FEATURED ARTICLE
Matthew Simmons
Stirring up a veritable hornet's nest; Matthew Simmons is the founder of Simmons and Company International, a Houston-based energy investment banking firm. Despite having more than 30 years experience in the oil industry, his research into the state of Saudi Arabia's oil fields was a revelation into the phenomenon of "peak oil', the point in human history where global demand for oil outpaces supply.

Saudi Oil-Gate

Part two of interview with Matthew Simmons on the myth of everlasting Saudi oil and the scandal that should have overshadowed Watergate

By Bill Moore

To Part One

"It should have been a big deal back in 1974 and 1979," Matt Simmons said, referring to a pair of Senate closed door hearings into the state of Saudi Arabia's oil fields.

But it wasn't. Had it been, America and the world might be a lot more prepared for "peak oil" than we are. Instead of Saudi Oil-gate, we got Watergate.

In researching his book, "Twilight in the Desert", Simmons came across a short article written in early 1979 by famed New York Times investigative reporter, Seymour Hirsch. According to the Houston investment banker, it "described these secret 1974 Senate hearings when, behind closed doors, the Senators were told that Saudi Arabian oil fields were being intentionally over-produced and they were going to have to cut back, anyway, so even if there hadn't been an [OPEC] embargo there would have been a necessity to cut back the oil".

Simmons assumed that because the hearings had been secret, there was little chance he'd learn more about what the Senators had been told thirty years ago. Instead, he discovered a two-page executive summary of a Senate Foreign Relations subcommittee staff report from April, 1979.

"It indicated that they'd just written a lot off [Saudi Arabia's] proven reserves and they had significantly changed their minds about what was sustainable peak production going down from 25 millions a day to maybe 9.8 million barrels a day".

When Simmons and his executive assistant, Judy Cristwood, attempted to find the complete report, the Senate librarian told them that the library doesn't keep copies because of space considerations, However, Simmons might try his local university, the librarian suggested. As fate would have it, a part-time employee who was also attending the University of Houston at the time, checked with the University library and found the complete 32-page staff report.

"When I read through this, it also referred to the '74 hearing and it gave the reference number".

That led Simmons to inquire with a friend at the New York Times, who was also an investigative reporter, as to whether it would be possible to track down the papers from the 1974 hearings. The reporter told him, "whatever they got, they've put under lock and key for the next fifty years".

His curiosity piqued, Simmons checked with another friend on Capitol Hill to see if maybe enough time as passed that the documents might have been declassified. Like an old-fashioned oil field wildcatter, Simmons' luck held. Because the findings of the committee were so inconclusive, the committee apparently decided to release not only the final report, but also make part of the public record all of the subpoenaed papers.

"I suspect I am probably the only person that every checked those books out".

What Simmons learned would pale Watergate and "All The President's Men" had we been paying attention.

The Washington Scandal That Never Was
"In January '74, when we were at the height of the '73 'Oil Shock', Jack Anderson, in the Washington Post, published three or four back-to-back stories, saying he was in possession of secret papers that came from someone within the Aramco companies" -- then consisting of Chevron, Exxon, Mobil and Texaco -- saying "they basically, intentionally convinced Saudi Arabia that these fields had no limits at which they could be produced. And their strategy was to produce every drop of oil of these fields before it was inevitable that they were going to get nationalized.

"As they did this, they ran into massive production problems of water encroachment and reservoir pressure drop, and so they were getting ready to dramatically cut back their production to prevent a production collapse when the embargo happened.

"Once Anderson published these three or four Washington Post articles, there'd been a subcommittee created by the Committee on Foreign Relations to study multi-national corporations. They'd just finished a big investigation of IT&T and the Allende government in Chile, so they asked Jack Anderson to come in and describe to them in a closed hearing what was going on. It was so fascinating to read this. It was January 28, 1974.

"Anderson asked to be sworn in and he begins his testimony saying, 'I asked to be sworn in because Aramco is already saying that I am making this stuff up'. And he tells them, chapter and verse, about this whistleblower giving him these documents because he thought they were operating against the best interests of the United States and the world.

"The Senators were so shocked, and [Anderson] would not disclose who his source of information was... déjà vu today... so they subpoenaed documentation from the four owners. And then they [held] additional hearings; and finally on June 20th they have about six executives from Exxon and Chevron testify under oath. One of the executives -- the chief reservoir engineer at Chevron -- testifies, 'Yes, these are messy problems. We're going to have to cut back. We cannot sustain this production. And the others, under oath, say no, there are no problems whatsoever'".

Simmons said that it's now apparent to him that people knew back then that the Saudi oil fields could never produce at the rate we were being told.

The myth of everlasting Saudi oil was created by us, he stated.

The Houston investment banker gradually pieced together the story of the scandal that never was. According to his sources at the New York Times, Seymour Hirsch wanted to do a major investigative story on the secret hearings, but his editors objected, pointing out that he'd never been to Saudi Arabia, to which Hirsch is purported to have replied that he'd never been to My Lai either, site of the infamous Vietnam War massacre of hundreds of civilians by the U.S. Army.

Instead of publishing the larger article, the Times cut it back to just three paragraphs -- the clipping that sent Simmons on his original quest for documentation.

"About this time, Iran had totally collapsed and Aramco notified the [U.S.] government that they were going to cut back their production [in Saudi Arabia] by a million barrels a day. And that triggered Frank Church, who had been chairman of the subcommittee in '74, and is now chairman of the Senate Committee on Foreign Relations, [to] ask if is a political act or could these be these problems we were warned about five years ago?

"So, they issue subpoenas again, collect a bunch of data, and whatever they collected was so sensitive it was put under lock and seal for fifty years".

Instead, the committee released what Simmons characterized as a "fuzzily written, 32-page staff report" that indicated there were problems and that the committee had done its job without revealing how serious the problems were.

Simmons believes that the reason the original investigation faded into obscurity in June of 1974 was the inconclusive nature of its findings.

"And by then, we'd actually forgotten about our energy crisis", he added. "It was over and we were right at the height of Watergate. And when all the papers were released to the public domain, it was the 10th of August, 1974... That's the week Nixon resigned".

It would be nearly thirty years before those documents again saw the light of day just as Simmons was wrapping up his manuscript, "Twilight in the Desert".

Answering His Critics
Uncovering those committee reports after having completed his study of some 150 Society of Petroleum Engineers [SPE] technical papers devoted to a host of production challenges across the Saudi oil fields, only confirmed what his research told him; that there is, in fact, a limit to how much oil the Saudis can produce.

But Simmons' critics have leveled two charges at him. The first is that technical papers are an invalid method for analyzing the production capabilities or limitations of an entire oil field, because they are written by engineers looking to bolster their careers and reputations by exaggerating problems.

"They deal with the problems in oil fields, not the opportunities", the critics argue.

The second charge is that as a mere investment banker/analyst, Simmons is hardly qualified to accurately assess -- much less understand -- the implications of the findings in SPE technical papers.

Simmons pointed out that he's spoken at least fifteen to twenty times over the last ten to fifteen years at different SPE conferences around the world, including in Saudi Arabia. It was after a six-day trip to one of those conferences held in the desert kingdom, that he started to question some of the things he was hearing that didn't seem to make sense to him.

It was after reading a technical report on a specific site in the super-giant Ghawar oil field that he determined to see if there were any other SPE papers that talked about specific Saudi fields. A conversation with the head of Society led him to a search of the SPE's online library of thousands of technical papers.

"What I discovered was there were hundreds of papers... the earliest one going back to 1961. By the time I'd gotten through 150 of them, it was a stack of about two or three feet, I realized that I had accidentally toured Saudi Arabia, and wandered through every one of the five [major] fields. And [among] those 150 papers was a single paper that talked about good news; and there was an unbelievable steady pace of papers written, saying we now are starting to understand why we have had all these problems... why our reservoir modeling has never worked".

By the time Simmons had reached the bottom of that stack of papers, what had started out to be research for a industry write paper, had evolved into a book.

"I knew if I was going to publish a book, it would be the most controversial energy book every published and I really didn't have any great interest in looking like a fool".

So, he asked associates who were experienced petroleum geologists and reservoir engineers to review his manuscript.

"If you look at the acknowledgement part of my book, I list about fifteen people, who in my opinion are the finest reservoir engineers in the world and petroleum geologists who very carefully read my rough manuscript, pointed out some things the papers had missed...

"The charge that the technical papers are invalid because they deal with the problems is an insult to the Society of Petroleum Engineers, and the board of directors of the Society of Petroleum Engineers feel just as strongly about that as I do. The idea that an analyst is unable to read technical papers… and then ask the best technicians to walk me through this, is effectively saying that only technicians can basically deal with technical data, and that is so utterly stupid, I can't believe it".

After being released some eight weeks ago -- when this interview was conducted -- not a single critique has surfaced that negates any of Simmons' conclusions, other than what he calls "regurgitations" of criticisms launched within the petroleum industry in 2004, when word leaked out he was writing his book: technical papers are useless in analyzing the potential production of a field, investment bankers/analysts can't understand them, and "Trust me, we have no problem".

Fishbones Or Wishbones?
The relatively recent advent of maximum reservoir contact or MRC drilling technology that sends fishbone-like bore holes down into oil-rich geological formations -- as well as other advanced drilling and extraction technologies -- promises to revolutionize the industry's ability to get at more of the oil that traditional approaches have missed.

So, while Simmons conclusions might have been valid at one time, this new technology solves those problems, his critics contend.

"Over the course of the last decade all of the major oil companies that use the same technology (used by Saudi Arabia) all fell for the same belief. If you go back five years and you look at the statements made by BP and Shell and Exxon and Chevron and Texaco and Mobil, they all believed that they were going to be able to grow their production by five to eight percent per annum for a decade or more because they were using these fabulous, new technical tools.

"I was saying very loudly in print that, in fact, we've created decline rates that are so great that it's going to start becoming very hard to even maintain flat production. I was basically speaking out in 1995, 1996 that it would appear that we're about three years away from the North Sea [oil fields] peaking, when the major oil companies said... the North Sea won't peak until 2010.

"It turned out that these technical tools are exactly the same in Saudi Arabia", Simmons continued. "They are tools that are operated by drilling contractors, and Schlumberger and Halliburton, and they're used all around the world. So, there is nothing unique about the tools that Saudi Arabia is using. They were 'turbo-straws' sucking oil out of all of the formations at the same time and... accelerating the rate at which the easy oil could be produced. And once it was done, the production collapsed.

"It turns out the North Sea peaked in 1999 and is already down by 25 percent".(1)

"The idea that these mainstay fields in Saudi Arabia will never age is as preposterous as saying there's a village of people that are 95 [years-old] that will be just as productive at a 195. Would anyone even vaguely believe that?"

Looking Through the Rearview Mirror at Peak Oil
Simmons is unwilling -- and unable -- to say when the Saudi fields will peak, largely because of the paucity of information coming out of the kingdom about the condition of their fields. That's why he has been calling for international collaboration between oil producing nations and oil consuming nations to inventory the world's oil reserves, starting with quarterly, field-by-field production statistics.

Once that happens, he believes that experts could in less than two days, determine the true state of the world's petroleum reserves and begin to plan for alternatives that will replace declining oil production before it occurs.

"Without that data, we're going to have to watch that rearview mirror and then wake up some day [and see] that it's actually now clear that their production's in decline. Once that turns out to be the truth, it's also just as clear for anyone that knows anything about this issue, that the world has [exceeded] sustainable peak production and is in decline".

Completely Off the Radar Screen
Apart from Congressman Roscoe Bartlett from Maryland talking about "peak oil" on the floor of the Congress -- largely to an empty chamber -- the subject of peak oil has been, in Simmons view, off the "radar screen" of politicians, which is why there is no mention of it in the recently signed energy bill.

That is starting to change, however.

"What is interesting is that Monday afternoon the American Meteorological Society held a two-and-half hour program in the Hart Senate Office Building, and there were five of us that spoke about peak oil... That's probably the first time that peak oil has been seriously addressed in Washington, D.C. in the history of the United States, other than Roscoe Bartlett's five times on the floor of the House in the last ten weeks.

"This is an issue that was off... anyone's radar screen", including Simmons' as late as 2000 when he helped advise the Bush campaign on energy policy.

"I spent a lot of time helping make sure that they had all the right issues in 2000. I had no idea in 2000 that peak oil was even an issue. I used to occasionally hear people discussing peak oil and economists laughing about the fact that we started worrying about running out of oil when the first oil fields in Pennsylvania started watering up... I thought, erroneously, that 'peak oil' meant running out of oil... That's before I realized that peak oil didn't mean running out of oil... as I said on Monday afternoon, peak oil means you 'peak'. And it usually means that right after you peak you go into decline. A hundred years from now, we could still be using 10 million barrels of oil a day. So we won't have run out of oil. But 10 million barrels a day when the oil needed 200 million barrels day is a catastrophe".

Reform Needed Now
Simmons writes in his book that we need to start doing the right things, right now, in order to forestall this catastrophe. And the first "right thing" is energy data reform, which he thinks could happen in a month's time if all the parties agreed that the current situation is unacceptable.

"Anyone that wants to claim they are a serious oil provider needs to start providing third-party audited production reports from every single key field, and get off this kick that this is confidential and nobody's business. It's just good supply chain management. That's about the only thing we could realistically do this year".

After that, Simmons believes we need to verify how real the issue of global oil production peak is and he suspects that when we do, we'll quickly realize that we are either at or, worse, have exceeded sustainable oil production on a global basis.

"That will then kick into gear some very, very drastic steps to start mitigating the impact of hitting a 'brick wall'. We have to substantially change the transportation use of oil, because that's 70 percent of the world's oil use... And 95 to 98 percent of all transportation is fueled by oil. So, it's not an electricity problem. It's not a heating problem. It's a transportation problem.

"So, what we have to do in a five-to-seven year period of time is dramatically change the way we use transportation fuels; and therefore, a lot of things that are on the conservationists' list go out the window because they take to long to have an impact".

For Simmons that means largely the abandonment of the concept of globalization where products were sourced from markets with the cheapest labor costs, assuming transportation cost was so incidental that it was "free".

"That has to stop. We have to stop the way we transport goods, which is easier to implement than the way we transport people, and get all of the large trucks off the highway system in the world". This means shifting the movement of goods to railroads and boats, the latter of which has an energy intensity that is one-twentieth that of trucks.

"If it's rail, the longer the train, the longer the distance, the greater the energy efficiency. You're getting savings of somewhere between three and ten times."

He also pointed out that removing the trucks off the road, you take a huge step forward in reducing traffic congestion and the inefficiencies that generates just in terms of fuel consumption.

"It turns out that traffic congestion is public enemy number one through five on passenger car fuel efficiency".

He believes we need to focus on building dramatically more efficient vehicles, but because it takes 20 years for there to be sufficient vehicles in the fleet to make a difference, this is a longer term initiative with little immediate impact.

Simmons also sees the need for greater local food production and organic farming, which necessitates a return to living in sustainable village communities.

"I actually think, in a funny sense, we can do that in a five-to-seven year period of time and not destroy the economies and actually have a more efficient way of living. If we don't take this stuff seriously and go to a war footing this could end up being one of the most unbelievably unpleasant experiences that the world has ever faced".

Oil Once Too Cheap to Drink
Yet despite his gloomly forebodings, Simmons said he is optimistic that people "basically aren't dumb enough to hit the wall. If enough attention is focused on this issue, we can actually lick the issue and come out being a lot better off".

"We also have to get used to the fact that it was a tragic mistake that we used up most of the world's highest quality oil at prices that were, effectively, free".

He explained that in the last 140 years, the average price of oil (in 2004 dollars) was just 3.8 cents a pint. Even at $60 a barrel oil, it's still only 18 cents a pint.

"Can you imagine any other liquid, of any kind of value, that you could buy for 18 cents a pint?

"Now we're left with a lot of oil, but its low quality oil and we're going to have to get used to paying maybe $4 or $5 a pint".

Be sure to listen EV World's complete interview with Matthew Simmons in MP3 audio format by downloading the file from: http://www.evworld.com/evworld_audio/matt_simmons2.mp3

(1) In the MP3 interview, Mr. Simmons says peak occurred in 1979, but in subsequent email correspondence he corrected it to 1999, noting that the fields are now down 40% in some cases.

EVWORLD Future In Motion Podcast

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Times Article Viewed: 10585
Published: 13-Aug-2005

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