Simmons: The Implications of Saudi Arabian Oil Declining (transcript - part 1)
The following is a transcript of a speech given by Matthew Simmons earlier in the month at the Hudson Institute. Simmons is an energy banker as chairman and CEO Simmons & Company International.
Matthew Simmons argues that "there is no other oil producer on Earth that can even begin to replace a significant shortfall in Saudi Arabia's oil. So if Saudi Arabia is at peak production then so is the World." Video coverage of his presentation from C-SPAN can be accessed directly here:
Hudson Institute presents: Saudi Arabia in Crisis
Matt Simmons, chairman and CEO of Simmons & Company International
Keynote address: "The Implications of Saudi Arabian Oil Declining"
Moderator: May is going to take the Q and A, and I hope we will run until 2:00 and break sharply at 2:00 [pm]. I am very pleased that we have Matt Simmons with us. He’s Chairman and Chief Executive of Simmons and Company International, a specialized energy-investment banking firm, one of the most important investment banking firms in the energy industry. A graduate of the University of Utah, he has an MBA from Harvard Business School, his firm has played a leading role in assisting its energy client companies, doing a large range of financial transactions from mergers and acquisitions to private and public financing. He has about 130 employees in offices all over the world. Matt is active in 20 civic activities in Houston, to enumerate, also in Boston; he’s been widely published, and he’s certainly one of the world’s leading experts on energy.
Matt, I am delighted you’re here, and I’ll turn the mike over to you.
Matt Simmons: Thank you. It’s an honor to be here and address the issue of, not the geopolitics of Saudi Arabia, but the far more important issue for the impact on the global society – the sustainability of the Saudi’s oil. The question that I will basically pose is: do we have a glass that is still half full or a glass that is in fact half empty?
Let me give you a little bit of background as to how I ended up becoming so deeply immersed in what I think I now know about the story of Saudi Arabia’s oil. I basically spent the last 35 years as an energy investment banker, and I have an enormous bent toward research, and most of my life I’ve worked on deals, and over the course of the last ten years, as I’ve sort of taken myself out of the day-to-day stuff, I’ve become a relatively active energy speaker, of various forms, and the more I speak the more curious I get about energy, and I’m a data nut, so the more data I get, I note, you know, there are some things I think we don’t properly understand.
Having participated for a couple of years running in an interesting oil-supply workshop that’s held in Washington once a year, where some of the singular people in our government looking after energy get the most knowledgeable people they can find around the world to come and try to figure out over the next three to four years how much capacity do each of these countries have, on a country-by-country basis, and the first time I participated in this I came back and said, “I don’t know where these guys get all these models, but they don’t have any knowledge of any of these countries.”
And so the next year, I actually encouraged the planners to let’s not waste a day by going around and having everybody pontificate, “Well my model says China can produce blah, blah, in 2002.” Let’s just have us all fill out a data sheet (because I had a suspicion that by the time we got to the eighth person, his model totally changed from what he heard from the other seven) and then let’s spend the time saying isn’t this interesting, you as a group say Kuwait will produce in four years somewhere between 2 million barrels per day (b/d) and 3 million barrels per day - where are the differences? Let’s spend our time focusing on the delta.
And that convention convinced me that we, as a group of people, knew nothing. And I thought, you know, I know more about some of these specific fields that they don’t know the name of and they know exactly what the country is going to produce three years from now, but they don’t have any idea which field is producing what, let alone are any of these fields in decline. So I embarked on one of these research projects I have a hankering to do, called ‘I wonder what our giant oil fields actually are today?’
I’ve never been a ‘reserve’ person; I never actually thought that any of that data meant anything of any value, long before the Shell reserve scandal. What I decided to do was to define oil terms as we always should, in terms of ‘current production,’ and say, o.k., I am going to call an oil field that’s producing over 100,000 b/d a ‘giant oil field,’ and I am going to see if I can figure out the list [of producing oil fields] from number 1, which I know is Ghawar in Saudi Arabia; I know number 2 is Bergen in Kuwait; I have no earthly idea who the next 8 are, let alone how many we have. And at one point in the fall of 2000 my assistant said, “You’re actually having too much fun,” because this really became a treasure hunt of data. And by about Christmas I published this study called ‘The World’s Giant Oil Fields,’ and I was absolutely astonished at what the results were.
It turns out that there are 14 largest oil fields that still produce 20% of our daily supply, and on average they were 50 years old, so today they’re 54 years old. And it also turns out that it’s been decades since we’ve actually found a giant oil field, because 100,000 b/d to 200,000 b/d aren’t actually giant oil fields, they’re just kind of nice (they’re really terrific if you own one), but if the world is consuming 80 million b/d, then a 100,000 b/d day source of supply is really a proverbial spin in the lake. And what I also didn’t realize until I did this (I kind of became a lot more familiar with some of these field names by the end - they became like old friends) I didn’t realize that the Middle East basically just had a handful of oil fields. Each of these countries, these great oil producers, doesn’t have a hundred fields that make up their production. They all seem to have 4, 5, or 6 [oil fields] and they’re all very tightly put together, so this is quite different.
At any rate, then a couple of years ago, I got asked to be part of a small delegation to go visit Saudi Arabia. So I spent 6 fabulous days the first week in February (a year ago) in Saudi Arabia. The people could not have been more courteous, and it was a very educational trip, but I arrived there highly curious about a bunch of oil questions, because of what I thought I knew and didn’t know, and stuff I’d heard over the years about the proliferation of energy in the Middle East, and so forth, and by the time we got onto the plane to come back, I said to a couple of my colleagues, “You know, there’s something here that doesn’t meet the smell test. First of all, I can’t imagine where 2 ½ million b/d of excess capacity that you can turn on at the wellhead and process it into usable oil can actually even be. I can’t imagine why they’re so intensively using all the best technology in the world, if they in fact have 90 years of proven reserve.”
There was a presentation that we had at the Expec (ph) Center at Saudi Aramco where one of the guys said the reason we are applying this technology is because it now takes fuzzy logic to make sure we are maximizing our natural resource base. I had never heard the term ‘fuzzy logic’ before’ so during the Q and A, I raise my hand, and actually I had two questions: “Was that model that you did of Ghawar with all those dots, were they wellheads?” And he said, “Oh yes.” And I said, “How come they’re all in the very north of the field?” [And he said] “Oh we just make an orderly progression from north to south.” And secondly, “What does ‘fuzzy logic’ mean?” And he said that fuzzy logic (which is a very common scientific term, but I just had never heard it before) is the difference between the other end of the spectrum from crisp logic. Crisp logic is true or false. A man of ten is young, true or false; a man of 20 is young, true or false; a man of 30 is young, true or false; a man of one hundred is young, true or false. When you get towards the center there is no true, there is no false, and it now takes fuzzy logic, and I said to myself, “if they have 260-billion barrels of reserves, if they can basically just keep turning on a tap, why does it take fuzzy logic?”
I didn’t want to be facetious - there was just something there that didn’t smell right, and I never realized (even doing this giant oil field study) it took me in the hotel in Dhahran, looking at this nice book we were given on the eastern province, to suddenly start realizing that you could draw a ring around these handful of great fields, and it would fit within the Great Salt Lake. I grew up in Utah - it’s not a very big territory.
So I came back, and I started discussing this with some of my colleagues, and one of my colleagues about a month later brings in the Journal of Petroleum Technology (this is a publication done by the Society of Petroleum Engineers), August 2002, and he said, “The funny thing is, I was just about to throw this away, and I noticed that there is an article in here about a little section of Ghawar” (which you will hear a lot more about). I read this, and you just never see individual field-specific things in the JPT. Well I wouldn’t read a lot into this, because it’s a very small area, but the first time I read it, I couldn’t read anything into it—it was so technical that I really barely understood what they were talking about. By the time I read it about the third time, I said, you know, I took out my drawing that I did of Ghawar, when I said are those dots all over the North, and I said if you could ever find about 5 more of these papers, you could really start stringing together maybe the real story that you never hear about.
So, ironically, the Offshore Technology Conference (OTC) was having a once-a-year on the first of May. It’s the largest energy conference in the world, and the OTC planners were having a press conference the following week to promote the upcoming OTC, and they asked if I’d be one of the people on the press conference. So on Sunday morning, I e-mailed the President of the Society of Petroleum Engineers (SPE), a guy named Mark Rubin, and I said, “Mark, before you come to Houston on Tuesday, do me a favor, ask the librarian (the SPE is headquartered in Richardson, Texas) if there’s ever been another paper done on Ghawar. I’d really love to read it.” Within about 5 minutes, I get an e-mail back saying, “Matt you’re a member of the SPE; we’ve digitized the entire library. It’s very user friendly, you ought to go out, I’m sure there must be (inaudible).
By the end of that week, I’d downloaded 39 papers, and by the time I’d read those 39 papers I thought if I am reading this correctly, the oil fields of Saudi Arabia are in terrible shape. And so I decided this summer I am going to do another white paper. As a couple of you know I happen to like to spend the summer in Maine. It happens to be quite a lot more enjoyable than being in Houston. So I got to Maine about the first of July, and I thought, you know, rather than do this sort of haphazardly, I am going to go back and put into that Google search machine every single field, every single key term, and just see how many more papers we basically get. Well I’ve got a list of about another 275 [papers], and I clicked through another 105. I can’t tell you the reaction I had the day they arrived by FedEx in Maine; I thought, “What on earth have I done, do I really want to spend the summer reading through this stack of papers like that?” And for about three weeks I didn’t. Then I finally got back into it and with a vigor, and by about the end of August, I had a sinking feeling that I had basically spent the summer touring the oil fields of Saudi Arabia, and actually speaking to people over a course of four decades, because once I finished in totality with these papers, I then could figure out by fingerprint -- luckily within the last 3 or 4 years they started using individual field names, so instead of saying this is a large carbonate field, I say no this is Abqaiq -- and so I then went back and reordered the paper by field, chronologically, so I could just start out with the oldest paper done on Abqaiq, for instance, all the way up to the most recent, and by the time I finished that I said, “You know, I am going to write a book,” and I now have a book that’s being edited and hopefully will be out this fall.
Around Christmas time I finished a really rough, cumbersome manuscript. I picked about 12 people that I thought were about the most knowledgeable technical people on earth that I knew, and asked if they would very carefully read through this and give me their comments. As a result of all that, a copy got into the hands of a board member of Saudi Aramco.
Then a lot of people from CSIS (Center for Strategic and International Studies) arrived, and you know, I’d given Bob a copy, you know, why don’t you read this, and he’s a senior energy fellow at CSIS, and Bob gets there and runs into this buzz saw of ‘this wacky guy in Houston, who is not a petroleum engineer, and he’s written this crazy work.’ So Bob, by the end of the week, pulls these guys aside and said, “You know, I don’t think you’re going to do yourselves any good by just calling this guy a nut, because he’s a fairly well-respected energy person; I’d like to suggest that we use the good offices of CSIS, because we’re going to ask Mr. Simmons to present his findings anyway, and then you bring whoever you’d like.” So at the end of February (and some of you might have attended) we had this incredible energy debate, that really began the opening up of information about the oil secrets of Saudi Arabia that had been closed for too long, and so what I am basically going to do is update you on where this whole issue is.
And let me start out with just two or three obvious reminders as to why this is such an important issue. There’s no question that Saudi Arabia is the world’s oil cornerstone. It’s not just that it is one of the two largest producers along with Russia, it’s that Russia actually uses a lot of oil, and Saudi Arabia doesn’t, so it’s by far the world’s top oil exporter. Assuming that the numbers are correct, which I think is an issue, 25% of the world’s reported proved reserves are in Saudi Arabia. If the numbers aren’t correct, then none of the other numbers in the Middle East are either, so the numbers just still probably are 25% (just not as big a number).
Now they are without any question the lowest-cost oil producer, but that number might be far higher than they think it is, because that number that you always hear per barrel is divided by some barrels that might not be there, and they don’t charge anything for electricity or water. Ah, they’re the only significant producer left in the world that have any spare capacity, and that’s the only thing you have to know to say forget about all the others; this is a really important deal, and in my opinion having studied 35 years our oil markets, there is no other oil producer on earth that can even begin over time to replace a significant short fall in Saudi Arabia’s oil. So if in fact, Saudi Arabia is at their peak production, then so is the world. So this is really basically a big issue.
Let me also be very clear that I have been an enormous admirer of the role that Saudi Arabia has played in the world oil markets over the last thirty years. I think the world owes them an enormous thanks. It turns out that in 1965 Saudi Arabia
(remember they started exploring for oil in 1935, and the first three years were really tough. They finally found what turned out to be a very small oil field in 1938, and then they discovered Abqaiq in ’40, and then the war postponed efforts. Then they finally discovered Ghawar, and by the ‘60s, they actually become the largest producer or the actual holder of world oil reserves) but by 1965 they were only producing 2 and ½ million b/d (not a lot of oil), and by ‘70 they were producing 3 million b/d.
Then a very surprising thing happened, without any warning whatsoever the largest oil producer on earth, which was the United States of America, peaked, and started down fast, and as a result of that they had to basically put the accelerator on, and they went from 3 million b/d to 8 million b/d between 1970 and 1974, and at that time there were SPE papers starting to be written on ‘we might be over-producing our oil fields, look at this water incursion.’
So ever since then they [the Saudis], accidentally, because no one ever asked them to become the world’s oil steward, and had we not peaked, they wouldn’t have had to do this. They inherited the role as the world’s swing producer, and I would say over the past 7 years that their track record has been exemplary. They’ve also been (in my opinion, trying to read what people in the energy business say) a long-term advocate, one of the most vocal advocates, of the concept of fair pricing. I think, unfortunately, too many consumers didn’t understand what fair pricing meant, and to most consumers fair pricing means free, which I think is very odd for the most important resource on earth, which happens to be energy.
They’ve also been a passionate believer in the need for a spare capacity cushion, and they’ve reminded people ad nauseum at energy conferences I’ve been to how much they’ve spent to make sure that they have this energy cushion, because we couldn’t tolerate any sort of energy shock. So I think the job they’ve done historically has been exemplary. But history is history, and the future is the future, and why I worry about Saudi Arabia’s oil begins with a stunning lack of any data of any quality whatsoever from all of OPEC.
It’s interesting, in the last several weeks, we toss about in the media numbers all the time about how much Saudi Arabia is producing, and Saudi Arabia has basically tossed some numbers out that might or might not be real. Ah, it turns out we don’t have any idea what Saudi Arabia produces.
In 2002, Saudi Aramco produced a very professional, I call it their Annual Report, and all the numbers kind of add up, so if they are fudging them, they’re cleverly fudging them so there’s no inconsistency. They said they produce 6.95 million b/d. Most of the estimates say Saudi Arabia produces 8 million b/d.
The single best data we get on OPEC oil production comes from a fabulous firm called Petro-Logistics in Geneva, Switzerland, and in case none of you have ever been to the offices of Petro-Logistics (I haven’t, I’ve just heard a lot about it), it’s a one-man show over a grocery store in Geneva, run by Conrad Gerber. I think it’s basically a scam. He’s front running for somebody, because there’s no way on earth that somebody could be over a grocery store in Geneva and say what Saudi Arabia is now producing. But the fact that everyone has been so clammed up about their own information has left the world held hostage to Conrad Gerber’s Miltsonian eye, ah, you know, which is itself alarming.
The only proof we have that Saudi Arabia has the outlook that the world is counting on is what I would call ‘trust me.’ That was probably a great concept when we had fresh oil supply, but we’re too close to the edge.
In the analysis I did of the Society of Petroleum Engineer (SPE) papers – by the time I finished, I basically went through 217 papers. Chronologically, they began with a paper written on Abqaiq in 1961. (That was when the SPE papers in the library were under a hundred; the SPE library today has 87,000 [papers] globally). And the papers ironically were the first problems of Abqaiq starting to deal with water incursion in their production. The last papers (because I haven’t gone back and done the data update since last fall) I got, were the A papers delivered at the Annual SPE conference in Denver, between October 5 and October 8 of 2003. And that paper trail is very specific; it’s just not that specific on the overall context. You really have to go through the whole lot of them and connect them together to come back and say there are some problems here, I believe.
Let me just give you some highlights of the specifics of the problems. It turns out that in theory Saudi Arabia has over 105 oil and gas fields now. Most of those I suspect are what I would call a structure, which is a field that might or might not at sometime produce anything, but 5 to 7 fields have produced (1950 to 2003) 90 to 95% of all of Saudi Arabia’s output. If you didn’t know anything else, you’d say that’s uncomfortable.
The king of kings, Ghawar, the largest oilfield in the history of the world, has accounted for between 60% and 65% of Saudi Arabia’s output, so if anything went wrong with Ghawar then we have a problem in the world. All but two of these key fields were discovered long, long ago, and have been in production for a long, long period of time. They have all used intense water management to keep reservoir pressures high. So as the fields aged, they postponed that natural depletion that usually happens. Then you go to a secondary recovery. They were doing secondary and primary at the same time, and that created the illusion that this high productivity would go on forever, but at some point, totally unannounced (because it’s always come unannounced; there’s no kind of early warning system that happens) the reservoir pressures on each of those fields will end. And when those reservoir pressures end, it’s unfortunately very similar to the human body as you finally start really going into very old age. When you slow down, the concept of ‘well, I’ll get better next week’ doesn’t ever happen. You just continue to slow down.
Over the last 30 years one of the great myths is that the Middle East is unexplored and that most of Saudi Arabia is unexplored. Over the past 30 years there’s been an intense effort to try to diversify themselves away from this asymmetrical distribution, and unfortunately most of it didn’t work. But the lack of verified data on all of this stuff has left the whole world in the dark, saying basically ‘trust me,’ and I don’t think you should have to ask people to spend effectively nine months going through these SPE papers to finally realize what the state of the most important oil producer is.
Now I tried when I was preparing this to go back through the CSIS presentation that was made by Dr. Saleri, who is head of reservoir management at Saudi Aramco and Mr. Baqi, at the head of exploration. Then in late April they gave a series of other presentations at the IEA in Paris, and I tried to go back through and take all those highlights, and I’d like to give you as honestly as I know how their response to my concerns:
First of all, categorically, current output can reach 10 million b/d, and in fact the last 30 days they’ve been remarkably pronounced that they can do that almost overnight. Ah, original oil in place, which is how much you have, they say has gone from 500-billion to 700-billion barrels of oil over the course of the last 20 years, even though they’ve found really no significant fields, just understanding more about the structures. They say 160- billion barrels of reported proven reserves is a highly conservative number. They say there are still 200-billion barrels of oil left to discover. They say their final development cost is 50 cents a barrel, and they say that their use of new oil field technology is exemplary, better than anyone in the world has ever done, and that new technology will effectively allow them to continue this oil miracle forever, and to my astonishment at the CSA presentation, they said not only could they produce 10 million b/d or 12 million b/d, we could produce 15 million b/d for fifty years, and so there really isn’t any problem.
Could these claims be true? Well at the end of April at CSIS the oil minister, Ali Naimi, said, “we have sent our best experts in February, and they proved we have no problems.”
At the program in February, after we finished the program, at a lunch with about 20 of us, Dr. Saleri gave me my lecture, and he said, “Matt, it pains me to think that you’ve wasted 9 months of your life reading these ridiculous SPE papers. I’ve written tons of SPE papers; SPE papers have to talk about the problems. It’s like airplanes take off every day, and the only reports you ever hear are the crashes. There’s so much good news that has never been reported, and you tend to exaggerate the magnitude of the problem.” I don’t believe that for an instance, but that is what he said.
The Saudi Aramco and the Saudi Petroleum Ministry have released vast amounts of new data over the last 4 months, and I think they deserve a fabulous amount of credit for starting to open up, but it’s just barely beginning. And what’s interesting is that, while the data is released, it has assured a lot of people,“Well, see? There really weren’t any problems.” It has also alarmed a lot of people that didn’t quite ever know what that number was, but said, “God that’s the number I always wanted to figure out.” So it’s not quite as simple as “Well, we now know there’s not a problem.”
Since Ghawar basically accounts for 60 to 65% of their production with apparently 5 million b/d in 2003, and its peak production was about 5 ½ million b/d when Saudi Arabia briefly produced 10 million b/d of oil in 1980, if Ghawar finally loses reservoir pressure, is that a big deal? Well, it’s obviously a big deal, because there isn’t any other country, any other continent that could start to make that up. If it [Ghawar] sees its reservoir pressure drop, you can make book on the fact that water problems, which is basically this issue of water crowding out oil in the well bore, because water always takes precedence over oil, water problems accelerate, high-oil productivity ends almost automatically, and finally you end up with inert oil.
Now when you have inert oil, it’s called ‘oil left behind.’ There are still lots of ways to recover that oil, but you’re talking about pumping out massive amounts of fluid to get out limited amounts of oil, so the dynamics change from being oil prosperity to a high degree of effort intensity in a very short period of time. In my opinion the Ghawar facts highlight this vulnerability.
Now I’ll show you in a second 4 to 5 pieces of information that were provided by Saudi Aramco about Ghawar recently, and you’re going to see Ghawar from kind of a bottom out in a reservoir simulation model.
[Matt points to a large screen depicting an apparent oil field]
Each of those lines represent districts, and it’s not clear now from reading some of those more recent papers in the last five years that this actually was a field to begin with, but just a very large structure that contained 5 to 7 different fields, because the productivity is so different, as this area proves.
Here’s basically the area - let me come around here – this is kind of important. They show you this area right here called Ain Dar and Shedgum, which has basically been an enormous amount of Ghawar. This is basically about 7% of the largest oil field in the world. So when you start talking about the asymmetry, it is the asymmetry of Ghawar, which is maybe the most nervous aspect of all.
Here is Ain Dar/Shedgum, this is their data. This is data the world had never seen before the last 4 months, in fact, almost everybody within Saudi Aramco never saw this data. This stuff is stuff they locked in the vault for some odd reason.) This is basically about 2 million b/d of the 5 million b/d coming from 8% of the field. That top line is what they are so proud about. They have maintained from 1951 through 2003 constant reservoir pressure. Guess how they do that? They basically are injecting 7 million b/d of seawater into the north end of Ghawar. Now what the sea water is doing is acting as a piston and keeping that pressure tight as a drum, and sooner or later they get to there and all that is left behind doesn’t have any natural drive. They are very pleased at that bottom line that the water cut at the best part of Ghawar is only 36%. There are a lot of articles written about water cut that say that when you get to 40% you’re almost to 80%, because by the time you have the average well bore at 40%, it’s really basically the analogy of a big dam, where you start to get too many holes in it, and you say wait a minute those holes, they’re going to rise on you fast.
Here’s an interesting piece of data about the proved reserves of Ain Dar/Shedgum. It turns out that basically this is 68-billion barrels of Ghawar’s total reserves, that they believe they can essentially recover 75% of those reserves. Now in carbonate reservoirs of this type, I think the world record recovery has been 45%, so if they do this it will basically redefine the physical properties of carbonate fields. But it’s also interesting that about the stage they’re at now, is generally where productivity starts falling dramatically. So this data is either good news or bad news, depending on how you want to interpret it.
Here’s their water cut at all of Ghawar. They basically were very proud in February to say back that it rose to a peak of 36 ½ percent in ’99, and now we got it under control. Well, the reason they got it under control is that 1999 is when they stopped drilling vertical wells in the kingdom of Saudi Arabia. The vertical wells were too close to the water and they were watering up in about 30 to 40 days, and so this is a temporary reprieve in my opinion.
And here’s basically the bottom end, this is the toe of Ghawar, this is the last part of Ghawar to be attempted to produce, and they’re going to do it through these multi-lateral smart wells that have water shut-off valves, so that as soon as they hit water, they shut it off, and they think they can basically get that up to 300,000 b/d and it will last for 30 years. But bear in mind that this is an area that estimating by eyeball is a three times bigger landmass than Ain Dar /Shedgum, just to show you the variance of the quality. The interesting thing is that’s just kind of the highlights of Ghawar. The aging issues are a lot worse at the other key fields.
Abqaiq which turns out to be about the most beautiful reservoir that’s ever been discovered in terms of pure quality, has now recovered according to the data they produced in this last 3 months, 73% of the total oil in place. That’s just about as good as you ever get, and that’s why you can read SPE papers written in the last 2 or 3 years that talk about recovering ‘attic’ oil out of Abqaiq. Now attic oil is a term that’s kind of easy to understand when you start realizing that sooner or later your oil column is gone.
Berri, which ironically was the other one of the three great other Arab light fields, onshore fields, became the last field to be put in production because Shaybah, the last field that came on, was a very complicated reservoir. Berri, from reading between the lines and stuff I am hearing about from Saudi Aramco people, is just about to do a blow down of its gas cap, which is what they’ve done to the Brent field in the North Sea, to essentially end its life as an oil field and use out the rest of its life as..[inaudible].
Abqaiq peaked in the early ‘70s at a million b/d. Berri peaked at about 800,000 b/d, so these were fields that we found very few of before.
It turns out that the 3 other key fields, Safaniyah, which is the largest offshore oil field in the world, the second largest producing field in Saudi Arabia, historically. Zulif and Marjan, which they’re all sandstone fields with terrible sand control problems, but the key thing that really puts these fields at risk is that there’s probably the world’s most fabulous aquifer that the world’s ever known that underlie these 3 fields, the neutral zone fields, and the Bergen complex in Kuwait, and there are hydrologists that are almost certain that the aquifer is about to deplete, so if the aquifer is gone, then basically you end up with inert oil that you have to pump out vs. manage through keeping the wellhead pressure closed. And it turns out that corrosion is an awful issue in every single one of these fields because of the intense use of water as a production technique, and it’s not potable water, it’s highly saline water, and to Saudi Aramco‘s credit they applied gold standard corrosion controls and it just didn’t work because the volumes were just too great.
Then you have a really interesting issue -- is technology the solution, which the Saudis Aramco senior mangers argue vociferously is the solution, or is technology the problem? What’s interesting is that we’re not talking about a dazzling array of hundreds of technologies; we’re taking about horizontal drilling, multi-lateral well completions, the use of 3d seismic to simulate reservoir models and reservoir simulation models.
I would say that all of that technology is stuff that our firm did key investment banking on to keep alive during the ‘80s, so this happens to be an area that I really feel technically that I sort of understood. They are certain that these advanced technologies are going to allow these fields to produce recovery rates that defied everyone in the North Sea and defied Alaska and so forth, and I feel that basically this same technology is just super-straws that are actually pulling the last easy oil out faster than it ever would have been found before, so we’re basically saying this gun is going to create peace, and I say no this gun is going to create war. And this is essentially the core issue. The whole ‘proved reserve’ issue is a really secondary issue compared to this issue.
I found it very interesting in these technical papers to read the paper trail on the concern of water encroaching and their desperate struggle to get this under control, because these are smart people, and they’re employing the single best technology that Baker Hughes, Halliburton and so forth, you know, the best technology companies you could ever have - they create all these great technologies. By the late 1980s they’re observing with great interest (which amazed me as I read this) the experience of the _____in Texas with using this horizontal drilling as a way to create great wellhead productivity, and then they’re amazed to watch with interest when PDL and LaMann (ph) run by Shell Oil Company, the best technicians, bring this technology to the Middle East for the first time ever, and start applying it at the Yibal field, and 2 years later they began applying this technology at Berri; then it went to Abqaiq; and then it went to Ghawar. And by the late 1990s they found that they couldn’t tolerate vertical wells anymore, because they were watering up almost as soon as they came on production. So out went vertical wells, generation number one, and in went the second generation wells, which are these long, extended-reach horizontal wells, and as you read these papers there’s a sort of sense of Eureka, we have finally solved our water problems, until about 30 months later they got introduced (as everyone else who has used the same stuff did, too) to the fact that water channeling is quite different than water coning. Water coning is just when the water hits the well bore, water channeling is the whole 3,000 foot waters up at the same time. So then they went to third-generation wells, which are called maximum reservoir contact wells (MRC), and I should have drawn these out, but these are basically, they are extended-reach wells, but they have multiple nipples on them. Some of the papers refer to these as ‘bottle brush’ wells (because they really sort of look like the bottlebrush) and they’re ecstatic, because this is returning well productivity to rates they basically hadn’t seen since the early ‘80s -- 8, 10, 12000 b/d per well, and no water for awhile -- super straws, in my opinion.
And it was interesting at the OTC in May, Dr. Soleri came and presented a paper that they have now gone to intelligent wells, as the best way to produce the fields in Saudi Arabia, which is the 4th generation. Intelligent wells are bottlebrush wells, but they have water safety valves on each of the nipples, which means, in my opinion, they’re starting to experience watering problems in the third generation wells, and this is how, moving through first, second, and third generation in a five year period of time, is how they “got their water cut under control.” In my opinion, that’s a holiday, and when the water cut comes back it will go just like Yibal.
Let me tell you the sad history of Yibal, which I’ve used many times as a case study, and I’ve gotten vicious (violent is a better word) reaction saying “that is not a good case study, that’s a totally different type reservoir,” and I say, “Yeah, I know it’s a different formation, it’s a Shiva formation just like Shayva.
But this case study, it’s the first field that used these tools, and the productivity was fabulous, and so Shell Oil company - now forget about all the stories about Shell Oil and their proved reserves –this is the best technicians at Shell went to the Mann government in 1997, and said, “We are so pleased with the use of this great technology that we’re recommending that we spend the money and increase the productive capacity by 30%, because it will last for ten years.” Unfortunately with the benefit of hindsight, in 1997 the Yibal field peaked at 250,000 b/d and it’s down to about 30 thousand b/d today. So when the end ended it just came down like Niagara Falls, and I think that Yibal is basically what we need to worry about in all 5, 6 of these key Saudi fields, and obviously they disagree with that.
What I also find interesting is to read in detail about their new projects that they have coming on. The biggest one is Qatif, and that will be a very key task. It comes on stream I think sometime they say maybe late July, early August. Qatif is not a new field. Qatif was actually discovered in 1945. It stands between Abqaiq and Ghawar. But it’s a field that they could never get to produce, even in the ‘70s, when they’re starting to worry about, ah, maybe we’re overproducing Ghawar, maybe we should find a way to rest this field, but the market needs our oil.
By 1977 they turned Qatif into a storage cabin for excess naphthalene at the Western Oil Refinery on the knowledge that it might destroy the reservoir. They didn’t care. The average H2S cut is about 10 to 20%, and H2S [hydrogen sulfide] if you breathe it, it kills you instantly. Qatif is a very complicated field. They think that they're going to be able to produce this field at 500,000 b/d for 30 years. I think, watching this, if you can watch it with any quality of information, will be one of the really telltale signs, because if this fails everything they have behind it gets worse.
Then they have a field called Abu Sa'fah which they share production with Bahrain, and in fact Bahrain’s paying for the project. They’ve already placed the world’s largest order for electric submersible pumps. Well, for 30 or 40 years you didn’t need to use a pump in Saudi Arabia to produce oil. You used a wellhead being shut-in to keep the oil from flowing more, so these are the next two best things they have to bring on.
Then what’s also interesting is that last December, they made quite a to-do at two or three energy conferences that “don’t worry, this is not going to be for excess capacity; we’re doing this to start replacing the normal declines in our mature fields.” But that argument went away totally in February, once this debate erupted. Now these fields are basically the proof that they can just keep going up, and that they have lots more behind this. Ah, this will be extremely interesting to watch
Behind this is the next big project that they're talking about and it's the Khurais field. Khurais turns out to be the second largest onshore structure ever discovered in Saudi Arabia, but after drilling 90-producing wells, which is almost the same amount that Ghawar had in the early seventies, they just couldn't ever find a way to get quality production out of Khurais. Well, they now think that modern technology has solved this puzzle, and they're talking about 800,000 b/d out of Khurais, but back in 2001 and 2002, Khurais was going to be the first field coming on, and then for some reason they dropped that and decided to do Qatif, so they also say that between Khurais and Manifah, if I pronounced that right, are 41-billion barrels of Saudi Arabia's proved reserves. You can't find any data whatsoever in any SPE paper ever written about Manifah - it's never produced anything, so what they have left might be fabulous, and it might be really meager pickings.
(Inaudible) has yet to be explored. Well, what I know from reading SPE papers, because they've been very specific, is that Saudi Aramco applies state-of-the-art geophysical tools to desperately search for oil outside the small concentration in the eastern province.
Ironically in 1986, if anyone can remember back in energy history, in 1986, we think we have maybe 20-million barrels a day of excess (inaudible) oil, and oil prices are hovering around 10, or 8 to 10 dollars a barrel. Saudi Aramco buys the technology for Landset - it's the most sophisticated aeromagnetic survey, and start creating communication between planes flying over the central Saudi Arabian peninsula and seismic crews on the ground in 1986. In 1989, they basically found out what turned out to be the only commercial success that they had in 30 years, and it's a little tiny field called Hawtah and 3 or 4 satellite fields, and the great news is that Hawtah produced about 49 to 51% gravity oil, so it's really almost motor gasoline quality. The bad news is that the maximum through very tight rocks they got 200,000 b/d out of this complex, and then to get it out you had to inject water from an aquifer nearby and the aquifer was loaded with bacteria, and now this field is almost corroded away, so the only really new field they found is really in very bad shape.
The other remaining areas, and this is also interesting, if you listen carefully to their side of the debate. They don't actually say there's oil every place. They say there are three areas left to be explored. Right along the Iraq border is an area that's never had any exploration, and it's kind of maybe the size of California, they say. It doesn't look like that to me, but they said that the deep water part of the Red Sea and the bottom part of the empty quarter, but that's not a lot of territory left, and you could also make the case as you look at the western desert of Iraq and then right south of it that it might not even be worth exploring, because we've intensely explored in Syria, Jordan and the rest of Saudi Arabia, and we've never found anything, so this might or might not have some oil still and so the idea that if they ever needed more they could just drill for it, well there isn't any data of any quality to support that claim.
There's an interesting thesis called the Royal Family of Hydrocarbons that the French Petroleum Institute created about three decades ago, when they spent a couple of decades or at least a decade studying the exploration history in all the hydrocarbon bearing places we know. They said what's interesting is what seems to happen like clockwork is that in about the first 5 to 7 years of exploration you tend to find the queen, the second biggest field. Occasionally you find the king, then it actually takes two or three years to actually hone in on either the queen or the king, whichever you didn't find. After that, over the next decade, you find 6 to 10 lords. Once you've done that you've got the Royal Family. Following that there are just lots of tiny pockets of hydrocarbon. Could the Royal Family theory be alive and well in Saudi Arabia? Well it's just interesting to look at the history. Abqaiq was discovered in 1940, and that was the queen. While Safoniyah was the biggest of the queens, the reservoir quality is so much worse in Safoniyah, I'd say it was the queen's stepsister. Then the king of all kings, Ghawar was [discovered] in‘48; and then Berri in ‘65; Zuluf in ‘64; Marjan in ‘67; Sheiba in ‘68; and that was the last. Isn't that interesting?
That is a long, long period of time to go without finding anything any better. It's also interesting in this context to stop just a second, and share a little bit of data about the Saudi gas initiative. It turns out that Saudi Arabia is listed as the 4th largest holder of proved-gas reserves in the world. About 4 years ago there was all this big excitement about the gas initiative - $25 to $30 billion dollars and the first time in 30 years major oil companies are going to come back into Saudi Arabia, and then the thing just kind of fell apart. It was kind of falling apart a year ago in February, when I was there, and once I started reading the SPE papers about gas, I said, “Well, I know why this is falling apart. Their reserves are awful.”
It's interesting that they went back and they divided the gas initiative up into little packages, so it would attract more parties. Early this spring they basically announced the four winners. The four winners were Lukoil, SimOil, Repsoil, and ENI oil. I happened to ask one of the of the senior executives of one of the very large oil companies in the United States, who spends a lot of time working on the gas initiative, and I said, “Were you guys kind of surprised that nobody from the western companies showed up for that?” He said, “not at all. Their reservoirs are awful.” And I thought that's interesting, they sounded awful to me in the SPE papers, too.
Why the gas thing is so important though is that Saudi Arabia today has about 24-, maybe 25-million people heading to 40 - given their population demographics - every added person in Saudi Arabia is going to need water. The only way they can create incremental water is desalination, and desalination has the energy intensity of a steel mill. If they don’t find natural gas, if they don’t quickly buy what's left of their cutters gas, then it's really problematic how they will actually continue to grow their water supply and their electricity supply, so it could turn out that the deficiencies in gas are actually a lot more important than oil.
Well there's finally an issue about the reserves, because if in fact their 260-billion barrels of proved reserves are correct, then they have 90 years, and so all this stuff basically might just become moot, or it could turn out that they basically, like all the other producers in the Middle East, got into bragging rights and during the ‘80s just upped their reserves by a pencil, and that their reserves could be no better or worse than what the single best people on earth thought they were that knew how to do this stuff in 1975. In the public domain there’s the field-by-field reserve estimates of Aramco when it was being run by Exxon, Chevron, Standard Oil of California, and Texaco, and they had the best people in the world doing these complicated reserve calculations, working on these issues. This was the biggest deal they had. They thought that all the fields, collectively, had 108-billion barrels. They thought Ghawar had 61-billion barrels - we were told in February that Ghawar has already produced 55 [billion barrels]. Now 61 is not total - it's the amount they could recover, so if it turns out that these guys are sort of correct, and it's interesting, one of my neighbors in Maine is the retired Chairman of the Board of Texaco. I saw him in Maine after the CSIS (Center for Strategic and International Studies) thing, and he said, ”Boy, every Texaco employee that I've ever known has been on the phone saying, ‘do you have any idea who this Simmons guy is?’” And he said, “Yeah, he's my neighbor.” So we were chuckling about that, and I said, “Hey Butch, tell me now, seriously, back in the ‘70s, how dumb were you guys?” Butch is about 6 ft 8 in., and he looks at me and says, “Well you're not calling me dumb are you?” And I said, “No, I'm just joking.” But I told him these numbers and said, “Your best people at Aramco thought that Ghawar had 61-billion barrels and it has now produced 55-billion barrels, but the Saudis claim that Ghawar has another 125-billion barrels that it can recover; 126 plus 60 is 180, could you have missed Ghawar by 3-fold?” And it's the first time I’ve ever seen this gentleman not in a jovial mood. He said, “Those are real numbers, you know. We couldn’t have missed by over 20 percent - that's impossible.” And he said, “We had better people working on these calculations back in the ‘70s.” Because we’ve really deteriorated as a society in the ability to do these complicated reserve calculations; ah, we've created a generation of what a couple of my scientist friends call ‘Nintendo Geologists’ who just sit at a workstation and do modeling and say, “Oh, look at that field.” And if it turns out that the old ‘75 numbers are right, then we really are almost to the end of the miracle, and we should be preparing for the beginning of steep declines in the 5 great fields, and so my bottom line on all this is not to say I know that this is going to happen, because I don’t, but I think this is an enormous worry for the well-being of the world, and I happen to believe that, in fact, as much as you might dislike energy, it's the best thing that we ever had, and it’s modern energy that's created basically every aspect of our society today, and unfortunately, there are still 5-billion people on earth who are just starting to use modern energy, and this is a bad time to say, “Oh, no, that era ended.”
And so, basically, I think it’s time to take really seriously an era of real data reform, and create some real transparency that means something. You know, if we were all the owners of a refrigerator company or let's say BMW, and we just designed a fabulous new line of cars, and these cars are going to sell like hotcakes and then someone says, “You know, look, the only thing that makes us a little nervous is that we have one steel mill that provides us with all of our rolled steel, but we have actually, we lost their phone number, but I just found it, and I said, “how good are your steel mills?” And they say, “Oh, our steel mills are in great shape.” Don’t you think that we would want to send someone there, and actually check them out, to just make sure they were ready? And I think it's time to check them out and a total - I am not talking about Saudi Aramco; I am talking about every single oil producer on earth that wants to be counted serious, including Exxon, BP - the whole nine yards - because we are too close to the edge - and my solution (and there are probably a lot of better solutions) but the only advantage to this is that it could be done by the end of the year is that we enforce, hopefully voluntarily, we enforce timely production of field-by-field production. I'd like 5 years, as an analyst, it would kind of give you a better idea of how to do trends, and then the next five pieces of data are the average number of producing well-bores that produce that, so if you see a field is at 100,000 barrels a day for 5 years, but their well-bores went from 50 to 500, you'd say, “Man alive, look at the embedded decline rates that are in that field.” Those are the ten pieces of data.
The last three are reserve base data. I would like to know the latest estimates, as an analyst, of the original oil in place, and that should kind of move around on you. I'd like to know the current estimate of the ultimate recoverable reserves, and then I'd like to know the cumulative production, because with those thirteen pieces of data, it would take me, as an analyst, half a day (with probably time to actually go have a nap) to actually go through the five fields, and say I was totally wrong, or Houston, we have a world class problem.
Can this reform happen, and then most importantly, is it too late? Well I am fully aware that secrecy has been a mantra at OPEC for the last two decades, and it's sort of inbred in their culture, and I've had a number of people within OPEC, say you know I kind of individually think that what you're suggesting actually makes a lot of sense but it just won't happen. I say that actually is for the birds.
We've done a lot more important things for society than to just say, “hey guys, it's just time to say the ‘trust me’ era is over.” And I think if the stake holders, and I think all of us in this room are stakeholders, if the stake holders get serious about this and just politely say guys, the old era is over, we need this data; there's nothing painful about this and everybody becomes a winner. And I think Saudi Arabia has been such a champion of better energy transparency that they actually could move to the head of the class by taking the lead in this, and I'd really hope at some point that they'd get over their annoyance of having someone even question the virility of their oil, and say, “Well, if it it's true, then rather than send people around the world to do stuff like I showed you, just start producing this data,” and this is what my message to them has been, and I said if three or four years from now that data shows I was wrong, I'll be the most public advocate in the world, saying I was totally wrong about my concerns, and I am delighted that I raised them, because I am going to sleep better at night, knowing that we have that data. The reason we need that data is, basically, if the data confirms my supply worries are true, we need to get working on what I euphemistically call ‘plan B.’ It is sort of a lot of things that Ann was talking about this morning we should have started working a decade ago, and ‘plan B’ is going to take a lot of time. Do we have the time? I'm not sure we do, but I know one thing, until we have this data, we're going to basically just fly until we hit a wall, and if we hit a wall, it can be one of the most surprising things in the history of our lifetime. Thank you.
End of part 1 of transcript. Part 2, the question and answers session, is available
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