuring, Saudi Arabia says it can happily deliver 10
million barrels a day for at least the next fifty years, possibly even
rising to 15 million barrels a day - and still for fifty years. This output
can be guaranteed because Saudi 'oil in place' will rise to 900 billion
barrels by 2025, while new technology will help existing recovery and lead
to many new discoveries. This was the message from Saudi Aramco, delivered
on February 24 th, at CSIS (Center for Strategic and International Studies),
a well-known think-tank in Washington DC, to an audience of diplomats,
CIA, EIA (Energy Administration Agency, part of the US Department of Energy),
media of record, and many energy companies and analysts of every stripe.
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- The trouble is that the Saudi Aramco presentations of
Mahmoud Abdul-Baqi, Vice President of Exploration, and Nansen Saleri, Manager
of Reservoir Management, seemed to be describing not just another country,
but another planet when compared with what Matt Simmons, President of Simmons
and Co (the world's largest private energy investment banker) had to say.
Industry observers noted that Aramco had never before said so much about
their reserves and how they hold production steady in their ageing oil
fields, but much of the Aramco presentation concentrated on the benefits
of new technology, especially in their medium-sized fields, and the possibilities
of future discoveries, without noting that well productivity had fallen
by more than half since the early 1970s. More than half of Saudi Arabia's
oil comes from one giant field, Ghawar, the largest ever discovered, and
the health of this field is now in serious doubt, after decades of water
injection to maintain pressure.
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- Simmons' case rests on the painstaking analysis of two
hundred SPE (Society of Petroleum Engineers) reports written over four
decades by Saudi petroleum reservoir engineers, as well as a fact-finding
mission in 2003, and ten years of other detailed studies of oil and gas
depletion. He has been publicly hinting for more than a year that assumptions
about Saudi Arabia's seemingly limitless capacity may be misplaced, but
now, ahead of the publication of his forthcoming book on Saudi oil, the
hints have been replaced by copious data and a dire warning.
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- Simmons noted that "in an era of poor energy data,
OPEC is a total vacuum," but his latest work on Saudi Arabia does
come at a time, when despite more than two decades of official secrecy,
questions are being asked about Middle East capacity and reserves, especially
since the surprise OPEC cut in production in February 2004.
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- A SPO has recently analysed the extraordinary OPEC reserve
revisions of the 1980s, which saw volumes leap from 353.6 billion barrels
in 1982 to 643.5 billion in 1990 despite no new large discoveries. Two
different ASPO studies conclude that reserves are somewhere between 100
and 300 billion barrels smaller than officially claimed. Evidence from
widespread and dramatic falls in well productivity suggests that reserves
may now be about what they were stated to be in 1982. This would fit with
the original numbers being understated by about thirty percent, and seeing
about this much produced in the intervening twenty years. (See ASPO Newsletter
March 2004, http://asponews.org.)
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- Simmons' new work on Saudi Arabia, the greatest of all
oil provinces appears to have lit the fire under a fast growing mass of
evidence that the Middle East is no longer capable of increasing production
at will either to stabilise price or make up for sudden falls in other
producers.
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- However, a major point of Simmons' work is that knowing
when Saudi Arabia is in permanent decline will be very difficult to discern
for some time. Despite Saudi Arabia's central role in world oil, there
is no official agreement on how much it is actually producing (and this
also applies to OPEC in general). Aramco's own report of 6.79 million b/d
in 2002 was notably lower than either the IEA or press reports. This has
led some to try to estimate production from tanker traffic. The OECD reported
that Saudi exports were flat from 2000 to 2002, but Simmons questions how
we can be sure of this.
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- During the question and answer period which followed
all the presentations, Simmons was noticeably reticent about when Saudi
Arabia would peak, but did note that Saudi Aramco had briefly produced
over ten million barrels a day in 1981. Afterwards, however he was more
forthcoming. "We could be on the verge of seeing a collapse of thirty
or forty percent of their production in the imminent future, and imminent
means sometime in the next three to five years - but it could even be tomorrow."
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- Simmons asks why the Saudis are expending so much effort
on the old reservoirs if they have so many new ones in the wings, many
of which have not even been tested. Could the reason be that many of the
other 300 recognized reservoirs "seem to lack permeability, porosity,
or aquifer - or all three"?
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- The 'Big Five' (Ghawar, Safaniyah, Hanifa, Khafji and
Shuaiba) giant oil fields, all found by the mid 1960s, produced 90% of
all Saudi oil in the last half century, but now, Simmons said, they were
only being kept going by massive water injection, so that the "sweep
of easy conventional oil flow is ending."
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- This may be most alarmingly true for Ghawar. According
to Saudi Aramco, Ghawar is only 48% depleted, though they do admit that
the northern and most productive region is 60% down. Simmons says that
if Aramco's 1975 reservoir estimate of 60 billion barrels is correct, and
he intimates that it is, then Ghawar is in fact 90% drained.
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- Many of the other large productive fields have a litany
of problems, including sand control and water cut struggles in Safaniyah's
northern end, and hydrogen sulphide and pressure drops in Marjan. The next
generation of production from Qatif, Abu Sa'fah, and Khurais all have "complex
production histories and each has its own set of challenges."
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- For all the Saudi insistence on the importance of technology,
according to Simmons "Aramco's reservoir models failed to predict
accurate fluid behaviour" fifteen years ago, and he wonders whether
their new models will do any better. The knowledge now gained might have
caused Aramco to manage its reservoirs differently in the 1960s and 1970s,
when it first started peripheral water injection, which could have led
to less oil being "by-passed" and left behind. However, hindsight
will not help Ghawar now.
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- Another key cause for Simmons' concern is the increasing
use of MRC wells (Maximum Reservoir Contact) or "bottle brush"
wells, which he says "now anchor future oil production". These
wells send out many offshoots into the reservoir: "in simple terms,
they hide from top side gas and bottom end water". They can certainly
produce oil more quickly, especially from "the last thinning columns
of easy oil", but they rarely increase the total yield, and invariably
hasten decline and increase its rate. This is the same technology that
led to the infamous production collapse of Oman's Yibal field, which "after
30 years of water injection pressure maintenance, embraced horizontal drills
in 1990, then peaked in 1997 [at 225,000 b/d] and saw production fall by
65% by 2001. The collapse was a total surprise". In 2004, production
has fallen by another 50%. Yibal constituted almost a quarter of Oman's
production in 1997.
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- Waving a wad of SPE reports, Simmons went on, "what
worries me is these 200 hundred papers because they've basically been written
by all their [Aramco] colleagues. They really describe a blizzarding trail
of problem after problem after problem - and what we heard today [from
Saudi Aramco] is 'we have no problems'."
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- Indeed Aramco stressed throughout their presentation
that whatever the market wants they can deliver, and talked frequently
of how the "tank" of Saudi oil would expand, thanks to exploration,
"delineation", and more technology. Yet Simmons pointed out that
much of Saudi Arabia lies outside the "endowment horseshoe",
which contains all the great Middle East oil fields, and compared this
situation with past, unfortunate US experience: "for years we knew
we had the giant fields on the California coast, we knew we had West Texas.
Alot of people thought there must be stuff in between if we'd just drill
for it. There wasn't."
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- As for technology, Simmons says that "instead of
creating easy supply growth, the technology revolution created monstrous
decline rates". Monstrous means up to 20% a year, as in the case of
Yibal, yet Aramco shows that Saudi depletion rates are generally lower
than those of many other large producers. However, as an example of differences
of interpretation perhaps, Aramco shows fallen giant Yibal as 4.3% annual
depletion, in company with Prudhoe Bay and East Texas but less than half
of a fast decliner like Brent. For the whole of Saudi Arabia, over its
entire production history Aramco claims 28% depletion. This is plainly
incompatible with Simmons' findings.
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- The two different reports presented by Simmons and Aramco
are so utterly divergent that they are polar opposites, so that there seems
to be no room for a middle ground. Either the Saudis are in the right direction
or Matt Simmons is. Simmons was one of the first in the world to begin
to comment loudly on global oil peak, after he discovered that the North
Sea giant fields of Forties, Brent, and Ekofisk had peaked and already
declined to midgets without anyone really noticing. Simmons and his staff
have carried out some of the most meticulously detailed studies of US oil
depletion, and he has been proved right concerning his prediction of North
American natural gas peak. "Non-renewable things do some day peak,
and there is some chance that that might be in the past tense. Scoffing
at the notion is today, in my opinion, frankly naïve."
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- Simmons, along with many others, is calling for a "new
era of true energy transparency", in which trust and "flying
blind" is replaced by "timely field-by-field production and well-by-well
data, budget details, third-party engineering reports" from OPEC.
But other parties are also implicated: there must be "far better demand
and cost data, and far better decline data for non-OPEC oil" from
the IEA [International Energy Agency], and financial reforms are needed
to tame "wild price volatility" - there must be "a realistic
economic model for how oil and gas needs to be priced."
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- However, there are many reasons why none of the above
will happen, not least, that if the Saudi situation is as bad as Simmons
portrays, then it is facing economic and social catastrophe in the near
future, and will be unwilling to advertise the fact. Other Middle Eastern
countries may not be much better off.
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- "I think we should worry about the future",
said Simmons after his presentation. "I think we should basically
look at this like we looked at nuclear warfare and say that would be so
awful if it happened - let's do something, put in a warning system."
Referring to Saudi claims of decades of future supply, Simmons said "we're
just stupid as a society to say 'now I know we don't have any problems'.
Fifty years is great if that's right. But if it's wrong, that's awful."
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- If the Saudis are right, the industrial world has decades
more of abundant and cheap oil. If Matt Simmons is right the world is almost
certainly in for global oil production decline before the end of the decade.
Taken together with the baseless 1980s Middle East reserves increases and
no new mega-finds elsewhere, this will most likely signal the end of the
oil age.
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- ***
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- The reader can judge the merits of all the presentations
given at CSIS on Feb. 24th 2004, and see a full conference transcript at
http://www.csis.org The author's short but revealing video interview with
Matt Simmons just after his presentation, is available at http://www.globalpublicmedia.org.
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- http://www.fromthewilderness.com/free/ww3/031704_two_planets.html
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