The web is full of “experts” claiming that oil production has peaked and that we are in permanent decline. Recently Shell Oil was forced to admit that it had been over-valuing its oil reserves by almost 30% – an admission that cost Shell dearly in the stock markets. At the same time, there are even more experts who continue to show that new fields and untapped reserves continue to grow. In a controversial analysis by Michael C. Lynch, President and Director of Global Petroleum Services, he tries to show how facts can be read differently by both sides and manipulated, simply because we are dealing with a lot of assumptions and many unknowns.

“This week saw a most unusual spectacle, resulting in a spate of news articles that may be difficult for the uninitiated to understand. Matt Simmons, an investment banker based in Houston and a longtime oil and gas price bull, presented an extremely alarmist view of Saudi Arabia’s oil production capacity and was rebutted by two officials from Saudi Aramco, which historically has been extremely reticent to release any details of its operations. The arguments presented are interesting not for their content but for the nature of the debate (reliance on inference instead of analysis) and the provision of data from Saudi Aramco about their operations.

“Much of the work done by Matt Simmons in the past few years on global oil and gas has relied heavily on inference, suspicion, and concerns while containing little or no real data. Yet, he claims that his new report is based primarily on readings of nearly 200 technical papers published by Saudi engineers and various publications of the Society of Petroleum Engineers (SPE). Although there is no reason to doubt this, the nature of the information he has collected must be questioned. A quick perusal of the draft report shows that there are virtually no tables or diagrams relating to Saudi oil fields, and the only hard information consist of scattered numbers, anecdotes and facts. Few if any are presented in any type of context.

“The primary concerns he [Simmons] raised were as follows:

· Saudi production comes from a few old oil fields;

· The Saudis rely on far fewer wells to produce more oil than the US and Russia do;

· Over time, the problems described in the technical papers appear to worsen;

· The error of the easy oil appears to be near nearly over some call;

· Vertical wells are obsolete and no longer used;

· The Saudis rely on MRC1 wells [Maximum Reservoir Contact wells, usually horizontal and with multiple bores from a single site and designed, as the name implies, to maximize contact with the oil-bearing strata], which caused production in Oman’s Yibal field to collapse;

· The Saudis have only found the few relatively large oilfields in recent decades;

· The big five oilfields account for 90% of production and all use water drive [process by which water is pumped down into the oil bearing strata via special wells in order to float oil to a level where it can be pumped out];

· If BP’s 1975 estimates of the Saudi field reserves are correct, then Ghawar has produced 90% of its oil;

· Saudi Arabia is now intensively explored; 85 of its oil and gas fields are untested; and

· Abqaiq and Berri are near the end of their production.

“He added a number of ‘observations’ about oil production, including ‘oil passed over is gone forever’ and ‘technology accelerates the production in existing fields but doesn’t seem to add to recoverable reserves’. Both of these statements are at best questionable.

“His conclusions from this were quite startling: Saudi Arabia is leaving a lot of oil in bypassed pockets, the remaining oil deposits will be smaller and harder to find and produce, capital expenditures in Saudi Arabia will soar, and within two to three years we will know if world oil production has peaked. He also remarked that he expects reserve write-offs to be widespread, largely representing companies thinking that new technologies, like MRC, would increase reserves but that this is not the case.

“Two officials from Saudi Aramco presented a detailed look at the situation in Saudi Arabia (Nansen Saleri, Manager of Reservoir Management and Mahmoud Abdul-Baqi). Although they were not directly responding to Matt’s arguments, they contradicted a number of things that he said and explained away virtually all of his concerns. The primary points included the fact that Saudi reserves are, in fact, very conservatively estimated, with proved reserves being even more conservatively estimated then called for by the definitions created by professional organizations (SPE, AAPG, WPC), which are relied on by Western companies. Saudi depletion rates are quite low, even when broken down by field and subfield, running at about 2% or so.”

“The production practices that so concerned Simmons, such as the use of MRC Wells, reflected the behavior of a nonprofit maximizing organization, i.e., a state oil company. The Saudis are attempting to maximize recovery, not value in their fields. They are willing to produce more slowly and with the best possible technology in virtually every instance, even if that means not producing it economically optimal rates.

“The argument that capital expenditures would be a constraint was countered by noting that costs are, by the most liberal estimate, under two dollars a barrel and more accurately about $.50 a barrel. The Saudis admitted to the use of water flooding in their fields but pointed out that the water cut after four decades at Ghawar was below 40%, had been stable for five years, and was far below what Western companies often produce in their fields. The article in the February 24 New York Times is a fascinating and sweeping review of water are referred to as the tired Saudi oil fields.

“The only problem is, most of the article focuses on the need for more Saudi oil and a variety of general comments about the difficulties of extracting that oil. These include: it is becoming more expensive to extract Saudi oil; foreign investment faces opposition inside Saudi Arabia (the natural gas deal offered to foreign investors collapsed last year); raising production to 12 million barrels a day would wreak havoc within a decade by causing damage to the oil fields; the Ghawar [oil field] is becoming costly to maintain, with an 8 percent decline rate and decline requires several hundred thousand barrels of new capacity every year; [and] some are questioning the ability of the Company to produce 800,000 barrels a day from the fields Qatif and Abu Safah, saying the goals are unrealistic and that costs are higher than anticipated, including difficulties with hydrogen sulfide, making development “particularly challenging”. The use of submersible pumps at Abu Safah is ill advised.

“Conclusions: There literally seems to be no evidence that the Saudi oil fields are facing any unusual challenges or that Saudi production will be constrained in the future by anything other than policy. All of the concerns appear to be instances where the most pessimistic interpretation has been chosen, such as fields not operating because of technical difficulties rather than weak demand.” [End of Lynch quote.]

Joel Sousken comments: After an otherwise good perusal of both sides of the issue, Lynch shows excessive bias in his conclusion-which overstates the positive view of future oil availability. I think the truth lies somewhere in between. We are not in danger of running out of oil anytime soon, but clearly world oil production is being strained and may, indeed, begin a slow decline. In a world war scenario where oil begins to be consumed at ever increasing rates, declining oil production could definitely play a major role.