Simmons: The Implications of Saudi Arabian Oil Declining (transcript – part 2)

The following is a part 2 of 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:
rtsp://video.c-span.org/project/ter/ter070904_saudi2.rm

Hudson Institute presents: Saudi Arabia in Crisis – Part 2: Q&A

Host: Thank you Mr. Simmons for this fascinating presentation. I’d like to open the floor to questions.

Question. Can you say what the SPE paper is?

Matt Simmons: Oh, Yes – the SPE paper. The Society of Petroleum Engineers is the largest technical organization in the world, and it is a fabulous organization. They have about 60,000 members, and they have chapters in every oil province, and they re giving conferences all the time, and at a conference you have to write a paper, and it gets vetted, and it’s really the heart of our petroleum education. It’s $5 a copy, by the way, to download them.

Question: We at IAGS, we did a similar study on Iraqi oil reserves, and the conclusions are just as sober, so I think it’s much broader than Saudi Arabia, so I sympathize with your frustration, and even though you’ve presented some very encouraging developments in the past four months, I think that they are being offset by very negative developments, when it comes to Russia’s transparency, we learned a couple of months ago that president Putin decided to declare Russia’s oil-reserves data as state secret, so I am not sure that we are going forward. We may be going backward when it comes to international transparency with oil reserve data. The most annoying thing to my view is the attitude of the US government on this issue, because if the Saudis are promising 10- to 15- million barrels a day for the next 50 years, I really don’t understand how come the energy information administration, Guy Caruso, for example, talking about 25-million barrels per day of Saudi oil production by 2025 to meet the 120-million barrels per day required to sustain world energy demand, so aren’t we really helping to proliferate and sustain this myth instead of debunking it?

Matt Simmons: Well, you know, it’s a good question. All I could say is that first of all, I am a good friend of Guy’s, and I think he’s struggling mightily to try to reform the entire IEA apparatus, and he’s dealing with a bunch of technocrats that are so proud of their models, and Guy does not produce all those numbers, and I – here’s what’s happened – this is the IEA in Paris, this is the EIA in Washington, this is the CGES where I spoke last week and everyone who does these models, they always come up with what they think demand could be, and then they back into supply by taking all the suppliers, and they take the most that they could possibly do, and then they find the plug figure is the Middle East. For a long time () the Middle east, and now we say, well, we know that Iran has peaked, we know that Kuwait has probably peaked, we know that the emirates could maybe do another 600,000 BDA, so the plug picture is Saudi Arabia, and everyone just took that for granted, because they looked at the 260 and they divided by 90 years and they could do that, and as odd as this sounds, I am sort of the belief that I was the first person in the world to actually say – something doesn’t smell right – other people have said something doesn’t smell right – but I stumbled into the SPE library, and by the time I started understanding these words it did become kind of exciting like a data search, but I think that we’ve all basically just blissfully gone along saying, well that has to be true, because if it isn’t what on earth will we do? I tell you what surprises me even more though is that I have been basically at this US-Japan Energy Dialogue meeting for the last two days, and need to go back there in a few minutes, but last week, I was at Shulkiyaney’s (ph) annual energy retreat with a lot of key people, petroleum ministers, past petroleum ministers, and I gave a talk about total energy, and the fact that we should be prepared for total energy to peak, and just get ready for it, so it’s not such a surprise, and that was deemed to be maybe the most pessimistic talk almost anyone there had ever heard, and at the end of the day I basically heard for about a half an hour all these people standing up and saying, I have been so depressed today about Matt’s talk, (this was a week ago yesterday) but, I’ve been so depressed today about Matt’s talk, and here’s where he’s wrong, and finally Shulkiyane (ph) said, Mr. Simmons you must want to defend yourself, and I just got up and said well, I kind of believe just what I said this morning, but I just think that you guys all need to understand that yes, it seems possible that demand can continue to increase, but I just came back from ten days in China and South Asia, and I tell you there is nothing that is going to slow that train down (and I had the opportunity of trying to explain what a term I use called ‘energy demand has become a runaway train’ at the Energy Institute of the East China University; these Ph.D. candidates couldn’t understand the concept of a ‘run-away’ train) there’s no way we can stop that train until we hit a brick wall; we have between 6 and 8 million b/d of announced projects coming on stream between now and 2009, and that’s being remarkably optimistic that they all happen on time, and they all have name-plate capacity when they come on, so that’s the best, best, best case. If global decline rates are only three percent – then we take away 11 and add 6 to 8 – the numbers don’t work, but the fact of the matter is that I am really viewed by most of these people as being some sort of a Darth Vader, and I am not, I am just an analyst, ah, but the more you analyze, the more uncomfortable this picture becomes.

Question: What if any response does the Saudi leadership give when asked the question, (perhaps maybe someone knows about Russia too) ah, why all the secrecy, there’s no obvious reason is there that this data, other than that you have something to hide, I mean that’s the only conclusion that you can come to, isn’t it?

Matt Simmons: You know what’s interesting is that all during the ‘60s and ‘70s all the OPEC oil producers produced field-by-field production, and then by the end of ‘81 it disappeared, and maybe it was when everyone had excess capacity and, I don’t know what it was, but I think , well I don’t care what the history is, enough is enough. There’s nothing about this data, unless they say it’s a ‘state secret,’ and it’s a ‘state secret’ because they are worried about how skimpy the data is–there’s nothing about the data that tips somebody’s hand–culturally the Middle East is a secretive place, and it’s always been. But again enough is enough, time for change.

Question: To what extent can you get this oil out by spending a lot more money?

Matt Simmons: It becomes two totally unrelated issues, because once you get inert oil; you get a total commingling with the water, and the gas bubble forms at the top, and then each individual well-bore just produces. I’ll give you a classic example of what I am talking about–the East Texas oil field by all accounts was the greatest oil field that was found in the western hemisphere, and it will ultimately recover (they think now) maybe 82 percent. Most people think the east Texas oil field ended years ago. Last year it produced 13,500 barrels a day of oil and over a million barrels a day of brine – so in West Texas, the average oil well produces about 95% water; the reason we have over a million barrels a day of stripper wells is it’s dealing with oil left behind, and we’ve never found the technology so far, to really effectively, you can go back and sometimes capture little pockets by doing these horizontal wells, and it’s a race between letting in water and finding areas where there’s still a little pressure there, you know, maybe when it all comes, we’ll be so ingenious, we’ll find some totally new way, but there’s nothing on the drawing board today.

Question: At present, by how much does that increase the cost of the oil?

Matt Simmons: Oh, it would probably go up twenty fold. I’m just guessing. Well what you also have to do is you have to put — there are 31 drilling rigs in Saudi Arabia, they would probably need a thousand. To create a thousand drilling rigs takes a decade of building drilling plants again. So it’s not the amount of money, it’s everything basically changes in a very profound way.

Question: In looking for a silver lining in this rather dark pictures. One it would seem that this suggests that there will be in the not to distant future a diminishing of the money that the Wahhabi will have to spend on the kinds of bad things that we were talking about earlier in the day. The other thing is that this could well catalyze some of the actions that we’re talking about on Plan B. To give people as much clarity about how you see that pressure sort of kicking in, economic or maybe even political. What’s your timeline. Saying the data is as you say it is, I know that you are not sure it is, but let’s just say it is, when does it peak, how fast does the diminution kick in in a really powerful way would you say?

Matt Simmons: Well there isn’t, as far as I can determine, there isn’t any data on earth that we’ve created that will tells us that we basically have peaked. The best tool we have is what I euphemistically call a ‘rear view mirror,’ and it’s just when you finally say, gosh isn’t that amazing. What I am now far more educated about on this peaking question, is that these are rate-sensitive fields, and the higher you produce the faster they’ll be over, and this was an interesting conversation that I actually had in Kuwait when I presented my Saudi finds at the boardroom of the Petroleum Corporation, you know, maybe we’re crazy to produce as high as we are, because we have nothing after oil, until we prepare something, so rate sensitivity becomes a really big issue, and how fast this could happen, well, it could basically be happening now, or it could be four years from now, or five, conceivably ten years from now, but I find ten years from now almost hard to believe, but I hope I am wrong, and I am probably overly worried about this. But since it takes so long to work out what I call ‘Plan Bs’, because ‘Plan Bs’ are no one thing, there are a prolife proliferation of things to do, before we do plan C, which is a totally new form of energy that we don’t even have on the drawing board today, then I think we should assume that the end is on hand, and start working feverishly, and then be presently surprised if we have five years or ten years.

Question: There seems to be a huge political implication to this. The Chinese are now getting very close to the Saudis, because by the year 2020 (and you just came from China so you probably have a better idea than I do) they would be consuming as much energy as we do in this country, and Saudi Arabia is looking for an ally that shares values with it, and China would be the one, so what is the political implication to the whole-world politics, but specifically the Saudi-Chinese relations.

Let me broaden that issue and give you a number that I gave at the presentation in China at the Institute for Energy Economics, which I am told is the only one so far that exists at an academic institution in China. As I said Mexico is the smallest per-capita-oil producer within the OECD, they produce just about 7 barrels per day of oil; I mean it’s consumed about 7 barrels a day. If India and China ever got to be where Mexico is, you’re talking about 40 ½ -million barrels of oil, assuming the population doesn’t grow. What I also said when I raised this issue in the Middle East, before the CSIS when I had the opportunity to give this Saudi presentation in Kuwait at the Organization of Arab Producing States headquarters and then the board room of KPC and then the next morning at Gutter Petroleum, you know, we don’t have any ‘Plan B,’ which is why we wouldn’t want to assume – I wouldn’t want to be part of the delegation that had to go tell India and China, sorry guys we actually used up your share on our watch.

But you know what was interesting, I gave a very blunt talk in China, and I got enormous praise for being honest, and what my conclusion was is that there’s nothing that we can do about this, it’s just gonna happen, but it is a show stopper for what you want to do and therefore it’s enormously important that you guys take the lead and maybe ideally pick Houston as a sister city for all of China, and let’s get busy on energy R&D we never even thought about before, and I suspect if you take the ingenuity of the Indians and the ingenuity of the Chinese, and you put ‘em square right looking in the mirror, that they might actually do something that we haven’t done, you know nuclear was the only form of energy that we created in the twentieth century, and it took about 50 years — we don’t have fifty years, but if you leave them unaware, and just blissfully assume (and if you listen to almost any energy economist today, they literally think I am raving mad, and I think they’re crazy) but that’s when the Chinese, in my opinion, get real mad, when it turns out that no one warned them about this. I had better let you all go.

Question: Your last remark reminded me that there was one issue that might have come up in the morning session and is raised by your remarks now. Ah, what about nuclear energy.

Matt Simmons: Nuclear energy has got to come back, but we don’t have any idea what the resource of the uranium is, and you know you add a hundred nuclear plants, which is kind of a Marshall Plan of nuclear, and it’s barely any energy. Our country has got to wake up and embrace nuclear energy. There’s nothing wrong with it (hire armies if you have to) – it’s clean and so forth and I also think it’s basically time for our environmental leaders to kind of grow up and say, you know, modern energy was the best gift we had in the world, and all we’ve done for the last 30 years – I painfully watched at too many conferences a trashing of every form of modern energy, and I say when it’s gone, and peaking doesn’t mean it’s gone, but we’ll start thinking, man alive, why were we so harsh on that stuff, so I just think we have a lot of big changes we have to make and if we make them now, and then it turns out that we didn’t have to, it’s kind of like our preoccupation for the last 50 years with thermonuclear war–we didn’t have one. I’m glad we worried. Thank you.

Moderator: Thank you all for participating in the conference it was a pleasure to have you

Transcribed by Rita Wiltsie

From: MATT.SIMMONS
Transcript of Simmons.2004-07-09