Peak Oil
The Saudis are now warning that their oil supplies are inadequate to meet future requirements. Matthew R Simmons has more perspective in this interview with the Agonist; also see this article by Kevin Drum.
In other words, there remains nothing to try. The best technology known to man has already been put to use all over Saudi Arabia in an increasingly desperate attempt merely to keep production steady at 10 million bpd. In the vernacular of the oil industry, Saudi oil fields have been in “secondary recovery” mode for years, and long experience elsewhere in the world has already taught us the limits of the advanced extraction technologies now being used in Saudi Arabia. They can mitigate production declines after a field peaks, but they can't stave off the peak itself. More money and more technology won't bail us out here. We're up against geological limits, not financial ones.
In other words, there remains nothing to try. The best technology known to man has already been put to use all over Saudi Arabia in an increasingly desperate attempt merely to keep production steady at 10 million bpd. In the vernacular of the oil industry, Saudi oil fields have been in “secondary recovery” mode for years, and long experience elsewhere in the world has already taught us the limits of the advanced extraction technologies now being used in Saudi Arabia. They can mitigate production declines after a field peaks, but they can't stave off the peak itself. More money and more technology won't bail us out here. We're up against geological limits, not financial ones.
posted by Management at 5:35 PM
3 Comments:
Saudis warn of shortfalls as oil hits $61
By Carola Hoyos and Neil Dennis in London
Published: July 6 2005 22:02 | Last updated: July 6 2005 22:02
saudi arabia oilOil prices hit new record highs above $61 a barrel on Thursday, driven by short-term supply fears as the first hurricane of the season threatened crude production and refinery operations in the Gulf of Mexico.
But private warnings also point to a worsening long-term outllook, with Saudi officials saying that the Organisation of the Petroleum Exporting Countries will be unable to meet projected western demand in 10 to 15 years.
At today's prices, the world will need the cartel to boost its production from 30m to 50m barrels a day to 50m by 2020 to meet rapidly rising demand, according to the International Energy Agency, the energy watchdog for consuming countries.
But senior Saudi energy officials have privately warned US and European counterparts that Opec would have an “extremely difficult time” meeting that demand. Saudi Arabia calculates there is a 4.5m b/d gap between what the world needs and what the kingdom can provide.
Saudi Arabia has the world's largest oil reserves and will need to bear up to half Opec's production growth in the next 10 to 20 years, with the rest mainly coming from Kuwait and the United Arab Emirates.
Saudi Arabia pumps 9.5m b/d and has assured consumer countries that it could reach 12.5m b/d in 2009 and probably 15m b/d eventually. But a senior western energy official said: “They said it would be extremely difficult to move above that figure”.
But European officials hope that energy saving measures could curb oil demand. They believe Opec could produce the 44m b/d the world would need if consumers adopted efficiency measures under discussion by governments in the US and Europe.
G8 leaders are expected to discuss the high oil prices during their three day summit which began in Gleneagles, Scotland, on Wednesday.
Fears that US refineries are ill-equipped to meet winter demand for heating oil and other distillates have driven crude prices more than 9 per cent higher in the last week.
These concerns were compounded on Wednesday as Chevron, Shell and BP all reported they were evacuating workers from platforms in the Gulf of Mexico as tropical storm Dennis was upgraded to hurricane.
These concerns were compounded on Wednesday as Chevron, Shell and BP all reported they were evacuating workers from platforms in the Gulf of Mexico as tropical storm Dennis was upgraded to hurricane
The August West Texas Intermediate contract on the New York Mercantile Exchange hit a record $61.63 in early electronic trade, while on London’s International Petroleum Exchange, the front-month Brent crude contract climbed to an all-time high of $60.26 a barrel.
Peak Oil, Saudi Arabia: Part 1
Sean-Paul Kelley | San Antonio | June 3
The Agonist - I received a lot of emails about getting the transcript finished. I just don't have the time this afternoon, but I will post the first third of the interview. Part 2 of Simmon's interview is here. And part 3 is here.
Here is Mr. Simmons book, if you are interested in peak oil issues and Saudi Arabia in particular. I enjoyed interviewing him and learned quite a bit.
More after the jump
-
By Sean Paul in Interviews on Fri Jun 3rd, 2005 at 12:43:29 PM PDT
Part 1: Matthew R. Simmons, June 2, 2005.
SPK: The first question is one I have to ask: I have read in some places that you have a relationship with the Bush family.
MRS: That is a widely misunderstood deal. And in fact I get embarrassed all the number of times I've been described as an energy strategists for the Bush family or a senior advisor to the Bush administration on energy. First of all I am a big, big supporter of President Bush. I have met him several times and I spent a lot of time in 2000 making sure that the Bush campaign strategy people were aware of the growing number of energy problems that we had cropping up so that this didn't catch them by surprise. And as a result of that I ended up providing a lot of the raw data that went into the comprehensive energy plan that was laid out by Governor Bush when he was running for President.
SPK: Were you involved in the Cheney Energy task force?
MRS: I didn't have any part of the Cheney Energy task force. All those people were cabinet secretaries. I'm not trying to duck any questions. I have to say I am a pretty non-partisan energy guy. When I started providing the data to the Bush campaign I was also warning the advisors to now Governor Richardson who was Secretary of Energy, of the same issues.
SPK: The reason I ask is that we're a liberal leaning weblog and I do not want to mischaracterize you.
MRS: I am glad that you asked that. I think the media has treated me very, very fairly. But that is my only gripe. Usually it never comes up and then they just publish that I am an energy advisor for President Bush. I advised him, but do not currently, and for quite some time, advise him.
SPK: You talk about Saudi Arabia and the conventional wisdom that it is still the world's lowest cost producer of oil; do you think that Saudi Arabia has the world's lowest cost oil production? If not, who does?
MRS: You know one of the problems is coming up with a proper definition of what you are including as your costs. For years they were undoubtedly the world's lowest cost oil producer because they had already paid for the fields. And the only costs they were counting were the operating costs to pull the oil out and they weren't charging anything for electricity or water, which is most of the cost.
It was a very artificial cost. Now, today they've announced that they are going to spend something like $50 billion between now and 2009 to try and create a million and half barrels a day of spare capacity.
And so, if they properly for charging for their water handling and their electricity they would be not the highest cost, but right up there. There isn't any real cheap, low cost oil left.
They will tell you their costs are $.40-.50 a barrel. Basically it's a fictitious number.
SPK: What do you estimate their costs are?
MRS: If you take the costs of things that have been totally written off, they really aren't real costs and figure out how much you want to charge for the water and electricity it could easily be between $10-20 a barrel.
SPK: There has been a lot of talk about Saudi Arabia's spare capacity, just how much do they have. Do you believe they have spare capacity and if so, what do you think it is?
MRS: If they have any spare capacity left it would have to be in Safaniya, which is the big offshore field. That's 28 gravity oil which is heavy oil, and there really isn't any spare refinery capacity left in the world for heavy oil. And if Safaniya actually could crank up by 1.5 mbds and at peak Safaniya could produce 1.2mbd, maybe 1.5mbd 20 years ago, so the whole definition, if you define spare capacity by the amount of readily available oil that is useable then I think the answer is categorically no, they have no spare capacity.
SPK: The criticism that you just laid out I have heard that from a friend who runs a hedge fund. Nice to hear it seconded.
MRS: They toss around with great frequency that they have 11mbd of capacity, that they are producing at some number, but I think it is highly questionable that they are producing 9.5mbd a day.
SPK: Now that I have not heard before.
MRS: I'll tell you why I say that.
SPK: Ok.
MRS: It's a world of sketchy data, there are only a few pieces of reliable data, really very solid data, and on the Oil Monthly Supply Report from the International Energy Agency almost all that data is just an estimate. The best table of data is the table 6 that shows the OECD Member countries, their crude oil by country of origin, and if you trace the amount of oil that has come in from Saudi Arabia and add it up, well, it doesn't add up.
SPK: Let me make clear the assumption underlying my next question: if the insurgency in Iraq ends how much oil do you think Iraq can bring online in spare capacity? That it's not already producing now, obviously they have some serious problems because the guerillas are blowing up pipelines left and right, etc, so what I am saying is: if the insurgency ends, what kind of oil can we expect from Iraq?
MRS: The most serious problems that the Iraq oil system has is the two old giant oil fields, Kirkuk and Rumelia, were basically around 80-85% of their sustainable oil production in the 80s and 90s and both of those fields have been terribly abused, over the last two years and they finally were able to, about six to nine weeks ago, to let two contracts to have the first serious reservoir studies done of those fields since the late 1970s. And my sense is that what the reservoir field studies will show, if they are done properly is that they basically destroyed those two fields.
And now the question shifts to, well, what about all these structures they have discovered that have basically never been developed? Well Saudi Arabia has 80 of those structures, but for some reason or another in the $50 billion plan of all these old fields they are trying to rebuild, not a single one of the 80 is being tackled.
So, I suspect that in Iraq they must be a little bit like Saudi Arabia's structures. You know, they are pushing these things so hard they had the money, and it really isn't that expensive to actually bring on a new field that you've already discovered.
Then there's the question about exploration in the Western Desert. They clearly haven't, but they've explored extensively in Syria and Jordan and in the Arabian Peninsula and they have never found anything.
If we were evaluating an IPO of an exploration project in the Western Desert Of Iraq I'd say, "until you found something you couldn't raise any money for it."
MRS: No one really knows but I will say this: its production is so totally different from normal fields and Ghawar is a prime example of this is that the reason normal fields start in decline is that the reservoir pressure finally drops to a level that the gas starts to bubble to the top of the field and the water starts intermingling at the bottom and the water and the gas crowd the oil out of the well bore. In very simple terms that's what declines are all about. In the early 60s as the Saudis, Saudi Aramco that is, started becoming very, very nervous about the rapid drop in reservoir pressure in these keys fields, and there are only three of them basically really being produced, they first experimented with gas injection to see if that would maintain higher reservoir pressure and that didn't work. So they then went to a novel approach, it's not novel any more as it's become sort of routine, of water injection as you produce oil producing at least a barrel of water and then a barrel and a half and then two barrels of water until now it's almost three barrels of water for every barrel of oil produced and what you are doing, is that you are basically doing that to continually drive the water column up towards the top of the reservoir to keep the reservoir artificially high. Incidentally you're squeezing the oil from the flanks to the center. And so all during this period of time you have at the surface the appearance of, "oh there's no decline rate."
What you are doing is primary and secondary recovery at the same time. And there is a lot of evidence if you read through these technical papers that within the most prolific part of Ghawar which was Northeast Uthmaniyah that in 1979 when they were reaching peak production rates Ghawar was doing about 5.8 million barrels of oil a day, Uthmaniyah was producing three of the 5.8mbd. My guess is that North Uthmaniyah is now almost gone.
SPK: You talk about the watering and what not but it is kind of an aside, do you anticipate something like the rapid decline in production at the Yibal field in Oman happening in Saudi Arabia?
MRS: Yup. That's the reason I've basically used the Yibal field as a case study. It's one of the most sensitive areas where I have gotten the most knee-jerk response. I've been told numerous times by Senior Petroleum Ministry and Aramco people, "Matt the Yibal field is nothing like our carbonate reservoirs." And I said, " I know its not, it's exactly like the reservoir you would have in China."
I'm not using it for the reservoir, I'm using it because it was the first giant field in the Middle East to import the technical tools that you think are destructive technologies and will allow you to produce for another 50 years and so do the technical best people at Shell.
The best technical people at Shell were so enamored with the use of these technical tools that they convinced the Oman government with a field of 250,000 barrels to ramp it up another 30% for ten years. That was in 1997. Just as they were starting the field went into collapse and by 2003 was producing 30,000-40,000 barrels a day.
That's the scary thing in my opinion. It's not the proven reserve controversy. That is a different issue. But the scary thing is that we should basically presume and then be surprised if they ever opened up the data I believe that all five of these great fields that are still close to 90% of production are headed towards collapse.
SPK: How well do you think Saudi Arabia could fake a massive decline rate? How long do you think they could keep something like that under wraps?
MRS: Until the production collapsed. What's ironic is that three years ago today I had no earthly idea I was going to write a book. But I read 15 to 20 technical papers as of this time two years ago and I said to myself, "Gosh, this is troubling." They are encountering a lot more problems than I ever would have imagined. I don't think there is any reason in the world to think that anybody would be any more concerned about Saudi Arabia than the gasps I got two years ago when I started saying, "you know what, I'm actually starting to think Saudi Arabia is an illusion."
I can't tell you the gasps I got from people, "you know Matt, I know you kind of picked the gas problems, natural gas here in the US, but you're going over the top. Saudi Arabia? Gimme a break!"
SPK: People these days don't like a Canary in the coalmine!
MRS: Well, you know it's amazing how the human mind works. Here's an example: somebody basically said the USSR is the only super-power that is as big as the US and by the hundredth repetition every single person in the world believes it and then the wall comes down. And people say, "oh my gosh, it's a third world country."
This is the same sort of a deal.
SPK: Do you think that Saudi Arabia can drill their way out of the current decline rate? Exploration?
MRS: Nope. Part of the issue is, I want to go back to the Ghawar field. The top 20% of Ghawar which is referred to as North Ghawar is basically where this very, very high permeability within the Arab B Zone 2B resides. Within the Arab B Zone 2B there is unbelievable permeability.
When you get outside North Ghawar you have the bottom 80% of the field that will basically produce 300,000 barrels a day for 30 years. That's the bottom 47 miles of Ghawar. And the top 30 miles were basically 4.5 million barrels a day.
If you could take the rig counts in Saudi Arabia from 45 to 50 up to 2,000 over a decade they could basically sustain their current production. What you have to do is take every rig in the world to Saudi Arabia. They are going to have one hell of a time going to 100 rigs by the end of 2006, which is their announced plan.
SPK: How large are the Saudi tank farms in country and internationally, like the ones in the Caribbean?
MRS: Somewhere between 50 and 70 million barrels of domestic tank farms and they have about 10-15 million barrels of Atlantic basin tanks farms that is broken out between some storage they rent in Rotterdam but the majority is in the Caribbean. The only times there is clear evidence of a Saudi surge was during the Iraq war where it jumped by about 800,000 barrels a day for about 45 days. I bet you they were just emptying the tanks farms.
SPK: Do you think there is any truth that the wells in the Neutral Zone are long horizontal wells and is it possible to run a multi-model horizontal leg into Iraq and tap it that way.
MRS: No, they can't reach that far. Not that I know of. And the Neutral Zone fields are so crappy. Why bother. Bear in mind that that is the northern extension of the Safiniyah field.
SPK: Are you familiar with the report, Exxon's Outlook for energy? From my reading of the report it said that practically all the future production increases in the world are going to have to come from OPEC. With what you are telling me and what you have written in your book, what you are telling me that it's not going to happen.
-
By Sean Paul in Interviews on Mon Jun 6th, 2005 at 11:52:22 PM PDT
MRS: It has a one percent chance of happening. Maybe half a percent, really.
SPK: What's the solution? A couple of brief ideas.
MRS: I think they have OPEC going to 50mbd by 2030. That means that we must have Saudi Arabia at between 20-35mbd.
SPK: You categorically don't see that as happening, do you?
MRS: Yeah, the chance of that is less than one percent. Now when you get less than one percent it doesn't matter what it is. I also think the risk of actually producing at 10-12mbd has a chance of maybe five percent. Again, I hate to use those numbers but it is just extremely low. The safest production profile for Saudi Arabia over the next decade is to lower their current production by a third to 50%.
SPK: Why would you lower production?
MRS: It's called conservation. The lower the rate you produce any pressurized oilfield then the longer you can produce it at a sustainable rate and you will recover more oil without having to revert to artificial lift.
SPK: Ok, little funny here. I thought when you said conservation I sensed a little glibness but now I understand. You are talking about the longevity of the oil field.
MRS: This use to be very common in the industry in the 60s and 70s. But now when you hear the word conservation people think you mean not driving an SUV. Being a conservationist in the oil industry meant producing at a gentle rate of production for a long, long period of time. And once prices collapsed you couldn't afford to do that unless you were you a really wealthy family. There are some examples in Texas of some really wealthy families that decided years ago they would never produce a field over a certain amount and they are still producing at the same amount today.
SPK: During the Asian financial crisis and the resulting collapse in worldwide oil prices, it was a demand side issue, I know a couple of people here in town that just stopped producing. They stopped because they weren't making any money as it cost them more to pump the oil out than it brought in the market.
MRS: The Cullen family in Houston, old man Cullen was one of the great wildcatters of the 30s and 40s, I don't know when his era finally passed but his great discovery was the O'Connor field and I was told a few weeks ago that they did a study back in the 60s realizing that if the O'Connor field production collapses their wealth comes to an end. And so they did a very detailed study and decided to produce it at 40,000 barrels a day and it is still producing 40,000 barrels a day. Had they gone to 200,000-300,000 it would have been over in the 70s.
SPK: That being said, what do you say about the demand side. You've talked about supply side, a way of reducing production so that you have a sustainable oil well, now lets talk about the demand side?
MRS: The current model is not sustainable. It is not sustainable but it is insatiable.
SPK: How do I just know that that soundbite is going to be around for a while?
MRS: Perhaps.
SPK: Joking aside, what's the solution?
MRS: Once it is clear that Saudi Arabia has passed sustainable peak production because once that happens then the world has categorically passed sustainable peak production.
One of the things we need to do is understand the true value of a really scarce resource. You know, we wasted most of the great oil, by giving it away. And get people appreciating that oil and natural gas need to be at prices that are vastly higher than what they are today. And once they get to that people won't get disturbed or mad. They'll accept it.
It's interesting the steps we can take that really aren't exactly as draconian as they sound on the surface. You got to fix the transportation market. 70% of every barrel of oil used in the world today is used to transportation. But there are some really interesting fixes. If you put all of the goods we now move by long haul trucks and get them off the highways and put them on the rails that has an energy efficiency of between five and ten fold, as opposed to five or ten percent. And that is not an impossible mission from a five to seven year time if we had to do it. There is a huge side benefit to that. By eliminating the trucks on the road we actually make a bug dent on traffic congestion. Traffic congestion is public enemy numbers 1 through 8 on passenger car fuel efficiency. And so we can have all of these Priuses and hybrids, don't get me wrong they are great. I drive a fabulous new Diesel Mercedes and I get, on the open road, as long as there is no traffic, I can get almost 50 miles to the gallon. But when I am in stop-and-go traffic I get between 5-11 miles to the gallon. You have to address traffic congestion and you have to address some of these areas where there are magnitudes of savings and then we have to learn to do things like distributed work. The miracle of the internet and working online. It took three months to get my firm online. Rather than have people drive for two hours in the afternoon and two hours in the evening we will actually adjust to people working in their neighborhood for their company.
And we need to learn how to make things closer to home.
Then there is agriculture. Food models. Apples sold in the summer in the UK 85-90% of them comes from New Zealand. That's a 22,000 mile journey for an apple! If we went back to growing our food closer to home which is easily done, we could help our economy, get better apples because they are local, and we save enormous amounts on money on energy/transport costs. We can make those changes in a 5-10 year period of time without going into an energy war.
SPK: Do you suggest taxing the price of oil? Would you suggest a tariff or something along those lines?
MRS: No, because you just basically make it look like the only reason there are high prices for energy are from taxes. I think there is a whole different issue. And that is what do we do with the abnormally high wealth and revenue this created. We need to make damn sure that the money is spent for good purposes.
For instance, in the United States we have a pipeline system that is delivering 21mbd of finished petroleum products and about 9mbd equivalent natural gas that is so utterly old and rusty that it cannot be maintained. Over the next five years we need to take this fantastically high revenue from this and reinvest it in rebuilding the pipeline system. Because what would really be a problem is that we not only have falling supply but a collapsed pipeline system. That would be the largest construction job in the history of the United States and it would touch every state. I think this would be a trillion dollar job. It would be good for and help our economy and wonderful for blue-collar jobs in a way that would tolerate the impact of $150-200 barrel prices.
SPK: You think that oil is going to be at $150-200 a barrel? It's gonna happen?
MRS: Yeah. On an inflation-adjusted basis the price we paid in the 70s was over a $100 a barrel. And that was when we had far more world wide supply than we have today. And we had a drilling system that was relatively new. The whole system is so utterly old that it needs to be replaced. There are 3,000 drilling rigs in the world, about 600 offshore and 2,400 on land. And the average age of the rigs onshore is about 30 years. The average age offshore is about 22 years. If they don't rapidly start re-building new rigs they are going to compound a whole `nother problem.
There are lots of ways to spend the money generated from oil. We might just have to actually have some tax policies because what we cannot tolerate is the owners of the oil just putting it in their pockets and getting even more utterly wealthy.
SPK: That is a very interesting comment. I do not think I have ever heard someone that works in the oil industry living in Houston say something so blasphemous! I'm glad to hear it, but very surprised.
MRS: Well, first of all, I am not an ideologue, I am a realist.
SPK: Along those lines, do you think there are more people in your industry who are beginning to feel the way you do?
MRS: I'd say it is probably now somewhere between 75 and 100 hundred of us. But that's out of a population of, oh, 2, 2 and a half million.
SPK: That isn't very many.
MRS: It's better than the ten or fifteen of us it was five years ago. The Swedish Academy of Royal Science have now held three hearings in the last two weeks and the first hearing, I was one of the four participants of the first one and they are going to come out with a major paper in the next few weeks addressing the issue of Peak Oil. And the Swedish Academy of Science is the group that picks the Nobel Prizes.
SPK: Pretty serious crowd.
MRS: And the reality is that this is now the work of about 300 people. I obviously think this is just as important as people being aware of the possibility of war in 1938-39.
SPK: As you are labeled as an investment banker I want to ask you who is going to profit from this and where should investors look to put their money?
MRS: The money that needs to be spent on this problem will create some very healthy companies. It won't be good for all the companies. I think the majors have themselves in a very serious box. They are too big. And they cannot acquire with high oil prices. I don't like the majors. Over the next year, the majors will do well in the stock market, but I think being small is beautiful. If you are small you are still nimble enough to have real growth. The service industry, are the foot soldiers and the refiners are the toll gate of being able to create a stable crude stream into high quality products. Like Valero. Any of the independent refiners, too.
SPK: Last question: Any ideas on the infrastructure rebuild play?
MRS: No specific names, because of the new rules. Being too stock specific can get me into trouble. But it is a good group.
SPK: Mr. Simmons, I really appreciate you taking the time out of your busy schedule and I hope that you sell lots of books. Thank you very much.
MRS: Well, there has never been a book published like this that is un-ideological and I hope that it is a serious wake-up call.
Thanks for your time as well.
Crude Awakening
The only hope for meeting growing world demand for oil is to tap Saudi Arabia's reserves. A Bush advisor on energy says those reserves don't exist.
By Kevin Drum
As recently as a few years ago, only two groups of people were interested in the arid subject of oil depletion. The first was Texas oil moguls and their lobbyists who roamed the halls of Congress searching out ever juicier tax breaks from our elected representatives. The second was a tiny group of cranks and conspiracy theorists who not only wrote for Scientific American but also frequented the sparsely inhabited corners of the Internet and begged the world to pay attention to the obscure topic of “peak oil”—whether the world wanted to pay attention or not. Fast forward to 2005, and the oil moguls haven't changed much. The peak oil cranks, on the other hand, are cranks no longer. In fact, they've practically become rock stars. Half a dozen books on the subject have come out in the last two years, and magazines from Rolling Stone to National Geographic also have published articles on the subject. The “end of oil” is suddenly a hot topic.
It's not hard to understand the change. As the 1990s came to a close, the world was awash in oil. Oil company executives counted themselves lucky to get 10 bucks for a barrel of crude oil, and analysts were predicting that even this price might be cut in half. Forever. When former oil executive Colin Campbell, the dean of the peak oil doomsayers, warned that the end of cheap oil was only a few years away, he was easy to dismiss. After all, hadn't he said the same thing five years before? And five years before that?
More generally, we could consider the consistently dismal track record of other resource pessimists. Didn't professional doomsayer Paul Ehrlich make a bet with economist Julian Simon in 1980 that the prices of five different metals would rise over the next decade? And wasn't he forced to pay off Simon in 1990 as steadily increasing supplies combined with more efficient manufacturing techniques had cut prices in half? Yes and yes.
Today, though, things look very different. Royal Dutch Shell shocked investors last year when it unexpectedly announced that it was slashing its estimate of proven reserves by 20 percent. The price of oil has climbed dramatically since 9/11, passing $50 per barrel for the first time since the Ayatollah Khomeini touched off the world's last oil shock in 1979. At the same time, the demand for oil continues to rise inexorably, fueled by ever bigger SUVs in the United States and steadily growing appetites for Western standards of living in China and India. More than a few mainstream analysts believe that oil prices could hit $100 per barrel in the next several years.
None of this comes because we're literally running out of oil. Everyone agrees that there's still plenty left. Rather, the theory of peak oil derives from a simpler but less widely understood question: How fast can the stuff be pumped out of the ground? Right now, the world consumes oil at the rate of about 84 million barrels per day (bpd), and that's the number which matters. If the world's oil suppliers can continue to increase this production rate as demand grows, the global economy is in good shape. If they can't, we're in trouble no matter how many barrels of crude oil are lying under the ground.
Concern with production rates is neither new nor especially controversial. In fact, it was first raised by M. King Hubbert, a Shell Oil geophysicist, over 50 years ago. In a now-famous paper written in 1956, Hubbert suggested that production rates for oil (and other fossil fuels) follow a bell curve: In new fields, clean, highly pressurized oil flows abundantly to the surface, and as new wells are drilled, production rates rise steadily. After about half the oil has been extracted, however, production rates start to go down. There's still oil left, but declining pressure, exhaustion of the best oil pockets, and increasing contamination bring it to the surface ever more slowly. Applying this production model to the entire United States, taking into account the rate at which new fields were being discovered, Hubbert predicted that oil production in the lower 48 states would peak around 1970 and then start declining.
Hubbert was roundly ignored at the time, but in fact oil production in the continental United States peaked in 1970, right around when he said it would. Thanks to new extraction technologies introduced since Hubbert's original paper was written, production has declined more gradually since 1970 than predicted, but it's declined nonetheless. Thirty-five years ago, the continental United States produced 9.4 million bpd of crude; today, it produces only about 4.7 million.
Nor is this phenomenon unique to the continental United States; most oil fields peak and decline in the same way. Prudhoe Bay peaked in 1989. The North Sea peaked in 1999. China's massive Daqing field probably peaked a year or two ago. They're all still producing oil, but they produce less and less every year.
No less an authority than that legendary curmudgeon-cum-oil magnate T. Boone Pickens thinks this is clear evidence that world oil production has already peaked. “Global oil [production] is 84 million barrels [per day],” he told a conference of alternative-fuel advocates in May. “I don't believe you can get it any more than 84 million barrels. I don't care what Abdullah, Putin, or anybody else says about oil reserves or production. I think they are on decline in the biggest oil fields in the world today, and I know what it's like once you turn the corner and start declining. It's a treadmill that you just can't keep up with.”
Pickens's view is typically colorful, but it's not shared by everyone. Hard data is surprisingly rare in the oil industry, and production forecasts range all over the map, but if forced at gunpoint to provide a firm answer, most mainstream analysts would probably hazard a guess that oil production will peak in 10 or 15 years at around 100 million bpd. The problem is that when such forecasts are broken down, they start to look decidedly shaky. Where are we going to come up with 16 million bpd of new production?
To begin with, oil is found only in certain specific types of geological formations, and we already know where they all are. And while it's true that there are still many of these formations left to explore, recent history suggests that most will produce only modest amounts of oil. Of the hot prospects of the '90s, for example, probably only Kazakhstan's fields have lived up to expectations, while fields in the Gulf of Mexico and the Caspian Sea have been disappointments. Despite the marriage of huge amounts of money with the finest available advanced technology, it's likely we've already found most of the world's truly big oil fields. The rate at which new oil is discovered has been dropping steadily for four decades, and there's no good reason to think that's going to suddenly turn around in future decades.
The same is true of other prospects touted for the future. There might be lots of oil in the Arctic or in the deepwater off the coasts of Africa. There are also tar sands in Canada and heavy oil in Venezuela. But even if they pan out, projects like these take years—or decades—to develop, are likely to produce at modest rates, and, in the end, will do little more than replace declines from older fields elsewhere in the world anyway. We're still looking for 16 million bpd of new oil.
For that, we have to look toward the Middle East. But if you dig around in the details, it turns out that prospects there are surprisingly thin as well—except in one place: Saudi Arabia. In fact, widely respected oil projections share a common feature: They assume that Saudi Arabia, which today produces about 10 million bpd of oil, will be able to double its oil production over the next decade or two.
This is the elephant in the room, and it's something that nearly everyone agrees on. If Saudi Arabia can't double its output, there's not much hope that worldwide oil production can increase very much either. In the end, it turns out that everything hinges on Saudi Arabia.
The problem is that projecting the capacity of Saudi oil production is a tough nut. Ever since the Saudis took control of their national oil company, Aramco, from Western oil companies in 1980, a shroud has dropped over every facet of the kingdom's oil industry. The Saudis release no official data on how their aging fields are holding up, or how well their exploration efforts are going, and their published production totals may not be credible, let alone how much they will be producing a decade from now. As with most OPEC members, Saudi claims of proven reserves have increased steadily since 1980, but most analysts agree that these numbers have been manipulated upward for political reasons related to OPEC production quotas and bear little relation to reality. For oil industry experts, Saudi Arabia is a gigantic black hole, a target of guesswork, not analysis.
After 9/11, however, things began to change. Reeling from American revulsion at the discovery that 15 Saudi nationals led by the son of a Saudi billionaire had carried out the attacks, Saudi officials began a charm offensive. In an effort to demonstrate their bona fides as a reliable—and necessary—American ally, the Saudi oil ministry began inviting oil analysts over for tours of its facilities. And although they hardly became models of transparency, they did start releasing more detailed production data than they had in the past.
In retrospect, this effort may someday be viewed as one of the most disastrous PR campaigns in history. Far from reassuring everybody, a closer look at the Saudi oil industry caused some analysts to lose hope altogether. In The End of Oil, published last year, Paul Roberts recounted his visit to Saudi Arabia: “I was standing on a sand dune in Saudi Arabia's 'Empty Quarter,' the vast, rust-red desert where one-quarter of the world's oil is found, when I lost my faith in the modern energy economy.”
Peculiar as it sounds, Roberts's problem wasn't with Saudi Arabia's oil, it was with Saudi Arabia's water. In most large oil fields, including all of Saudi Arabia's, oil is forced to the surface by the natural pressure of the reservoir itself. In order to keep this pressure up as more and more oil is extracted, water is injected back into the reservoir.
This standard part of oil field maintenance still carries a cost: Eventually the injected water seeps into the oil itself, and the stuff that makes it to the surface becomes increasingly contaminated. That's perfectly normal, but what prompted Roberts's dismay was the discovery that at Saudi Arabia's Ghawar field, the biggest oil field in the world, the percentage of water mixed in with the oil is now 30 percent. That's a dangerously high level.
Another analyst who made the post-9/11 pilgrimage to Saudi Arabia was Matthew Simmons, an advisor to Dick Cheney's energy task force and a one time contributor to George Bush's energy plan during the 2000 campaign. An investment banker who has specialized in the energy industry for 30 years, Simmons visited Saudi Arabia for six days in 2003 as part of a U.S. energy delegation and, like Roberts, came away skeptical. Could Saudi Arabia really double its production rate over the next decade? For that matter, could it increase its production rate at all? Or had Saudi production already peaked?
His interest piqued, Simmons turned to perhaps the most honest available resource about Saudi Arabia's oil industry: The over 200 technical papers written since 1961 by Aramco (and then Saudi Aramco) engineers and managers and published by the Society of Petroleum Engineers in Richardson, Texas. Simmons admits that this is a very small keyhole through which to peer in order to estimate the true state of the Saudi oil industry, sort of like trying to decode Linear B from only a couple of slabs. Still, he is convinced that the reports, especially the more recent ones on which he primarily relied, present a consistently disturbing picture. The result of his analysis is Twilight in the Desert, whose title summarizes his conclusion: He thinks Saudi oil production—and therefore world oil production—is in a lot more trouble than anyone is letting on.
Once again, water is at the core of the critique. Of Saudi Arabia's 10 million bpd of oil, about 90 percent comes from a mere seven giant fields, all of them old. Ghawar, a uniquely gigantic field which all by itself accounts for more than half of Saudi Arabia's output, has been in production since 1951. A massive water injection program was begun in the early '60s, and today more than 7 million barrels of seawater are required daily to keep Ghawar going. Even at that, though, the best evidence indicates that Ghawar's production may have already begun declining.
Simmons presents a considerable amount of engineering evidence to back up his contention that Ghawar's best days are drawing to a close—and then, just as the lay reader is ready to scream for mercy, does the same in minute detail for Saudi Arabia's other major fields. In fact, Twilight in the Desert is more monograph than book, a detailed and technical assessment that's heavy on references to permeability (delightfully measured in millidarcies), the Arab D geological formation, rock homogeneity, oil-water contact planes (Ghawar's being mysteriously tilted), reservoir fractures, and more.
Fundamentally, though, Simmons's argument can be broken into two parts. The first and most detailed is a contention that Saudi Arabia's mainstay oil fields may have already passed their production peaks and are unlikely to ever supply more oil than they produce right now.
The standard response to this argument is that new technologies are allowing us to extract ever increasing ratios of oil from aging fields, but, in a clever bit of rhetorical jujitsu, Simmons stands this argument on its head. Saudi Aramco, he writes, is already using the most sophisticated technology in the world. Vertical wells are less and less common, replaced years ago by more efficient horizontal wells and more recently by even more efficient Maximum Reservoir Contact wells designed to suck the last possible drop out of aging oil pockets. Geosteering, 3-D seismic imaging, and increasing use of downhole intelligence are routine. Saudi technicians have a computer complex so sophisticated, they can literally stand in a room wearing special glasses and get a three dimensional view of reservoirs over a mile underground.
In other words, there remains nothing to try. The best technology known to man has already been put to use all over Saudi Arabia in an increasingly desperate attempt merely to keep production steady at 10 million bpd. In the vernacular of the oil industry, Saudi oil fields have been in “secondary recovery” mode for years, and long experience elsewhere in the world has already taught us the limits of the advanced extraction technologies now being used in Saudi Arabia. They can mitigate production declines after a field peaks, but they can't stave off the peak itself. More money and more technology won't bail us out here. We're up against geological limits, not financial ones.
The second part of Simmons's argument concerns exploration for new sources of oil in Saudi Arabia. Contrary to conventional wisdom, which assumes that Saudi Arabia is a vast expanse of desert that has only been lightly explored, Simmons presents considerable evidence to indicate that, in fact, almost every square mile has been mapped with the most sophisticated available modern tools—but with little return. In recent years, only one major field has been discovered outside the Eastern Province (home to all other major Saudi oil fields), and its performance has been problematic. The possibility of finding major new fields outside the Eastern Province looks considerably less promising today than it did a couple of decades ago.
Simmons suggests that the Saudis have tacitly acknowledged this reality in their decision to pour most new investment into seeking to revive old fields instead of drilling in new ones. After all, why would Saudi Aramco expend so much effort on expensive attempts to resuscitate aging fields were there any genuinely promising new fields to exploit instead? Simmons concludes: “Unless some great series of exploration miracles occurs soon, the only certainty about Saudi Arabia's oil future is that once its five or six great oil-fields go into steep decline, there is nothing remotely resembling them to take their place.”
Against Simmons's arguments are two things. First, he has access to extremely limited information. As he admits, he's trying to connect some very faint dots based solely on scattered technical reports and what little public data exist. Second, the Saudis themselves, who do have access to plenty of information, have consistently claimed that they can significantly increase oil production over the medium term—and they've never missed a shipment yet. As the Center for Strategic and International Studies (CSIS) recently put it, Simmons's argument “depends on the Saudi Aramco managers being wrong or covering up massive risks and development problems, and virtually all of the other analysts examining world oil reserves and production potential being wrong about both the size of the world's oil reserves and the ability of modern technology to provide future significant gains in ultimate recovery.”
In other words, Simmons's view is very much a minority one, a fact of which Simmons is well aware. Still, if Saddam Hussein was able to fool the world (and perhaps himself) about Iraqi WMD capabilities, it's equally possible that the Saudis are fooling the world (and perhaps themselves) about their production capacities. Indeed, just as Saddam felt that his power in the region depended on the perception that he possessed WMDs, perhaps the Saudis feel that their world influence depends on their reputation as a source of limitless oil.
Simmons himself avoids such speculations, but in other respects, he seems comfortable in his contrarian role. As the CSIS report implies, he is skeptical that magical new technologies that will allow oil companies to substantially reinvigorate old fields outside Saudi Arabia, and he does believe the Saudis themselves are either lying or in serious denial about their own future capacities—and that the rest of the oil industry has lazily taken their assurances at face value for years instead of investigating them closely. He also implicitly puts the question to his skeptics: If the Saudis are so anxious to soothe the world's fears, why don't they produce the detailed field-by-field reports, test-well analyses, and exploration results that would convince everyone they're telling the truth?
For Simmons, this is no idle question. His main fight these days is to push for increased transparency in the oil industry so that independent analysts can rely on more than guesswork to figure out how much oil we have left. It's a good cause as far as it goes, since the almost complete lack of solid information in the oil patch leads different analysts to wildly diverse conclusions. Peak oil doubters, for example, project a world production peak sometime around mid-century, if ever. They note that production has continued to increase for decades despite warnings of decline ever since the first oil embargo. They point out that estimates of world oil reserves have increased since 1980 despite the fact that we've gulped down more than 500 billion barrels of the stuff during that time. And they argue that higher prices will promote additional exploration and more extensive use of costly technology, while making it profitable to develop otherwise remote deepwater and Arctic oil fields.
But a growing number of analysts view these arguments as Pollyannaish at best and obtuse at worst. Yes, production has risen steadily over the past century, but declining oil fields mean this is unlikely to continue in the future. Claimed reserves have increased, but this is due more to political and statistical finagling than to actual new discoveries. And the slowing rate of big new finds combined with the increasing number of disappointments suggests that we shouldn't count on future mother lodes to bail us out. Saudi Arabia really is our last, best hope. If Simmons is right that Saudi Arabia's oil production has peaked, so has the world's.
Still, even the peak oil ideologues who make these arguments can't agree on how close the peak actually is. Princeton professor Kenneth Deffeyes jokingly pinpoints the peak on Thanksgiving 2005, Colin Campbell's latest prediction puts the date around 2007, and other peak oil supporters suggest dates anywhere between last year and 2015. As Simmons and others admit (or perhaps warn ominously), we won't know for sure that oil production has peaked until a year or two after it happens.
Even if the doomsayers are right, solutions are hard to agree on. Market forces will certainly solve part of the problem. As prices increase, demand for oil will level out and production will—for a while—increase slightly as it becomes profitable to drill in marginal fields that are currently lying fallow. But this obscures the fact that high prices, as bad as they are for an economy addicted to cheap oil, aren't the worst prospect facing us. The real problem is spare capacity.
Spare capacity is not the same as the possibility of future discovery, which is necessarily speculative and, in any case, won't be on line for years, if ever. Rather, it's pumping capacity that is currently unused but can be turned on immediately if needed in a crisis. Saudi Arabia, for example, was able to open the taps on its wells practically overnight during the 1979 Iranian crisis, and then again in 1991 during the first Gulf War. If that immediate spare capacity hadn't been available, oil prices wouldn't have just spiked, they would have skyrocketed.
But those days are gone. Twenty years ago, OPEC had spare production capacity of about 15 million bpd. A decade ago that had dropped to 5.5 million bpd. By 1990, spare capacity has dropped almost to zero. What this means is that arguments over the exact timing of peak oil are increasingly academic. No matter who's right, what we can say with some certainty is that even if oil production continues to grow, it will grow slowly, which means that supply will barely keep up with rising demand.
In other words, it's likely that we're now in a permanent state of near zero spare capacity, which in turn will lead to an increasingly unstable world. As we enter an era in which even Saudi Arabia has no spare capacity to smooth out supply disruptions elsewhere in the world, any blip in supply, whether from political unrest, terrorism, or merely unforeseen natural events, will cause prices to carom wildly. A world with $100 per barrel oil is bad enough, but a world in which a single pipeline meltdown could cause prices to skyrocket to $300 per barrel for a few months and then back down is far worse.
What to do? Any serious policy solution has to be based on four fundamental pillars: increased production, development of alternative fuels, conservation, and increased efficiency. And because these are all very long lead items, the time to start is now. After all, if the peak oil theorists are right, we have only a few years left until oil production peaks and then starts to decline. But even if they're wrong, the peak is still only 10 or 20 years down the road—and instability induced by spare capacity is a looming problem regardless.
So, why hasn't anyone in either party seriously acknowledged the reality of peak oil? It's not because they don't know about it. George Bush is a former oil man, after all. “He tells me to keep speaking out loudly and honestly about our energy situation,” Simmons informed a reporter who asked what Bush thought of his recent peak oil warnings, but the all too obvious follow-up—does Bush believe he should do anything about it?—was left hanging.
Unfortunately, the answer is all too easy to guess. Among Bush and his Republican allies, energy policy is almost entirely focused on one thing: opening up the Arctic National Wildlife Refuge to drilling. And while acknowledging peak oil might help with that fight, it would also open up a Pandora's box of issues Republicans are desperate to avoid. Conservative orthodoxy on taxes prevents any serious discussion of conservation measures like increased gas taxes, and Republican friendliness to business interests prevents consideration of stronger gas mileage standards for SUVs or federal standards for energy-friendly building codes. Bush and other Republican leaders pay lip service to development of alternative fuels, but serious funding is nowhere to be seen. The energy plan currently on offer from the White House is derided by practically everyone on both right and left as little more than a transparent set of payoffs to Bush administration cronies.
Democrats have their own set of problems. Opposition to drilling in ANWR is almost religious despite the fact that environmental damage to the Arctic wilderness would probably be modest. Increased mileage standards have more support, but auto union opposition keeps them on the back burner. Looming over all these specific policy proposals, however, is an even bigger fear: being tagged as an energy Cassandra. Call it Jimmy Carter-itis: No one wants to follow in the footsteps of the man who wore cardigan sweaters on TV and warned about an era of limits—and turned out to be wrong. Democrats paid for that with 12 years of political exile.
All of which is bad news. Even if we prepare ourselves for the peaking of oil production with a sensible, broad-based energy plan, we'll still be faced with the pain of prices marching relentlessly higher for years to come in order to match demand to steadily diminishing supplies. If we're not prepared, though, the bad news of peak oil becomes potentially catastrophic: An oil shock leading to global recession at best and a long string of resource wars at worst. Given the choice between these two bad alternatives, and the long lead time required to implement any kind of serious energy plan, we'd be well advised to get started now.
Post a Comment
<< Home