A Tale of Two Planets
A Report
on the
Conference
“Future
of Global Oil Supply: Saudi Arabia"
Held at CSIS,
Washington DC, February 24th 2004
by Julian Darley
julian@postcarbon.org
(special to From The Wilderness )
© 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.
March 17, 2004 1800 PST ( 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.
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.
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.
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.
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.
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.)
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.
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.
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.”
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”?
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.”
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.
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.”
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.
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.
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'.”
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.”
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.
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.”
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.”
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.
“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.”
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.
***
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.
______
Julian Darley is Director of the Post
Carbon Institute, based in Vancouver, Canada, and author
of the book ‘High Noon for Natural Gas: The Next Energy
Crisis', forthcoming from Chelsea Green Publishing
( http://www.chelseagreen.com ). A wide
range of live video and audio interviews on oil and
natural gas peak can be found at http://www.globalpublicmedia.com.
http://www.fromthewilderness.com/store/books.shtml
