The Fading Twilight of Oil - Part 2
By Bill Moore
PUBLISHER'S COMMENT: We decided to make part one of our two-part interview with Matt Simmons available to all EV World readers in keeping with our mission to educate all of our readers about this critically important topic. We also did it, admittedly, in the hope that it will encourage more readers to become premium subscribers. Of the estimated 70,000-115,000 people who read EV World every week, less than 1,000 are paid subscribers. We hope that by offering those of you who haven't yet joined the ranks of EV World supporters a taste of what our premium content is all about, you'll spend $29 on what we believe is a worthwhile and important educational effort. You'll get access to great information, often found nowhere else, and you'll help spread the word.
In part one of our interview, I asked Simmons about the argument that the reason production is falling in many of the traditional oil producing nations -- Mexico, Venezuela, Saudi Arabia -- is because they haven't been investing in their petroleum infrastructure, particularly in exploring for and developing new fields.
He quickly cut me off, saying that view was "naive and superficial".
"I could have said stupid," he added, pointing out that this is a view being fostered by 'Big Oil' company executives who are finding themselves locked out of most of the remaining large, relatively easily accessible -- and profitable -- oil fields.
Okay, I could buy that, but what about the contention that Saudi Arabia must surely have vast, untapped reservoirs of crude oil under its ocean of desert dunes that it can turn to once its giant fields along the Persian Gulf decline?
Simmons agreed that there are other regions of the country that may hold the promise of more oil: the deep water part of the Red Sea along its western border, the vast Empty Quarter, and an area along its border with Iraq that is nearly the size of the state of California.
"If you read between the lines," he explained, "what they are effectively saying is the other 95 percent of the Arabian peninsula, we've given up.
"In the folklore of the petroleum industry... they list about 80 other fields, but none of them have any published evidence that they are going to try to produce them. And where they are spending this $90 billion is going back and trying to rejuvenate some very poor performance old fields.
"These guys aren't stupid. If they really thought that one or two of these other 80 fields would be easy to do, with $100 oil, they'd be dusting them off."
Shifting briefly to a Wall Street Journal article on Exxon Mobil that was published the day of our interview, Simmons noted that the company reported the worst reserve replacement performance in the history of the company. If this trend continues, Exxon Mobil will be out of oil in a generation, which is why its executives continue to grouse about getting access to nationalized oil fields, and was willing to risk a feud with President Hugo Chavez in Venezuela, but more on that dispute further down.
After the 2004 debate and the publication of 'Twilight in the Desert', Saudi Aramco responded by making more data public than it ever had, so I asked if Simmons was satisfied with what they'd published.
"Oh, heavens no! It doesn't provide a scrap of data on exactly how much each field actually produces."
To highlight the problem, he pointed to the company's recent annual report that it produced 8.3 million barrels of oil a day. When he adds up his estimates for the various fields, it appears that instead of Ghawar producing the 5 million barrels Nansen Saleri contends in his "Sunrise in the Desert" presentation, it may, in reality, only be producing 3 million. But that's the problem, without the data, we have no way of knowing how close to exhaustion these aging fields are.
Turning to the National Petroleum Council's "Facing the Hard Truths about Energy", I asked what was his take on the 2007 report.
Being a senior member of the NPC, Simmons told me that he "took vociferous disagreement" with the draft of the report. He explained that it was supposed to be an in depth analysis of the implications of peak oil. Instead, out of the 145 pages of the report, there were only, by his estimate, seven paragraphs on peak oil. So, rather than addressing U.S. Energy Secretary Bodman's original request, the NPC deflected it by talking about everything from climate change to automobile efficiency.
It wasn't until the Summer of 2007, when the NPC convened two days of panel discussion, which included Simmons and seven other peak oil proponents, that the senior members of the project had what he called "an epiphany."
"'Gawd, you guys are talking about flow rate,' they realized. 'We thought you were talking about remaining useful resources.'
"I thought, literally, give me a break," Simmons told me. "These senior vice presidents of these major oil companies thought peak oil was remaining usable resources versus flow rates? My daughters understand that. "That's a real, honest-to-God story."
So, did they decide to revise the report? I asked.
"No, they basically didn't want to scare anybody."
Simmons not only filed a letter of protest, but threatened to drop out of the NPC, realizing in the end that he could do more inside the industry as a voice for change than being on the outside.
"I love the oil and gas industry," he said, adding that it's been very good to him. "But I know that oil and gas companies are far less realistic about how the world works than the service companies have had to be, because the service companies are actually out there doing the heavy lifting.
"There is a tendency of the industry, within the largest companies in the industry, to think it's not our job not to worry people and to make sure they realize how reliable we are and how resourceful we are. And don't scare everyone, because if we scare somebody, we might get government intervention that will be harmful to us.
"That has become the mantra. I don't know where these guys come from on that, because I think that we all are responsible for being stewards, for this one thing will end the 21st century real fast, if we don't get this right."
Few Questions and Even Less Action
While it would appear that peak oil is starting to get more coverage in the media, from blogs to news stories to History Channel documentaries, there appears to be very little concrete action by policy makers to address it.
Simmons pointed out that in all the scores of American presidential debates, the topic of peak oil has yet to come up. The closest was when the candidates -- both Republican and Democratic -- were asked what they'd do about high oil prices. The responses were predictable, but lacking in any real substance or acknowledgment of the daunting scope of the challenge, he said.
"I know how long it takes to create a new fleet of cars. I know that we have 280 million vehicles on the U.S. roads today. And I know that we have almost 900 million vehicles around the world. You can create the newest car you ever wanted, but it will... take decades before we have enough of them introduced until we start moving the needle."
Unbelievably Scary Stuff
I asked Simmons about a quote attributed to him in a recent Wall Street Journal article that he'd found some "unbelievably scary stuff" related to peak oil.
He replied that it was the latest series of petroleum engineering reports he'd read that cover not just the Saudi fields, but also other Middle East oil fields from Iraq to Iran to the United Arab Emirates.
"You've got to remember that in the 240 papers that I listed [as] my sources in Twilight in the Desert, those early papers started out in the late 60s and most of them were written between 1995 and... 2002. When I did my big data dump it was in the summer of 2003."
So to get more current, he downloaded the most recent technical papers written in 2006 and 2007, several coming from a conference he attended in Dubai in early December, 2007, just three months ago.
"They are so much more specific now... and also I know more how to read the key words better.
"These great fields of the Middle East... and I went beyond Saudi Arabia... I read all the papers about Iraq, Iran -- a few on Iran, not many -- and then Kuwait and the U.A.E... and all the great oil fields in the Middle East are set up to go into the sort of North Sea tailspin soon."
Simmon's definition of "soon" is within the next few months or "maybe we have the next two or three years before it happens", he stated.
"But when it happens, it's going to go fast," he warned, accelerated by the very tools that made possible enhanced oil recovery in the first place. He pointed out that the reason the Saudi's claim to have the water encroachment into some of their fields under control now is because they are using a special type of nibble the automatically cuts off that portion of the well head when water reaches 30%. Simmons contends that hardly suggests they have water under control if the well simply stops producing oil.
We changed tack and talked about Exxon Mobil's lawsuit against Venezuela, a spat that has escalated to international proportions with banks in Europe freezing PDVSA assets and President Chavez threatening to stop shipments to the United States.
Simmons analysis of the situation is that Exxon Mobil will ultimately loose the fight because Chavez's government controls the oil. He thinks the oil giant was irresponsible in going into Venezuela and negotiating a deal where for close to the next two decades they will only have to pay the country one percent in royalties for the oil they siphon off.
"One of my arguments to the oil industry when the oil companies went into these heavy oil field projects in Venezeula is they cut too good a deal. When you pay the host government, who is a struggling, poor country, a one percent royalty for the first 17 years, you're asking to be nationalized once you've spent your money.
"Our firm has always had a very strong philosophy in doing negotiations since we've done about a $100 billion in mergers and acquisition projects, we've done a lot of negotiations, that if you basically don't have a 'win-win' philosophy, most of your deals will never close. And I'll take 99 percent and you take 1 percent is not a 'win-win' philosophy.
"It's a macho behavior that is find kind of odd. Chavez is going to win."
Are We At Peak Yet?
I asked him if we are at the peak yet, to which he responded that he's seen some "very alarming data" from the U.S. Energy Information Agency's monthly world crude oil production report. That data, which he admits is getting a "bit stale," shows that world conventional crude oil production peaked in May of 2005 at 74.3 million barrels a day. By August 2007, that number was down to 72.5.
"When you are almost two million barrels off your mark... and we need to be marching from 74 up to 80 real fast... we can't do that. There are too many countries that are now into irreversible decline.
"Had I not known as much as I know now about the Middle East, I would say 'Well, we'll just go in and drill a few more wells in the Middle East and find another Ghawar.' That isn't in the cards.
"From a planning stand point, we're far better off saying it's too bad we screwed up so badly, but we should assume that was peak oil and we should prepare for the possibility, maybe not high probability, but possibility that by 2013, which is five years from now, we'll be down to 65 (mmbd)... But we could never have gotten to 100."
That's not just Simmon's view, it turns out. That the world will never reach 100 million barrels of crude oil production a day was recently echoed by the heads of Total, BP and Shell, the latter of which forecast that by 2015 all the easily accessible oil will have been pumped and that the world would either have to "scramble" in a fight for the last reserves or follow a "blueprint," or what Simmon's referred to as "road that hasn't been built yet.
"And if they are saying 2015 or 2016, their internal people are probably saying 2009."
My last question to Matt Simmons was what advice he'd give the next U.S. president. To find out how he responded you'll need to listen to the interview in its entirety, which you should do anyway since this article represents only a synopsis of the full conversation. We encourage you to use either of the two MP3 players at the top of the page or to download the 5.88MB file to your computer for transfer to and playback on your favorite MP3 device.
Also be sure to see my comments about Simmons' 3-hour presentation to senior Pentagon brass the day before we talked in the February 26, 2008 Insider Update. You'll find it intriguing, if not downright alarming.