Matthew Simmons: Twilight in the desert?

It may be unwise to rely on Saudi Arabia to fulfil galloping oil demand, says Matthew Simmons –

The world assumes that regardless of how fast demand for oil grows, it can continue to be supplied by ever-increasing amounts of oil from the Middle East, and particularly from Saudi Arabia. This assumption may be false. A very high proportion of the oil production from Saudi Arabia comes from a small number of giant oilfields that could be nearing their twilight stage. The more intensively that oil is produced from these key fields, the faster “twilight in the desert” will come.

An unquenchable thirst

Global oil demand is now growing at an unsustainable pace. Just a decade ago, economists were confident that oil demand was stagnating and might have a hard time exceeding 70 million barrels per day (bpd). Oil demand in 2004 is estimated to have topped 82 million bpd, with a projected growth of a further 2 million bpd in 2005. Driving this growth is economic prosperity in the developed world, and the onset of a similar level of prosperity in China, India and other countries that were once light oil users.

Detailed long-term oil supply and demand models from the Paris-based International Energy Agency (IEA) forecast that growth in oil demand will slow but will still reach 107 million bpd by 2020 and 121 million bpd by 2030.

A gushing well?

For such demand to be met, there will have to be huge increases in oil supply from the Middle East. Within the region, Saudi Arabia is presumed to be the only supplier able to add another 10 million to 15 million bpd within this time frame. Some Middle East producers now struggle simply to maintain current production.

The IEA model for oil demand exceeding 121 million bpd by 2030 assumes that Middle East oil output will grow by around 32 million bpd. It is silent on the exact amount that Saudi Arabia would need to provide, but it has to be the bulk of this enormous increase.

Few energy observers have ever questioned whether it is possible to make such big production increases. Instead, there is a general sense that Middle East oil is bountiful and also cheap to produce. This becomes the basis of a leap of faith that output in a place like Saudi Arabia can grow almost as fast as demand. For years, I believed that these “boundless Middle East oil” claims must be true, since so many oil experts seemed sure this was the case. My feeling that their confidence might be ill-founded began in 2000 when I started a study of the then largest-producing oil fields. I was surprised to find that each Middle East producing country supplied a significant proportion of its oil from a few giant but mature fields.

I was most surprised at the production profile of Saudi Arabia. Based on the best information I could dig out, which was surprisingly hard to obtain, it appeared that around 90% of Saudi Arabia’s oil in 2000 was still coming from five or six fields. The three most important fields, producing more than 80% of total Saudi oil, were discovered in 1940, 1948 and 1951.

Drilling for the truth

In early 2003, I embarked on an intense review of more than 200 technical papers written about actual conditions at these key Saudi Arabian oilfields. By the time I finished this research, I felt I had crawled through the vault of state secrets about the oilfields. Some papers were quite general; most were highly technical. Almost all were authored or co-authored by technical experts working at Saudi Aramco, the national oil company of Saudi Arabia.

Not a single paper put the total challenges that now face Saudi Arabia into proper perspective. Most papers only discussed a limited area of one old giant oilfield. But when the total scope of this research was pieced together, the picture that emerged convinced me that it would be virtually impossible for Saudi Arabia ever to increase its oil output – even simply for surge production – to levels even close to 20 million to 30 million bpd. Instead, there is a risk that the oil coming from this small number of old fields could peak and begin the same steady decline that happened in America after 1970, when output from the 48 contiguous states peaked, or in the North Sea in 1999.

I also have grave doubts about the reliability of the reported proven reserves of Saudi Arabia (and most of the other Middle East producers’ reported proven reserves, too, for that matter). Saudi Arabia’s oil ministry and senior executives of Saudi Aramco have acknowledged that their proven reserve totals have grown more than two-fold in the past two decades without finding much new supply. But these same officials are adamant that this reported reserve appreciation came as a by-product of intense technical analysis and the use of modern technical tools which enable them to understand better the magnitude of Saudi’s reserves.

The reality is that the reported proven oil reserves of Saudi Aramco jumped from around 110 billion barrels in 1978, the last year when proven reserve calculations were being done by the four western oil company shareholders (Exxon, Mobil, Chevron and Texaco), to around 160 billion barrels over the next two years. It then jumped again to more than 250 billion barrels in 1988. This was before any of the technology now being used in Saudi Arabia was ever introduced. These numbers have never been subject to any third party audit, nor to any report on how the reserves stack up on a field-by-field basis. Until an independent third party conducts an independent reserve audit, the whole world would be wise to cast doubt on the quality and reliability of these numbers.

The questions I have raised on the sustainability of Saudi Arabia’s current oil output have also been countered by various presentations by senior technical authorities within Saudi Aramco who produce comforting statements and graphs displaying the ease with which Saudi Arabia could produce 10 million, 12 million or even 15 million bpd for at least another half-century. As assuring as these statements sound, there is no technical proof offered to back up these “Trust Me” statements.

Why I worry that a possible serious production decline could be in store for all of Saudi Arabia’s ageing giant oilfields is that all key fields have been under an intense water injection programme to maintain high reservoir pressure and also to sweep the easily extracted oil from the flanks of each field to the relatively small number of producing wells. At some point in time – and that time could be soon – the water sweep will end and the high reservoir pressures will drop. This is simply the ageing process of any oilfield. Once this happens, daily oil production will go into the same steep decline that finally hit Prudhoe Bay and all the giant North Sea oilfields.

There is no way to target accurately the date that oil production could begin to decline. The event will only be clear after the fact. Since the consequences of this energy surprise are so alarming, it would be folly for the world to assume the event will not happen.

I am promoting a new standard of oil production transparency that calls for all serious oil and gas producers to begin timely reports of oil and gas production by key fields (or at least key production units) and also report the number of average well bores that create this production, along with some key reserve data on each major field. This new era of transparency, if also verified by third party audits that what is reported is not simply a “second set of books”, would go a long way towards either allaying worries or underscoring the seriousness of this supply risk. The need for a new era of “Trust but Verify” energy data reform has never been greater.

Until there is far greater disclosure of field-by-field production, I will continue to fret that we might be living with the illusion of bountiful oil supplies when that supply is actually dwindling.

Matthew Simmons
Matthew Simmons is chairman and chief executive officer of Simmons & Company International, a specialized energy investment banking firm. He publishes numerous energy papers for industry journals and is a frequent speaker at government forums, energy symposiums and in board rooms of many leading energy companies around the world.