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PDVSA workers in Venezuela celebrate take over of Orinoco oil fields wresting control from some of the world's largest oil companies. After exploiting its easily accessible oil, first discovered in the early 1900s, the South American nation is turning increasingly to heavy crude oils from deep in its interior.

The Fading Twilight of Oil

Part 1 of exclusive interview with Twilight in the Desert author and energy investment banker Matthew Simmons.

By Bill Moore

Houston investment banker Matthew Simmons is somewhat surprised and obviously pleased that his 2005 'Twilight in the Desert' has now surpassed 100,00 copies in print -- making it a best seller of sorts -- and that it is now available in German, Chinese, Japanese and Korean.

But what really pleases him is that despite early and inaccurate accusations that his book criticizes Saudi Aramco for mismanaging Saudi Arabia's giant oil fields, his research efforts have won the praise of the very people who assumed they were the target of his pen.

That praise, however, hasn't tempered his conviction that the world as we know it is about to change irrevocably as the demand for petroleum outpaces supply.

In this exclusive interview, Simmons talks about the changes he's observed in the oil and gas industry since the release of 'Twilight' in May, 2005.

"Oil prices have gone from $60 to $100," he replied. "if they had gone from $60 to $10, there would be a lot of people saying, 'That idiot from Houston, obviously he was wrong...

"A lot of people attribute the price rise to hedge funds and fear factors... No, the market is really tight."

But for Simmons, it's not been the steady climb of the price of oil over the last three years, that has been the most important change for him personally. He told me that it was the education that he got researching the book, wading through the 200-plus petroleum engineering papers with the help of industry professionals that served as the basis of his book.

What surprises him the most is how he's taken such a keen interest in the technical minutiae of petroleum engineering after spending most of his career as an investment banker to the oil industry having little interest in how oil and gas actually were produced.

"I knew that porosity and permeability were two different properties that were highly important to create reservoir rocks so you can actually flow oil, but I could never remember which was which and what each one was," he explained to me. "That was the degree of my knowledge five years ago. By the time the book came out, I had the good fortune to spend an undo amount of time reading through carefully and writing in the margins of technical reports on field-specific projects to then find a group of people who in my opinion, are the best of the best reservoir engineers that were teaching people. And they collectively, a group of less than ten people, helped me sort of better understand some of the stuff I wasn't quite properly describing or saying.

"So I thought I was on pretty solid ground when the book came out, or I would have never let it be published. If I had been totally wrong, it would have destroyed my reputation and that of the firm that I has spent almost 40 years building up.

"But what I now know is so much more about the mechanics of what I was talking about, and also I have had unbelievable feedback from thousands of thousands of people who read the book. And also an inordinate amount of people... not thousands ... but an inordinate amount of real senior people from within the ranks of Saudi Aramco who gave unbelievable praise when they finally read the book."

Simmons notes that we have seen the longest sustained rise in the price of oil in the history of the industry without being driven by some artificial, geopolitical [event] resulting in people holding oil off the market.

"Demand is still growing by leaps and bounds and the supply isn't. And we've seen the total collapse of the North Sea [oil fields]. We're seeing the rapid demise of Cantarell, which briefly became the second largest producing oil field and these are all visible, raw, hard numbers."

He added that one of the founding members of OPEC, Indonesia has now become an oil importer. In addition, China's two largest fields are now in irreversible decline.

Closer to home in the Gulf of Mexico, the US has 720 producing oil fields, but if you take away the top 35 fields, all of them in deep water and which produce 65% of the region's oil, the remaining fields produce, on average, just 900 barrels a day, barely enough to justify keeping them open.

Naive and Superficial

I asked Simmons about the contention that production is stalled or declining in oil-rich nations like Venezuela and Mexico because their governments have been under-investing in developing new reserves, shifting oil profits into politically-popular social programs.

He responded that this view is naive and superficial.

" I could have said stupid," he told me. "I'll tell you why I say that. It's an easy argument to make if you basically don't have time to look at the data."

He used the example of Venezuela where, until Hugo Chavez fired its senior managers, the national oil company was having to deal with depletion in nearly century-old oil fields. He explained that its engineers have degrees from all the best petroleum engineering schools in America.

"They were doing everything they could do to fight the decline curve," he said, a task that meant finding 800,000 new barrels of daily oil production every year just to replace its depleting oil fields.

The story is much the same in Mexico where the giant Cantarell field has officially gone into decline after producing a million barrels of oil a day for twenty solid years from just 40 wells. As flow began to tail off, Pemex, the national oil company, installed more and more wells, finally reaching 450 and spent another $20 billion on a nitrogen injection program to increase reservoir pressure.

"They are using the finest technology," Simmons said.

"Saudi Aramco is the single largest client of [oil service giants] Schlumberger and Baker Hughes. So these people are applying the finest tools we have."

He commented that during CERAWeek, an oil industry conference held in Houston last week, the head of Saudi Aramco told the audience that his company is going to spend $90 billion on field restoration projects in Saudi Arabia.

"The idea that they are under-exploiting their [reserves] is a terrific theory, but it is actually superficial and naive."

The Expertise Does Not Reside at Exxon Mobil

But what about the suggestion that what these countries need is a good dose of Western investment and expertise? I asked.

Simmons immediately responded, "That is foolish, because the Western technology they are talking about does not reside at Exxon Mobil or BP or Shell. It resides at a Baker Hughes, a Schlumberger and the drilling companies and BJ Services and Weatherford. That's one of the big changes in the world today. The national oil companies are finally realizing they don't need an intermediary called 'Big Oil.' The oil service companies would far rather work for one of the national oil companies, so they don't spend a year-and-a-half trying to squeeze all of the profits out of a contract.

"That's what's really happening where the rubber meets the road. All these theorists are talking about a world they hear about from the CEO's of Big Oil who are so perplexed that they aren't wanted anymore to come into Angola and cream their fields."

As to the question of how responsible have the Saudis been in managing their rich endowment of crude oil, Simmons answered, "I think they have been remarkably responsible in doing everything they can to pull the last oil out. That is a far cry from 'we can do this forever.'

"And 'we can do it forever' is exactly the silly thinking that took place within Pemex when they were in denial for the first year and half when Cantarell started into irreversible decline. And the same sort of thinking that took place for a decade in the United States when all of a sudden in December 1970... the lower Forty-eight [states] started into irreversible decline, 'well that's because we've had a drilling slump for ten years.'

"No it's when we finally got off prorating and starting producing these fields 31 days a month."

Simmons explained that despite the initial criticism of Saudi Aramco executives who assumed he didn't know about the new technologies they were employing -- which is why the Houston banker couldn't know what he was talking about -- it turns out that he did. It was his company, Simmons & Company International that provided the loans to develop and deploy all this new enhanced oil recovery technology.

"That's what I cut my teeth on in the 1980s as an investment banker. I know what all this stuff does."

It was because of these tools, that oil companies began telling their share holders in the early 1990s that they were going to increase their recovery rate from old fields by 7% annually, indefinitely. But all they actually did was introduce them to 30% decline rates as these wonderful new tools pulled the remaining oil out of the fields faster.

Sunrise in the Desert?

The polite feud between Simmons and Saudi Aramco continues. The latest salvo coming in the form of a new paper and PowerPoint presentation entitled "Sunshine in the Desert" by his arch nemesis, Nansen Saleri, the same executive he debated at the famous CSIS event on February 24, 2004.

This latest attempt to paint a rosy picture of the geological situation under the sands of the Kingdom, was so unrealistic in Simmons' views -- with projections of Saudi Aramco being able to raise production to 10 and 12 million barrels day -- that not only did other observers start to question Saleri's credibility, but it inspired 'Twilight's' author to spend the recent Super Bowl weekend wading through another stack of 100 new petroleum engineering reports on the Saudi fields.

His four month-long education into interpreting the 200 reports during the summer of 2004 now paid off as he skimmed through the new reports, zeroing in on the relevant predicate and conclusion in each. What had taken an entire summer nearly four years ago, he was able to accomplish part-time over a single weekend in late January.

What he learned would demolish Saleri's arguments that Saudi Aramco has successfully revived its first giant field, Abqaiq and that its super-giant Ghawar field will be able to produce 5 million barrels a day for decades to come.

But to find out what he learned, you'll have to listen to the complete interview using either of the two MP3 players above and return here for the concluding half of this interview. If you want to be alerted by email when Part Two appears, be sure to sign up for our free weekly email newsletter using the form field in the left-hand column.

Times Article Viewed: 38167
Published: 24-Feb-2008


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