The Myth of Everlasting Saudi Oil
By Bill Moore
"We've created a gigantic myth over the last thirty-five to forty years", Matthew Simmons told me from his summer home in Maine, "that effectively said the Middle East has unlimited amounts of oil when it wasn't true".
How does he know this? Because he's spent the better part of the last two years carefully combing through a three feet-high stack of Society of Petroleum Engineer technical papers he discovered after attending an industry conference in Saudi Arabia.
"What I didn't realize at the time was I apparently was the first person of any sort of notoriety to ever even raised the issue [of the health of the Saudi oil fields], which now fascinates me. How did we start so glibly assuming that the Middle East has so much oil that they would, basically, never face a peak amount when, in fact, there was no data to support that other than some numbers that didn‘t have any validity behind them".
And therein lies the kernel of the problem. No one -- with the exception of the Saudis -- knows with any certainty how much oil has been extracted. I wanted to say "pumped", but the fields in Saudi Arabia don't use the traditional "donkey" pumps to extract their oil. Instead, they use reservoir pressure schemes to force the oil from underground petroleum traps locked in ancient strata. In fact, no public data has been released on the fields in Saudi Arabia since Saudi Aramco was nationalized around 1982. So, it's been 23 years since the last reliable production numbers were released.
"The proven reserves, which used to be reported on a detailed, field-by-field basis disappeared, rolled up into just country-by-country. Over the period of the first eight years of the 1980s, all of the Middle East oil producers tripled the amount of proven reserves they said they had. And then, effectively, country-by-country, the [proven reserves] number stayed still. It never changed from 1987-88 to 2005; and nobody ever said, What's going on? How do you basically keep producing 15-20 million barrels a day out of the Middle East and the proven reserves never change?"
Tanker Traffic "Consultants" a la Spies
One of the more intriguing stories in "Twilight in the Desert', Simmons' new book on the state of Saudi fields, is paucity of reliable data on Middle East production in general and Saudi production, specifically. Simmons is one of the first people to point out the fact that much of the data underlying "official" production numbers are unreliable, based largely on the findings of Petrologistics, a "powerful" information collecting company located over a supermarket in Geneva, Switzerland.
According to Simmons, this company is usually the first one the media "glums" onto each month when the latest Middle East production numbers are released. This data, he alleges is gathered from a worldwide network of harbor "spies" located in the world's top oil export countries.
"They look through a pair of binoculars and a sort of a gauge in their windows to check [tanker] plumb lines as to how much oil is being loaded into the tankers. And [Conrad Gerber's] story is he can't disclose the names of his harbor spies; he can't even call them at home because when he used to do that, one of them got killed.
"What's interesting is that there are twenty other people… sources that report Middle East oil, but they all seem to get their first data from Petrologistics. And again, no one has ever basically questioned, Well how does he get that data?" Simmons explained. He pointed out the obvious problem that even with harbor spies using binoculars and plumb lines, there is no way to know the grade of the oil and how much being pumped aboard the vessel or its ultimate destination.
"You have no idea if its 1.8 million barrels or 2.2 million barrels. You have no idea where the tankers going," he said. "But again, no one ever thought about where this data comes from.
"We have an energy data system created today that is simply rubbish."
Accidentally Deliberate Cloak of Secrecy
Despite oil producer claims -- and this includes the oil companies as well as oil producing nations -- of not wanting to report field-by-field production data for supposed competitive business reasons, Simmons also thinks that stance is rubbish. He pointed out that both Britain and Norway required extensive production data from the North Sea fields they controlled and none of the oil companies' competitiveness was jeopardized.
"The oil industry accidentally created a cloak of secrecy and no one every thought through whether this was either good or bad. It just happened. It was just the culture of the industry".
And until as recently as 2004, the Saudi's were as closed-mouth about their oil fields as everyone else. What makes the Saudi's position so sensitive, even though they only produce about 10 percent of the world's oil (between 8.5 and 9.5 million barrels a day), is their historic excessive production capacity. In the past, when world oil supply hit a pump like a hurricane in the Caribbean or a war in Iraq, it was able to quickly ramp up its spare production capacity and stabilize the global market.
"The problem is, it's the only country on earth that we have always assumed had the ability double its oil output or triple its oil output as global demand grows. And the second problem is there are only about four other countries in the world that can produce over 3 million barrels of oil a day. Russia, whose oil peaked over 12 years ago and had a recovery [but they're about to go into production collapse again. The United States, which peaked in 1970, at 10 million barrels a day, and that was before Alaska and deepwater [drilling], and the lower 48 are now down to about 2 million barrels a day from 10. And then Iran and Mexico and China. After that you get to producers that are between 2 and 3 million barrels a day; and there are about 10 of those. And then you drop down to most other countries are producing between a half million and million barrels a day. That would all be fine if everyone just used their own oil".
The trouble is, we don't.
Simmons said that world oil consumption has grown from 70 million barrels a day in 1995 to what some experts are predicting will be 86-88 million barrels by the end of 2005.
More troubling is a newly released U.S. Energy Information Agency projection that sees global oil demand growing to 119 million barrels a day by 2025.
"The only way we could ever, ever [produce] 119 million barrels a day is if Saudi Arabia is producing somewhere between 20 and 30 million barrels a day, and my worry is that since Saudi Arabia gets 90 percent of its production from five fields that are very old, each of those five fields could easily, in the next 3 to 5 years, go into a significant production collapse.
Instead of nearly 120 million barrels of oil being consumed daily by 2025, Simmons thinks it's more likely the world will have to make due with half that much, just 60 million barrels a day.
Sympathetic to the Saudis?
One of the curious contradictions to come out of Simmons' book, ‘Twilight In the Desert' is the sympathetic tone he expresses towards the Saudis, despite now being considered by some in the Kingdom and the oil industry as "public enemy number one".
"I say just the opposite," Simmons responded. "I am highly respectful of the role they have played in the oil markets, and I think it's too bad that the world effectively encouraged them to believe that they could produce anything we'd ever need. And they got so proud about that, that when the word of this guy (Simmons) in Houston writing a book started leaking out, it invoked some unbelievable… that couldn't be, that just could not be. It was like someone going to the Vatican and saying there really isn't a God".
In "Twilight", Simmons explains how the Saudis, on several occasions when the world demanded it, pushed their fields to the very brink of collapse. Between 1997 and 1999, the Saudis had to "rest" their fields, scaling back production to half its present level, in order to keep them from going into steep decline.
It is that willingness to be the swing oil producer to help keep the world's economy on a stable footing that earned them Simmons respect.
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When people think of oil wells they either think of newly discovered "gushers" shooting oil 200 feet into the sky or those nodding "donkey" pumps slowing sucking up a few barrels of oil a day in played-out oil fields. Even though Simmons has been a "serious student" of the oil and gas industry for 33 years, he admits that he still had a lot to learn about the oil business, especially why the fields in Saudi Arabia are so utterly unique. Researching and writing the book proved an education for him, especially in understanding the mechanics of reservoir pressure and its role in oil field collapse.
Oil trapped in geological formations is usually under pressure from entrained methane bubbles mixed in the petroleum like carbon dioxide in champagne or soft drinks. These gas bubbles gives crude oil its "fizz"; its what causes the "gusher" in the John Wayne movie. Like shaking a bottle of beer or pop, the oil will naturally flow up the "straw" propelled by this reservoir pressure.
As you extract more and more of the "fizzy oil", this pressure begins to drop -- like champagne going flat -- and less and less oil flows out of the formation. Gradually, the methane starts to form a gas cap at the top of the oil column. At the same time, with internal pressure reduced, the brine water that is the "floor" of the oil column and trapped the oil in the deposit originally begins to co-mingle with the oil.
Simmons explained why this is important.
"When you drop to what is technically called the 'bubble point', the gas entrapped in the oil molecule starts bubbling to the top of the oil reservoir and it creates a gas cap, and then the reservoir pressure falls even faster and it finally hits what is called 'dew point'".
To keep the "fizz" in the field, the Saudis pioneered a technology used around the world: a massive system of water injection at the outer edges of the oil. This helped maintain reservoir pressure by 'squeezing' the oil towards the extraction wells.
But gradually over time, as hundreds of millions of gallons of both aquifer water and seawater from the nearby Arabian Gulf were pumped into the fields, more and more of the oil began to be mixed with water; not a good sign. Many Russian and Iraqi fields collapsed because of excessive water encroachment, and most American stripper wells in the Southwest now produce just 2.2 barrels of oil daily, on average and upwards of 500 barrels of brine water. The super giant Ghawar oil field is purported to be seeing 35 percent "water cut", a troubling harbinger.
"For every barrel of oil they produced, they began injecting a barrel of water, and then it became a barrel and a half of water, and then two barrels of water. And what they were doing was artificially keeping reservoir pressure high until they had finally swept all the easy oil out. Once they‘d finished that process, there was still massive amounts of oil left, but its oil left behind, in technical terms".
Simmons pointed out that the best estimate for the number of oil wells in Saudi Arabia is somewhere between 8,000-10,000 producing 8-10 million barrels of day, while in the United States we have about 1 million wells producing just 5.5 million barrels a day.
"To sustain their production once they lose reservoir pressure, you'd have to take that number to 400,000 to 500,000, which would be fine if you could easily create another 2,000 or 3,000 drilling rigs, but since the world is now out of spare drilling rigs, that's also a problem".
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_simmons1.mp3