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Out to shock the world over Saudi reserves

As President George W Bush strolled around his Prairie Chapel ranch in Texas last week with Saudi ruler Crown Prince Abdullah, oil prices were high on the agenda during talks between the leaders of the world’s biggest energy consumer and largest oil exporter.

At the same time, Matt Simmons, one of Bush’s energy advisers, was at a conference in Edinburgh, spelling out harsh facts on Saudi oil production which, if proved true, would have severe repercussions for the global economy.

Simmons’s belief is that Saudi has been overstating its oil reserves for years, its biggest oil fields are in decline and it will struggle to live up to its promise to crank up daily output from around 10 million barrels a day to 12 million by 2009 and later 15 million to meet global demand.

He visited Saudi in 2003 as part of a US energy delegation. By the time he left, six days later, he was convinced that the rosy picture the Saudis had painted of their key strategic resource was deeply flawed but he could not yet prove it.

“On the plane back from Riyadh I said ‘Something doesn’t meet the smell test …’ I have made my career out of uncovering illusions and I thought, wouldn’t it be odd if the biggest energy country in the world proved to be an illusion,” he says.

Chairman of Simmons & Co, the independent energy investment bank he founded in 1974, Simmons is about to publish a book – Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy – in which he outlines the fruits of his painstaking research into the true extent of Saudi oil reserves.

Simmons studied some 200 petroleum engineering reports on the biggest oil fields in Saudi, a nation which boasts 25% of world reserves.

“It was the most exhausting project of my life … like putting together a complex patchwork quilt,” he says. He found “a smoking gun” – no evidence of major new finds beyond a limited “golden triangle” and clear evidence of major fields entering decline.

Global data on oil reserves is a sensitive topic. The big oil-producing nations, members of the Organisation of Petroleum Exporting Countries (OPEC) production cartel, are particularly sensitive about revealing data as any downward revision in oil wealth would have ramifications on economic and political stability. Simmons claims that OPEC members frustrated attempts to get real data over the past two decades because the higher their reserves seemed, the bigger the quota they obtained.

In the 1980s, Middle East reserves jumped by some 43% in three years, despite there being no major new finds.

Oil nations and oil companies alike have a motive to exaggerate reserves. Shell admitted last year that it had overstated reserves by a whopping 20%, sending its shares crashing. “Sure, there are other bombshells out there still to come,” Simmons claims.

He is calling for the world to adapt a new standard of disclosure of oil reserves, which he refers to as “13 points of light”. The idea has support from the International Energy Agency, International Monetary Fund and G8 leaders of the world’s richest economies.

But facing up to the truth is not easy for those with vested interests. Simmons says: “My two worst critics in Saudi think I’m looney … but I think I’ll sell a lot of books there.”

His arch critics – two senior figures in Saudi oil firm Aramco – visited Washington recently to debunk his theories, arguing that with new technology and future discoveries, they could hold production steady in mature fields such as Ghawar, the world’s largest.

But Simmons says the seeds for today’s problems were sown in the 1970s when US oil majors urged the Saudis to use water injection to get high oil flow rates. Simmons argues that this has led to significantly lower recovery levels. “Big Oil bagged the Saudis … people knew in 1972 that if they produced at those levels it would destroy the reservoirs,” he says. Does he fear the Saudis might want to silence him now?

“Some people in Saudi will think I’m a hero because the oil price will go up … I’m no Salman Rushdie,” he grins.

And what does Bush think of Simmons now? “He tells me to keep speaking out loudly and honestly about our energy situation,” Simmons replies.

In the run-up to Bush winning the Presidency in 2000, he hired Simmons to help write and edit his energy plan. Simmons had previously warned Bill Clinton’s administration of impending oil shortages. He advised Melanie Kenderdine, who became director of US oil policy, and former energy secretary Bill Richardson, to concentrate on finding out how much oil OPEC had rather than on begging for more.

“Melanie came back and said ‘Oh Matt. There’s no oil out there … But if you talk to the super-majors there’s no crisis at all,” Simmons says.

He takes a pride in being a contrarian, making strategic moves against conventional wisdom in his career that later proved to be prescient.

Son of a wealthy commercial banker, he was a research associate at Harvard Business School when he did his first oil-related deal in 1969, raising $340,000 for a diving company fighting off a takeover.

“The guy who ran it pioneered the use of mixed gases to take men below 200ft. If that hadn’t worked we’d never have had the North Sea,” he says.

Five years later, investors in the company made 60 times their money – a blistering start to Simmons’s career. He set up an office in Boston doing deals in a number of sectors. “But I’d fallen passionately in love with companies selling services to the oil industry,” he says.

When the Yom Kippur war broke out in 1973, sending oil prices soaring, Simmons saw his future: “I foresaw a boom in oil services of which we’d not seen seen the like since the railroad days.”

He moved to Houston and secured funding from Edward Bates & Sons, a bank controlled by Ivory & Sime, and founded by Jimmy Gammell, father of Cairn Energy founder Bill, just one of his long-standing links with Scotland in the early days of the oil boom.

“The industry was full of gruff old boys and we were the young Harvard MBAs. Man alive, it was fun,” he says

Bates was declared insolvent during the secondary bank crisis and Simmons had to buy back its shares from the Bank of England. There followed seven strong years, interrupted by another oil shock in 1981. “I thought there would be an oil crisis like you wouldn’t believe and I’d best get into restructuring,” he says.

Simmons steered countless companies through painful financial restructuring at a time when other banks declined to get involved. “It was the best of years and the worst of years,” he recalls.

His principles remain the same as in 1974 – specialise in energy products and services; offer the highest quality advice; pride yourself on being small; and have fun.

“When we emerged at the end of the 1980s I thought – our sector got nuked and we didn’t just survive, we are actually now an important firm,” Simmons says.

In 1993, Simmons moved into the securities business, which now accounts for 40% of revenue, and expansion continued in 1998 when Simmons hired Colin Welsh to head up a new office in Aberdeen.

A restless mind with unflagging energy, Simmons spends increasing time at his home in Maine where, besides indulging his passion for painting, he buries himself in energy research. If his latest book is anything to go by, he may have a few more shocks in store for the future.

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