There’s enough rhetoric — much of it conflicting — about oil supply/demand these days to prompt even the hardiest observer to reach for the aspirin bottle.

For instance: Global demand continues unabated vs. prices cooling China demand; OPEC can produce however much oil needed vs. OPEC is at capacity, etc., etc.

Adding to the uncertainty is OPEC’s recent out-of-the-blue call for the United States to release oil from the Strategic Petroleum Reserve to help cool prices. The plea received little attention despite the fact OPEC prides itself in being able to control prices, ideally holding them just high enough to keep the coffers full yet low enough to discourage major consumers from serious development of alternative fuels.

When OPEC kingpin Saudi Arabia recently announced a production increase, there was scant mention the increase was mostly in the form of low quality crude rather than sweet.

Whether these recent actions can be viewed as red flags is a matter of opinion. One observer, longtime energy investment banker Matt Simmons, CEO of Simmons and Company International in Houston, says there’s ample cause to be concerned about Middle East oil supply, particularly that of Saudi Arabia.

“We’ve basically created a global energy plan built on a house of sand,” Simmons said, “and there’s no Plan B if their production actually starts to decline, just like the U.S. did and like the North Sea is doing.

“Saudi Arabia’s last giant field, Shaybah, was discovered in 1967, and what we have in Saudi Arabia is a handful of fields all too old for a world that assumes oil is anywhere you want to find it in the Middle East,” he said. “It’s the last Great Myth: Oil is everyplace.

“It turns out there’s an unbelievably tiny concentration in the Middle East of what I call the golden triangle of energy,” he continued.

The triangle starts with Kirkuk at the top of Iraq, comes down the eastern side and in 20-30 miles east of the Iranian-Persian border, drops down to the bottom of the UAE and comes across to a leg back up to Kirkuk, which is about 40 miles west of the western border of the Persian Gulf.

“That’s about a 1,000-mile by 450-mile by 800-mile triangle,” Simmons said. “And in that triangle is every significant oil field ever found in the Middle East.

“Saudi Arabia has searched for 30 years to find oil outside this very tiny area in the eastern province to try to find ‘Plan 2’,” he said, “but the only few commercial discoveries ever made were modest in terms of Middle East oil fields.”

The only major commercial discovery was 50 miles southwest of Riyadh in 1989 at the Hawtah Field, which became known as the Hawtah trend. Production peaked at 200,000 barrels of oil a day.

The water injected, according to Simmons, was corrosive and laden with bacteria, severely damaging the reservoir’s long-term sustainability.
A Lot From a Few

To answer his own growing list of questions and gain insight into Saudi field discoveries, production methods and volumes, Simmons analyzed more than 200 SPE technical papers on the subject. His findings were reviewed by a number of technical experts.

“If you read carefully, a totally different picture emerges than you get by listening to people who say they have 260 billion barrels of reserves and, conservatively, they’ll get 70 to 80 percent recovery,” Simmons said, “which no else in the world has ever done.

“I think they’re on the last legs of easily recoverable oil, and they’ll end up with 35 to 45 percent recovery of original oil in place, just like the performance of other carbonate reservoirs,” he said.

“To recover far more will require using artificial lift and exponentially more wells.”

What makes the Saudi oil picture so uncomfortable overall, Simmons noted, is the asymmetry of the oil supply.

“Eight fields have effectively been 98 percent of all they’ve ever produced, and six fields are basically 95 percent,” he said. Ghawar (see related story, page 4) is one, and it’s consistently been 60 to 65 percent of all the oil they’ve ever produced from the late ’50s to 2004. We could find these fields are about to roll over like all great fields have done, and when Ghawar goes into decline, the world’s peaked.”

For now, Ghawar continues to churn out about 5 millions barrels of oil per day, thanks in large part to an extensive water maintenance program. The question is, can the status quo be maintained?

“They’ve now shut down most vertical wells doing anything but water injection, with all new wells being extended reach horizontal multi-lateral wells,” Simmons said. “These are basically just hiding from a rapidly emerging gas cap and hiding in the middle of the ever-thinning oil column as the water column is rising to the top of the field.

“When that day is over, these fabulous wells creating this productivity through eight to ten wellbores will all water up.”
A Matter of Trust?

Saudi Aramco has a far different take on the future of Saudi oil.

In fact, the company sent two of its high-ranking executives to Washington, D.C., in February to refute Simmons’ assertions when he presented his findings to the Center for Strategic and International Studies.

A transcript of the presentations included comments by Nansen Saleri, manager of reservoir management at Aramco, regarding current and future production.

The current company plan is to maintain capacity of 10 million barrels/day and to replace reserves to the tune of 15 billion barrels between 2005 and 2009, Saleri said. He declared if Aramco ramps up to 12 million barrels daily production by 2014, this can be sustained comfortably for 50 years or more.

He elevated the numbers even more, stating the company actually could produce and maintain as much as 15 million barrels a day until 2054.

Saleri qualified his remarks somewhat by noting this depends on world market conditions.

To reinforce his predictions, Saleri emphasized the company’s capabilities, including extensive use of advanced technologies and the ability to ride herd on water cut levels. He emphasized the reduction in water cut on average at Ghawar.

The potential production numbers may be impressive, but Simmons maintains that Saudi Aramco has not been forthcoming with production data to back up its claims.

“They didn’t say how they would be able to do this,” he said, “and I say we’re badly in need of massive data reform. We need true energy transparency.

“We need field by field disclosure of historical production and the average number of producing wellbores that created it,” Simmons said, “so analysts for the first time ever can do productivity decline rate analysis versus ‘trust me, we don’t have a problem.’

“Then we need three specific pieces of proven reserve data by field, verified by a third party, just as someone like, for example, GE needs their books audited even though they know them better than anyone,” he said. “Then, if three years from now, there is no sign of any problem, I’ll publicly say I was an alarmist to raise this.

“All we’re getting now is ‘trust me’, and I say we’re in the mode of ‘trust but verify.'”