Transcript: The Implications of Saudi Arabian Oil Declining

30 Pages·2004·0.18 MB·English

[Note: Audio quality is poor; background noise occasionally renders speakers inaudible.]

Transcript: The Implications of Saudi Arabian Oil Declining
Presented by Matthew Simmons
July 9, 2004

Matthew Simmons:
...far more important issue than the impact on the global society, the sustainability of Saudi oil.
The question I'll basically pose is, do we have a "glass is still half-full" or a "glass is 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 thirty-
five years as an energy investment banker. I basically have an enormous bent toward research.
Most of my life I've worked on deals.

Over the course of the last ten years, as I've sort of taken myself out of day-to-day stuff, I've
become a relatively active energy speaker at various forums. The more I speak, the more curious
I get about energy. I'm a data nut, so the more data I get, the more I get saying, there's some
things I don't think we properly understand.

Having participated for a couple years running in an energy oil supply workshop that's held in
Washington once a year, where some of the most senior people [inaudible] 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 does the [inaudible] countries have on a country by
country basis.

The first time I participated in this, I came back saying, I don't know where these guys get all
these models, that they don't have any knowledge of any of these countries. So the next year, I
actually encouraged the planners – let's not waste a day by going around and having everybody
pontificate, "Well, my model says China can produce oil [inaudible] in 2002." Let's just have
them all fill out a data sheet – because I had a suspicion that by the time we got to the eighth
person, his model would totally change from what he heard from the other seven.

Then let's spend the time saying, "Isn't this interesting? You as a group think that Kuwait will
produce four years from now somewhere between 2 million and 3 million barrels a day. Where
are the differences?" Spend our time focusing on [inaudible]. That session convinced me that
we as a group of people knew nothing – that in fact I know more about some of these specific
fields that they don't even know – 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. I want to [inaudible]
largest oil fields actually are today. I've never been a reserve person. I never actually thought
that [inaudible] meant anything or any value, long before the Shell reserves. What I decided to
do is to try and look, as we always should, in terms of current production.

Say okay, I'm going to call an oil field that's over 100,000 barrels a day a giant oil field
[inaudible]. I'm going to see if I can figure out the list from number one, which I know is
Ghawar in Saudi Arabia, I know number two is Burgan in Kuwait – I have no earthly idea of the
next eight, let alone how many we have. At one point in the fall of 2000, my sister said, "You're
actually having too much fun." This really became a treasure hunt of data.

By about Christmas time, 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 about fourteen of the largest oil
fields still produce 20 percent of our daily supply and on average they were fifty years old – so
today they're fifty-four years old.

It also turns out that we had been decades since we actually found a giant oil field. We're now
[inaudible] 100,000-200,000 barrel-a-day oil field actually aren't giant oil fields, they're just kind
of nice – they're very terrific if you own one. But if the world is consuming 80 million drums a
day and 100,000 barrels a day is your source of supply, it's really the proverbial spit in a lake.
What I also didn't realize until I did this -- I kind of became a lot more familiar with some of
these [inaudible] by the end of it, like they're old friends – I didn't realize that the Middle East
basically has had a handful of oil fields. Each of these countries that are great oil producers don't
have a hundred fields that make up their production. They all seem to have four to five to six,
and they're all very tightly put together. So this is far different.

Then a couple years ago, I was asked to be part of a small delegation to go visit Saudi Arabia.
So I spent six fabulous days in the first week in February a year ago in Saudi Arabia. The people
could not have been courteous. 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, and stuff I heard
over the years about the proliferation of energy in the Middle East and so forth.

By the time we got on the plane to come back, I said to a couple of my colleagues, "You know,
there's something that doesn't meet the smell test." I can't imagine where 2.5 million barrels of
excess capacity [inaudible] and the processing [inaudible] oil could actually [inaudible]. I can't
imagine why they're so intensively using all the best technology in the world if they in fact have
ninety years of provable reserves at the current [inaudible], because the insolvents in Saudi
Arabia was something that I was kind of familiar with.

There was a presentation we had at the Expat[?] Center at Saudi Aramco, where one of the senior
guys said, "The reason we're applying this technology so intensively is [inaudible] fuzzy logic –
to basically make sure we're maximizing our natural resource base." I had never heard the term
"fuzzy logic" before, sounded very peculiar.

I raised my hand. I had two questions. "Was that model you did at Ghawar, all the dots, were
they wellheads?" He said, "Oh, yes." I said, "How come they're all at the very north of the
field?" "Always make an orderly progression from north to south."

"And secondly, what does fuzzy logic mean?" It was really interesting. He said, "Well, fuzzy
logic" – which is a very common scientific term that I had just never heard before. "Fuzzy logic
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 twenty of young, true or false. A man of
thirty is young, true or false. A man of a hundred is young, true of false. When you get toward
the center, there is no true, there is no false, and it now takes fuzzy logic."

I said to myself, "If they have 260 billion barrels of reserves that they can [inaudible] just keep
turning on the tap, why does it take fuzzy logic?" I wasn't being facetious, I was just thinking
there's something that doesn't meet the smell test here.

I never realized, even in the giant oil field study, and it took me sitting in the hotel in Dhahran,
looking at this nice book we were given on the Eastern Provinces, to suddenly start realizing that
you could draw a ring around these handful of great fields and [inaudible]. I broke [inaudible].

So I came back and I started discussing this with some of my colleagues. 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 – in August 2002. He said, the funny thing is, I was just
about to throw this away, and I noticed there's an article in here about a little section of Ghawar
[inaudible].

I read this, and you just never see individual skill-specific things in the JPT. So I wouldn't read a
lot into this, because it's a very small [inaudible]. The first time I read it, I couldn't read anything
into it, it was so technical. I barely understood what they were talking about. By the time I read
it a third time, I thought – I forgot my drawing I did of Ghawar, with the little dots all over the
north – I said, "If you could find about five more of these papers, you could really start stringing
together maybe the real story that you never hear about."

So ironically, the [inaudible] Technology Conference was having a – once a year, the first of
May, it's the largest energy confab in the world, and the OTC planners were having a press
conference the next week to promote the upcoming OTC. They asked if I'd be one of the people
on the press conference. So by Sunday morning, I e-mailed the president of the Society for
Petroleum Engineers, a guy named Mark Gruben, 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
– "ask the librarian if there's ever been another paper done on Ghawar. I'd really love to read it."

Within about five minutes, I get an e-mail back saying, "Matt, you remember the SPE – we
digitized the entire library. Very user-friendly, you ought to go on. I'm sure there must be one."
By the end of that week, I'd downloaded thirty-nine papers. By the time I read these thirty-nine
papers, I thought, "This actually is a – if I'm reading this correctly, the oil fields in Saudi Arabia
are in terrible shape." So I said, "I think this summer I ought to do another planning paper."

I like to spend the summer in Maine, it happens to be quite a bit more enjoyable than being in
Houston. So I got to Maine about the first of July and I thought rather than do this sort of
haphazardly, I'm going to actually go back and put into that Google search machine every single
field, every single determ, and just see how many more papers we get. I got a list of about
another 275, and I clicked through another 105.

I can't tell you the reaction I had the day they arrived by FedEx in Maine. My God, do I really
want to spend the summer reading through this stack of papers like that? For about three weeks I
didn't. Then I finally got back into it and it was even bigger. By about the end of August, I had
a sinking feeling that I basically spent the summer touring the oil fields of Saudi Arabia, and
actually speaking to people over the course of four decades – because once I finished in totality
these papers, I then could figure out by [inaudible] – because luckily towards about the last three
or four years, they started using individual field names versus saying "this is a large [inaudible]"
– no, this is [inaudible]. So I then went back and reordered the papers by field chronologically,
so I could start with the oldest paper done on [inaudible], all the way up to the most recent.

By the time I finished, I said, "I'm going to write a book." I now have a book that's being edited
and I hope to have out this fall. Around Christmas time, I finished a really rough, cumbersome
manuscript and I picked about twelve people that I thought were 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 in the hands of a board member of Saudi Aramco and then Bob
[inaudible] from CSIS arrives in Saudi Arabia – I'd given Bob a copy, saying, "Why don't you
read this?" He's the senior energy fellow at CSIS. Bob gets there and he runs into this buzzsaw
of this wacky guy in Houston – he's not a petroleum engineer and he's written this crazy book.

To Bob's incredible credit, by the end of the week, he pulls these guys aside and says, "I don't
think you're going to do yourselves any good by just calling this guy a nut, because he's a very
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 can bring whoever you
like."

So at the end of February – 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. So what I'm going to basically do is sort of update you on where
this whole issue is.

Let me start out with two or three obvious reminders as to why this is basically such an important
issue. There's no question that Saudi Arabia is the world's oil cornerstone. It's not just that it's
basically one of the two largest producers, along with Russia, it's the fact that Russia actually
uses a lot of oil and Saudi doesn't, so it's by far the world's top oil exporter.

Assuming the numbers are correct, which I think is an issue, 25 percent of the world's recorded
proven reserves are in Saudi Arabia. If the numbers aren't correct, none of the other Middle East
numbers are either, so they're still probably 25 percent. [inaudible] the lowest [inaudible]
producer, but that number might be far higher than they think it is, because that number you
always hear per barrel is divided into some barrels that might not be there and they don't charge
anything for electricity or water.

They're the only significant producer left in the world that have any spare capacity. That's the
only thing you have to know to say forget about all the others, this is the really important deal.
In my opinion, having studied thirty-five years on the oil markets, there is no other oil producer
on earth that could even begin over time to replace a significant shortfall 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've 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.

Turns out that in 1965, Saudi Arabia – remember, they started exploring for oil in '35. First three
years were really tough. Then they finally found what turned out to be a fairly small oil field in
'38. Then they discovered [inaudible] in '40, then the war postponed efforts, and finally they
discovered Ghawar. By the '60s, they'd basically become the largest producer, the largest
[inaudible] oil reserves. But by '65, they were only producing 2.5 million barrels a day
[inaudible] oil. By '70 they were producing three.

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. As a
result of that, they had to basically put the accelerator on, and they went from 3 to 8 million
barrels a day between 1970 and 1974. At that time, there were SPE papers starting to be written
on "we might be overproducing our oil fields – look at this water incursion."

So ever since then, they've basically accidentally – no one ever asked them to become the world's
oil steward. Had we not peaked, they wouldn't have had to do this. But they inherited the role as
the world's basically [inaudible] producer. I would say that over the last seven years, their track
record has been exemplary.

They've also been, in my opinion, having read what people in the energy business say, a long-
term advocate – one of the most vocal advocates – for 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. That [inaudible] for the most important resource on earth,
which happens to be energy.
They've also been a passionate believer in the need for spare capacity production. They
reminded people ad nauseum [inaudible] about how much they spent to make sure that they have
this energy cushion, because we couldn't tolerate any sort of an 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 [inaudible]. It's interesting – in the last several weeks we've
tossed about in the media numbers all the time about how much Saudi Arabia is producing.

Saudi Arabia has basically tossed some numbers out that might or might not be real. 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 [inaudible]. All the numbers kind of add up, so if they're
fudging them, they've cleverly fudged them so there's no inconsistency. They say they've
produced 6.95 million barrels a day. Most of the estimates said that Saudi Arabia produced 8
million barrels a day.

The single best data we get on OPEC oil production, the first source of media, comes from a
fabulous firm called Petro Logistics in Geneva, Switzerland. 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, Conrad [inaudible]. I think it's basically a scam. He's front-
running for somebody [inaudible] because there is no way on earth that anybody could be over a
grocery store in Geneva and say, "Saudi Arabia is now producing..." But the fact that everybody
has been so clammed up on their own information, we've left the world held hostage to Conrad
[inaudible] is itself alarming.

The only proof we have that Saudi Arabia has the sort of oil outlook that the world is counting
on is what I would call "trust me." That was probably a great concept when you had the fresh oil
supply, but we're too close to the edge. The analysis I did of the Society of Petroleum Engineers
papers, by the time I finished, I basically went through 217 papers. Chronologically they began
with a paper that was written on [inaudible] in 1961, when [inaudible] in the library was still
under a hundred.
The SPE papers today are in the 87,000 [inaudible] globally. The paper, ironically, was the first
problems of [inaudible] 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 – the last papers I got were
the A papers delivered at the SPE annual conference in Denver between October 5 and October 8
of 2003. That paper trail is very specific. It's just not at all 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 the highlights of the specifics of the problem. 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 basically a field that might or might not sometime produce anything. But
five to seven fields have produced, from 1950 to 2003, 90-95 percent 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 oil field in the history of the world, has accounted for
between 60 and 65 percent of Saudi Arabia's output, so if anything went wrong with Ghawar
then we have a problem with the world. All but two of these key fields were discovered long ago
and have been in production for a 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 of using [inaudible] and then you go to a secondary cover. They were doing secondary
and primary at the same time, and that created the illusion that basically this high productivity
would go on forever.

At some point, totally unannounced – because it always comes unannounced, there's no kind of
early warning system this happens – the reservoir pressures on each of those fields will end.
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 "I'll get better
next week" doesn't ever happen. You just continue to slow down.

Over the last thirty years, one of the great myths is that the Middle East is unexplored and that
most of Saudi Arabia has been unexplored. Over the last thirty years, there has been an intense
exploration effort to try to diversify themselves away from this asymmetrical distribution. But
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 and in the
"trust me." I don't think basically you should have to ask people to spend effectively nine
months going through these SPE papers to finally realize what the stake of those [inaudible].

I tried, as I was preparing this, to go back through the CSIS presentation that was made by Dr.
Solari[?], the head of reservoir management at Saudi Aramco, and Mr. Banke[?], the head of
exploration. In late April they gave a series of other presentations at the IAA in Paris. I tried to
go back through and take all the highlights. I'd like to give you, as honestly as I know how, their
response to my concerns.

First of all, [inaudible] the current oil output can reach 10.5 million barrels a day, and in fact in
the last thirty days has been [inaudible] so they could do that almost overnight. Original oil in
place – this is kind of how much you first have before you start figuring out how – they say
basically going from 500 billion to 700 billion barrels over the course of the last twenty years,
even though they've found only no significant fields, is understanding more about the structures.

They say that there are 260 billion barrels of reported crude reserves is a highly conservative
number. They say there's still 200 billion barrels of oil left to discover. They say they're finding
[inaudible] or what I call incidental, the number they're publishing is 50 cents a barrel. 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 maintain this miracle forever. To
my astonishment, at the [inaudible] presentation they said not only could we produce 10 or 12,
they could produce 15 million barrels a day for fifty years. So there really isn't any problem.

Could these claims be true? At the end of April at CSIS, Oil Minister Naimi[?] said, we have
sent our best experts in February and they proved we had no problems. At the program in
February, after we finished the program, at a lunch for about twenty of us, Dr. Solari[?] gave me