Finding the Peak - Part 2

Continuation of May 2003 presentation to ASPO meeting in Paris

By Matthew Simmons

In 1999 the Natural Petroleum Council projected that supply growth in natural gas would be adequate to increase gas use by 36% by 2010. In 2001 we had a record drilling boom for Natural Gas. This failed to budge supply. In 2003 natural gas clearly faces a crisis. The United States and Canada is in decline.

What we all missed in 1999 was that no one could come to subtract unconventional supply growth, coal bed methanes, tar sands, deep water associated gas, and these giant gas wells down to 18 to 20 thousand feet vertical, from the conventional base, and discovered conventional base at about fifty feet... (unintelligible) [p]eaked through Europe in the nineties and is now approximately 35 BCF (Billions of Cubic Feet) a day. So it turns out the United States gas experience, uh, has experienced about the same phenomena that oil did 30 years ago.

The North Sea experience is interesting. The North Sea had all the worlds' best operators, state of the art technology. Its peak was assumed to be years away in 1996 and 97. In 1999 the U.K. Sector peaked. In 2002 the New Eastern sector peaked. The North Sea has the world's best field by field production data. Seeing peaking is easier in the North Sea than anywhere else but few people seem to study the data. Peaking, it turns out, even in the North Sea is easy to ignore. And then there's the experience of the Caspian Sea.

In the early nineties the Caspian seemed to be the next Middle East. In 2001 we had 20 out of 25 dry holes that dampened the enthusiasm for the Caspian significantly. In 2001 Kashagan was finally discovered, deemed to be the greatest field in the decade. In 2002 BP and Stat Oil quietly sold their 14% of Kashagan for 800 million dollars. In 2003 British Gas put their 17% on the block for 1.2 billion dollars. Which raises, in my opinion, the question, "What do these original parties know about the world's greatest field or do they merely want to spread the wealth? I think what this all means is that non-OPEC oil, particularly outside the Soviet Union, is either peaking as we speak, or has already peaked.

Any serious analysis now shows solid evidence that the non-F.S.U. non-OPEC oil has certainly petered out and has probably peaked. F.S.U.'s supply is suspect or should be. A new frontier is always a possibility but it is becoming increasingly unlikely now that deep water is basically here and come and gone.

And serious energy planners need to assume non-OPEC supply is at a plateau. But thank heavens for the Middle East. The big non-Middle East OPEC producers are also past the peak. Algeria and Libya could probably still grow but they're too small to offset everyone else. And only the Middle East can logically be explained to replace declines elsewhere.

The Middle East's transparency is an oxymoron but there are some data that shed some light. And so let's basically spend a few minutes looking at the Middle East, the Promised Land.

Middle East energy is the Promised Land. All roads the roads lead to Rome and to the future of oil and gas Rome is the Middle East.

The Middle East is where we still have abundant reserves. It's still cheap to produce; it's still extremely unexplored. So if the rest the world is long in the tooth thank Allah for Mecca. But are we so sure this is the truth? It turns out that the Middle East oil and gas so far is not all over the Middle East. The Middle East covers an enormous land mass, but all of the oil and gas as we know it today is compressed into an interesting golden triangle. And all the great finds happened years ago. In the past three decades exploration success has been modest in the Middle East abyss. Is this because no one looked very hard or because there's not much else to find? Here is the interesting golden triangle of the Middle East; If you start at Kirkuk in the north and you draw a line down through the great oil fields of Iran, going down south and come over six or seven hundred miles picking up the great fields of the UAE and come back up 800 miles to Kirkuk virtually every field of any size between 1909 and the late sixties is probably in that basin.

It turns out that Saudi Arabia has what they thought was a fabulous discovery outside that in 1989. By 2003 one field and five satellites needed gas injected to create flows to get about 200,000 barrels a day. So it's also interesting to take the United States and superimpose this same golden triangle on part of the United States on the part of the United States I grew up in. It basically covers most of Arizona and part of Utah, so it's not a very big area. So if all roads lead to Rome then one area, Saudi Arabia, is clearly home port. Saudi Arabia became the most important oil exporter once the U.S. peaked. Though also not trusted, Saudi Arabia has constantly tried to become the world's most trusted supplier of oil and they generally have done that. Saudi Arabia has assumed a virtually limitless amount of cheap oil. But let me tell you about some of Saudi Arabia's oil and gas challenges. In Saudi Arabia there have been no major exploration successes since the late sixties. Almost all of Saudi's production comes from a handful of very old fields. Almost every field has high and rising water pressure. Ghawar, the world's largest field injects seven million barrels a day of seawater to prop up reservoir pressure. And outside North Core hundred barrel [unintelligible] have been very hard to find. Some key fields have never worked out. Others have now watered out. And it takes utter logic to plan for Saudi Arabia's future.

What Saudi Arabia's real energy costs might be is that Saudi Arabia is probably no longer a low cost producer. Lifting costs, plus, may now rise exponentially. Natural gas parting costs are extremely high and have been elusive. But what is Saudi Arabia's right price for oil? I would argue that no one really knows because we lack the data.

But it turns out with a little bit of hindsight that the optimists turned out to be wrong. While the optimists estimate, the economist rectifies, the debate still rages on; the jury basically has now rendered the verdict. The optimists have lost. Too much field data now proves their total thesis was wrong. Supply never surged, demand did grow. But as it grows it still falls. This doesn't prove though that the pessimists were right. The pessimists unfortunately and ironically might also be wrong. Most serious scientists worry that the world will peak in oil supply. But most assume that this day of reckoning is still years away. Many also assume that non-conventional oil will carry us through several additional decades. They were right to ring the alarm bell. But they too might also be too optimistic. Non-conventional oil unfortunately is too non-conventional. Light oil is easy to produce and convert into usable energy. Heavy oil is hard to produce and extremely energy intensive and very hard to grow rapidly. It turns out the United States of America has nine fields left that still produce over 100,000 barrels a day. And three of the nine have turned out to be located in California and on average are 103 years old. The reason these fields are still there is that they're very heavy oil. And heavy oil can last forever but it's very hard to get out of the ground. And it takes a remarkable amount of energy to convert heavy oil into usable energy.

Five years ago I barely had thought about the question of, "What does peaking mean and when might it occur?" I was intending at the time though to study the concept of depletion and the phenomenon that field after field was tending to peak fast and decline at rates that were unheard of before. The uh, uh, I think basically that now, that peaking of oil will never be accurately predicted until after the fact. But the event will occur, and my analysis is leaning me more by the month, the worry that peaking is at hand; not years away. If it turns out I'm wrong, then I'm wrong. But if I'm right, the unforeseen consequences are devastating

But unfortunately the world has no Plan B if I'm right. The facts are too serious to ignore. Sadly the pessimist-optimist debate started too late. The Club of Rome humanists were right to raise the 'Limits to Growth' issues in the late 1960's. When they raised these issues they were actually talking about a time frame of 2050 to 2070. Then time was on the side of preparing Plan B. They like Dr. Hubbert got to be seen as Chicken Little or the Boy Who Cried Wolf...

In 1957 the Sputnik woke up to the rest of the world. By 1969 we had a man on the moon. That was not easy, but the job got done. Could an energy Sputnik create a similar wake up call? If we had such a wake up call is it too late? Is there a Manhattan Project or an Apollo program that would work? It turns out that reliable energy is the world's number one issue. Creating reliable and affordable energy opens the door to solving the problem of the world's water, food, and healthcare. Without reliable energy all these other needs dull.

The world is still growing. There five billion people on the earth today that are still either maturing in age or yet to be that old. And five billion people still use little or no energy. If the world's oil supply does peak, the world's issues start to look very different. Thank heaven the debate began even if it might have been too late. Thank you. I'd be happy to answer any questions.

Questions and Answers (not verbatim)
Hi. I'm Steve Andrews. Given your message now and given that you've had a half hour in the Oval Office with president Bush, why is there such a disconnect between the apparent policy of the administration and the harsh reality of the message you just gave this audience?

A. I think that there are people within the Bush Administration including the President and Vice President... I think it was unbelievably discouraging to see what occurred after the Bush Energy Plan was introduced .... And then after 9/11, the administration got totally distracted in dealing with all the events that they've been dealing with since then. I will tell you that there is a growing genuine concern in Washington about what is happening with natural gas today.

Q. I've been reading your papers for the last two years, and I want to congratulate you on really good work, and in many cases it's work that I would have expected from a gas company, not from an investment banker. Last year, you defended the administration's concept of depletion...and you show a real genuine concern for the future of the world,... and the hydrogen proposal is really a fantasy, don't you think it is time for a more enlightened energy policy.

A. That would be wonderful but I think that it is going to take a while. There really aren't any good energy solutions for bridges, to buy some time, from oil and gas to the alternatives. The only alternative right now is to shrink our economies. This is a tough question and I have no answers.

Q. I know that you are on the books to bring back nuclear power back into the industry.

A. Positive news. The Yucca Mountain is not complete. We have to figure out how to remove the nuclear waste. The bad news is that we have had one bad accident in Ohio and one in South Texas in which they found some borax acid that had become powder...is this a defect in the Westinghouse design. These are things which could set nuclear back 5 to 10 years.

Q. Mike Ruppert, From The Wilderness -- In the Baker Institute-CFR Report from April, 2001, you were kind of dissenting and you called for a Manhattan Project-type investment, what would that entail?

Q. Second question – In the war on terrorism since 9/11, we have gone to Afghanistan, and we've seen some pipeline development across Afghanistan, we've seen Iraq, now Saudi Arabia, developments in West Africa, also in Colombia where the terrorism coincidentally seems to appear exactly where the oil is or in the swing producing nations, do you believe that is all coincidental? (Laughter)

A. (More laughter) Those are pretty intelligent questions. What I encourage people to think about in terms of energy blueprints is to think about them in terms of the Marshall Plan. I still believe that there is an urgent need for an energy Marshall plan. And couple that with a water energy program. I don't know if you can draw any parallels that every place we have energy we also have terrorism other than just musing about the fact that all I the last twenty years while we have apparently benefited from these unbelievably low bargain basement prices, the prices were so low that none of the host nations were able to basically create any semblance of a modern society, and over a 20-year period of time, all of their populations exploded, they all have high birthrate, very young people, and terrible economies. Unfortunately, we ended up with the door prize that was so low that it was hard for them to maintain a company infrastructure and doing nothing to start rebuilding their societies. I suspect that had they been lucky enough to have had energy ...two or three times higher and then worked carefully with these producing countries to be enlightened about how... instead of putting in some young and powerful leaders to start creating a middle class... and people would have started focusing more on how to become more prosperous. I guess in hindsight that is easy to say.

Times Article Viewed: 4047
Published: 22-Jun-2003

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