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Have the Saudis Hit Peak Oil?

| 17 Comments | 1 TrackBack

The article I clipped below uses a book by a oil industry insider to back the claim that the Saudis have passed 'peak production' on their main oil fields and, due to their H20 injection/extraction techniques, they will rapidly exhaust what they have left.

I would not be shocked if the following were true, the Saudis lie about nearly everything that is important to them, but it has the feel of environmentalist Mathusalen "I-told-you-so" doomsaying to it. Still, this CV does have me watching closely:

"First, a few words about the author of Twilight in the Desert. Matthew ("Matt") Simmons is not a militant environmentalist or anti-oil partisan; he is chairman and chief executive officer of one of the nation's leading oil-industry investment banks, Simmons & Company International. For decades, Simmons has been pouring billions of dollars into the energy business, financing the exploration and development of new oil reservoirs. In the process, he has become a friend and associate of many of the top figures in the oil industry, including Bush and Cheney. He has also accumulated a vast storehouse of information about the world's major oilfields, the prospects for new discoveries, and the techniques for extracting and marketing petroleum. There is virtually no figure better equipped than Simmons to assess the state of the world's oil supply. And this is why his assessment of Saudi Arabia's oil production capacity is so devastating."

The Saudi oil bombshell, by Michael T Klare is published in the Asia Times, whose domain seems to be down at the moment. Some excerpts:

"Saudi Arabia is about to face the exhaustion of its giant fields and, in the relatively near future, will probably experience a sharp decline in output. "There is only a small probability that Saudi Arabia will ever deliver the quantities of petroleum that are assigned to it in all the major forecasts of world oil production and consumption," Simmons writes in Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. "Saudi Arabian production," he adds, italicizing his claims to drive home his point, "is at or very near its peak sustainable volume ... and it is likely to go into decline in the very foreseeable future."

In addition, there is little chance that Saudi Arabia will ever discover new fields that can take up the slack from those now in decline. "Saudi Arabia's exploration efforts over the last three decades were more intense than most observers have assumed," Simmons asserts. "The results of these efforts were modest at best."

If Simmons is right about Saudi Arabian oil production - and the official dogma is wrong - we can kiss the era of abundant petroleum goodbye forever. This is so for a simple reason: Saudi Arabia is the world's leading oil producer, and there is no other major supplier (or combination of suppliers) capable of making up for the loss in Saudi production if its output falters...."

And...

"To fully grasp Saudi Arabia's vital importance to the global energy equation, it is necessary to consider the DoE's projections of future world oil demand and supply. Because of the rapidly growing international thirst for petroleum - much of it coming from the United States and Europe, but an increasing share from China, India and other developing nations - the world's expected requirement for petroleum is projected to jump from 77 million barrels per day in 2001 to 121 million barrels by 2025, a net increase of 44 million barrels. Fortunately, says the DoE, global oil output will also rise by this amount in the years ahead, and so there will be no significant oil shortage to worry about. But over one-fourth of this additional oil - some 12.3 million barrels per day - will have to come from Saudi Arabia, the only country capable of increasing its output by this amount. Take away Saudi Arabia's added 12.3 million barrels, and there is no possibility of satisfying anticipated world demand in 2025.

One could, of course, suggest that some other oil producers will step in to provide the additional supplies needed, notably Iraq, Nigeria and Russia. But these countries together would have to increase their own output by more than 100% simply to play their already assigned part in the DoE's anticipated global supply gain over the next two decades. This in itself may exceed their production capacities. To suggest that they could also make up for the shortfall in Saudi production stretches credulity to the breaking point."

So, what's up with the Saudis?

"In the end, therefore, it comes down to this: America's entire energy strategy, with its commitment to an increased reliance on petroleum as the major source of our energy, rests on the unproven claims of Saudi oil producers that they can, in fact, continuously increase Saudi output in accordance with the DoE's predictions.

And this is where Simmons enters the picture, with his meticulously documented book showing that Saudi producers cannot be trusted to tell the truth about future Saudi oil output....

...Essentially, Simmons' argument boils down to four major points:

  • Most of Saudi Arabia's oil output is generated by a few giant fields, of which Ghawar - the world's largest - is the most prolific.
  • These giant fields were first developed 40 to 50 years ago, and have since given up much of their easily extracted petroleum.
  • To maintain high levels of production in these fields, the Saudis have come to rely increasingly on the use of water injection and other secondary recovery methods to compensate for the drop in natural field pressure.
  • As time goes on, the ratio of water to oil in these underground fields rises to the point where further oil extraction becomes difficult, if not impossible. To top it all off, there is very little reason to assume that future Saudi exploration will result in the discovery of new fields to replace those now in decline....

...By drawing on these technical studies - cited here for the first time in a systematic, public manner - Simmons is able to show that Ghawar and other large fields are rapidly approaching the end of their productive lives."

Caveat reader - but something to think about.

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Tracked: June 29, 2005 8:49 PM
Excerpt: What are our favorite theofascist terror-supporters up to now? Joseph Braude, writing for T...

17 Comments

Would that be the same Michael T. Klare who writes for The Nation - http://tinyurl.com/doqqr ? I don't find it all that shocking that industry people would also rattle the drums about 'peak oil'. After all, if you or your friends are close to cashing in their options, why do your best to relieve anxiety and get shares of oil companies down to a normal level? Mr. Simmons runs an investment bank in natural resources, by the way. The current oil scare can't be bad for business. Incidentally, why has this report in the CS Monitor, which is hardly a right-wing newspaper, received so little attention? http://www.csmonitor.com/2005/0622/p25s02-wogi.html This is a group of experts, not just the one, saying that oil supplies are going to be on the increase. I am seriously considering buying put options in oil companies (which is not intended to be investment advice, just my personal opinion).

In the process, he has become a friend and associate of many of the top figures in the oil industry, including Bush and Cheney.

This is a suspect statement. If one is dropping names of top oil figures why drop two names that would be included for political purposes only?

If true this would make Iraq that much more critical. With large proven reserves that have been, well, underutilized over the last 15 years (not to mention an ax to grind against the Saudis).

You know, I've been against the Iraq mess since before it started. I didn't trust Bush.

But say Klare is right. And keep in mind he's far from the only one to say this, and keep in mind we have no reason to trust the Saudis on anything.

In those circumstances, if the men in the White House knew this, and leveled with the American people that the Iraq mission was about energy security, I think I -- and a lot of other people from wingnut to moonbat -- would have been willing to sacrifice, forgive, and gut it out.

OIL isn't just a leftist boogeyman, and everybody knows it. If the Sauds are about to crap out, every American knows what that means. Supplying Wahhabist terrorists is (for now) an abstract thing. Making gasoline $6 a gallon is direct and immediately understandable.

But did the President say anything about this tonight?

These are some comments I received from someone who used to work in the oil business. This first comment is on Saudi oil fields:

Petroleum production fields have limited lifespans, and one reason the Saudi ones are still producing at a high rate is because they were properly managed. Domestic oil production is operated on a "first come, first served" basis and oilfield history is full of periods when a large strike was followed by an oil boom, when every person who could hire a driller came in and pumped as much out of the ground as possible, as fast as possible. This has the effect of destroying reservoir pressure very quickly and leaves a lot of residual oil in the ground that could other wise be removed if reservoir pressure had been maintained. A lot of secondary (water flood) and tertiary (compressed gas) recovery processes are being done on old fields here in the US, especially in Texas where they have been in production for over 70 years in some cases. But the damage was done a long time ago. New production in the Gulf of Mexico and Alaska has taken up some of the slack, as the North Sea has fed the Scandinavians and the Brits for decades. But even those fields are becoming "mature" (which basically means over the hill). There may be some untapped reserves under the continental shelves off the West and East coasts, but it will be a long, hard political battle to gain permits to drill out there.

The Saudi fields are owned by the King and have been managed by a very short list of companies, with the most highly paid geologists in the world. There was no mad rush to develop them, and the reservoir hydrology has been maintained, permitting easy and efficient extraction. However, they will NOT last forever, and the possibility that they will become depleted in our lifetimes is very real. Other petroleum production in the Persian Gulf and in Russia is declining now, as well. The Russian fields, in particular, are suffering the effects of decades of mismanagement and neglect. It is critical that development of post-petroleum energy supplies be accelerated.

Our domestic utilities have been relying on coal for a long time. Nuclear power is also being revived. Windmill farms are sprouting up all over West Texas. The biggest use for petroleum, transportation, is going to be the biggest challenge.


This is another comment he made that relates to the concept of "punctuated equalibrium" as other oil sources are brought on line to start replacing Saudi crude:

There is a large shallow formation in the Permian Basin in which you can sink a well almost anywhere and produce between 1 and 5 barrels per day. You lose money at that production rate and it would take a lot more that $50/bbl to make it worth producing. There are many other places to look. What keeps them looking is the possibility of another large strike like the North Sea. There is a lot of interest in deep water drilling in the Gulf, where new technology is being put into play, and eventually the Atlantic Seaboard and Pacific Coasts will see offshore development, despite the screaming protests of them that's agin it.

When the Saudi fields start declining, world energy prices will rise and we will see the same economic consequences we saw in the 70's - inflation and unemployment, among others. Honda, Toyota, and GM are actively working on hydrogen fuel cell technology, in anticipation of this. They have functioning autos, but the cost and range are still limiting factors. Even with hydrogen fueled autos, the hydrogen requires large amounts of energy for production. That means coal and nuclear electrical production facilities. We will move away from internal combustion engines (at least for personal travel), but the transition will be a lot less expensive and traumatic if we start planning for it now.

Bland assurances that everything will be OK will only shift the burden of managing it to the next generation of talking heads in DC. They will be better off than the House of Saud. When it becomes obvious that they no longer control the world oil market and that the wealth of the kingdom is going away, the radicals will try to take control. If they succeed, heads will roll, literally.

I don't expect to see gas go below $2 a gallon again. We will be lucky if we are not paying $3 a gallon before the year is out.

There are also other sources of oil available at higher prices. Canada's Alberta Tar sands and Venuzuela's tar sand deposits are economically viable oil sources at current prices. The issue is the long term price point for the multi-billion capital investments that need to be made to extract the oil.

I expect that Canada will see tar sand oil extraction development very soon. Given the current political corruption problems in Canada's ruling party and its minimal representation in the western provinces. The coming of major oil funds from those tar sands promises major political changes in Canada

There are also technologies that will change the nature of power generation like magnetohydrodynamics for cleanly burning high sulfur coal and particle bed nuclear reactor technology which promises to be both scalable to sizes smaller than current major nuclear plants, thus lowering capital investment risk, and being fail safe besides.

The problem with particle bed ractors is that uranium is a limited resource and unless we go to breeder reactors -- and lots of readily available plutonium -- it will run out as well.

There is no free lunch here.

The prediction that world oil production will soon (or possibly has) peaked has been around for a while. In fact, a little part of me hopes that it will happen soon.

Only when we are finally faced with the crisis will we finally turn to other energy sources (like nuclear, for example) which can ultimately wean us from stuff that fuels radical islam.

Yes, the end of cheap oil will be a real economic hardship while our economy adjusts. But adjust, it will.

For the Middle Eastern despots who have squandered the wealth acquired through oil sales, the end of their oil reserves will be an unmitigated disaster. Were the oil to suddenly disappear, Saudis would again become the street-sweepers in Cairo. They have no institutional resiliance, as we have in the West, and will suffer badly.

Just my $.02
DRK

Mr. Telenko has it just about right.

The Saudis have not needed to overproduce their fields. In fact, their "swing production" efforts have resulted in strong domestic Saudi criticism for selling at today's price what will be worth much more tomorrow, all as a "favor to the US". When they've had problems with the price of oil, it was because they were bringing in--in oil boom times--more money than they could wisely spend. There continues to be domestic pressure to reduce production.

But the Saudis aren't just putting all their eggs in the oil basket. They've moved strongly into natural gas, both as a byproduct of oil production (no more flaring, for instance) and in tapping natural gas reserves that will see them well into the next century. They're also moving toward more verticle integration, talking of running their own gas stations abroad, through privatized ventures.

While the percentages have slipped over the past 20 years, the Saudis are still investing in solar power research (In the 1980s, they had the highest investment in such research in the world). Even when oil runs out, they're still going to have more sunlight than they need.

The Center for Strategic and International Studies issued a report last month on Saudi oil production, effectively disputing Simmon's claims. The Saudis are also continuing to explore for new oil, finding 6K bbl/day fields every few months.

Trent, your point (#5) about long-term pricing is important, and widely unappreciated. Private organizations contemplating an investment in the energy sector are looking to achieve certain financial returns, in terms of return on investment, return on capital employed, or another metric. For big projects, hundreds of millions to billions of dollars are involved, over decades. Both project-specific and economy-wide risks have to be figured into every decision.

In this regard, two of the impediments to energy development have been

  • the "low" price of oil, when seen in terms of the cost-per-barrel-equivalent of wind, oil-shale, LNG, hydrogen, etc., and
  • the unpredictability of the price of a barrel of oil 5 or 10 years hence.

This second point has held true because OPEC, and Saudi Arabia in particular, has had a significant ability to adjust production to produce a target price. Saudi Arabia's cost of extraction has been so low (cause of them finally being implemented--sustained high oil prices--will be mistaken for the effect. In other words, the talking point will be that Conspiracies of Western elitist plutocrats have inflated oil prices so that they can profiteer with their malign oil-shale, offshore, nuclear, coal, and LNG projects. (I assume that solar, wind, tide, and conservation will escape this criticism for Sacred-Green-Cow reasons.)

Rising oil prices mean real pain, and especially for poorer people, and poorer societies. As your oil-industry friend's common-sense statement goes, "the transition will be a lot less expensive and traumatic if we start planning for it now. The Greens are wrong about a lot of things (IMO), but they are spot-on in sharing that critique.

Post #8 immediately prior got mangled in the move from Preview to Post. The culprit was my use of the "less than" symbol, misinterpreted by software as a bungled html call. Trying again...

Trent, your point (#5) about long-term pricing is important, and widely unappreciated. Private organizations contemplating an investment in the energy sector are looking to achieve certain financial returns, in terms of return on investment, return on capital employed, or another metric. For big projects, hundreds of millions to billions of dollars are involved, over decades. Both project-specific and economy-wide risks have to be figured into every decision.

In this regard, two of the impediments to energy development have been

  • the "low" price of oil, when seen in terms of the cost-per-barrel-equivalent of wind, oil-shale, LNG, hydrogen, etc., and
  • the unpredictability of the price of a barrel of oil 5 or 10 years hence.

This second point has held true because OPEC, and Saudi Arabia in particular, has had a significant ability to adjust production to produce a target price. Saudi Arabia's cost of extraction has been so low (less than $5/bbl IIRC) that they can make money at almost any price point. The Royals have been sensitive to demands (pleas?) from Washington to keep prices down for US political and economic reasons. Plus, lower prices mean a higher volume of sales.

As a point of reference, Osama bin Ladin, whose Salafist/Wahhibbi ideology is very close to that of the Saudi elites, proclaimed in one of his screeds that the "just" price of oil would be $144/bbl. It's unclear to me why those elites have sold Saudi oil for $18 to $40 per barrel for most of the past decade. A sense of responsibility for the World Economy, or the fates of the world's poor? (doubtful.) Concern over the value of their own First World investments? (possible.) Their sense that, hey, Saudi Black Gold is a virtually limitless resource? (addressed in this post.) The widespread over-quota production ('cheating') by OPEC cartel members? Private or implied threats from Washington?

In any case, one of the effects of the end of the 'cheap' Saudi oil era will be to make many alternatives both more profitable and less risky. However, given the appeal of Know-Nothing ideologies, it seems unlikely that these projects coming on-line will be seen as a Good Thing. The cause of them finally being implemented--sustained high oil prices--will be mistaken for the effect. In other words, the talking point will be that Conspiracies of Western elitist plutocrats have inflated oil prices so that they can profiteer with their malign oil-shale, offshore, nuclear, coal, and LNG projects. (I assume that solar, wind, tide, and conservation will escape this criticism for Sacred-Green-Cow reasons.)

Rising oil prices mean real pain, and especially for poorer people, and poorer societies. As your oil-industry friend's common-sense statement goes, "the transition will be a lot less expensive and traumatic if we start planning for it now. The Greens are wrong about a lot of things (IMO), but they are spot-on in sharing that critique.

It's unclear to me why those elites have sold Saudi oil for $18 to $40 per barrel for most of the past decade.

A Saudi Minister of Petroleum said that the Stone Age hadn't ended because lack of stones. That is, technological development, not petroleum shortage, will terminate the Oil Age, and countries with vast reserves (no matter what speculators' propaganda tells) might find someday that they are loosing value. That is the reason why Saudis have always tried to keep the barrel's price down.

Joe A (#10),

Good (& amusing) point. A similar one made by the pundit who noticed that, for all of crude's wondrous qualities, its owner can neither bathe in it nor drink it. However, I don't think these help us think about the problems we may be facing.

Energy isn't hard to find. High-density, portable, storable, convenient, abundant energy that is cheap: that's another story.

Cars (etc.) can be made to run on lots of fuels. But each currently has some major problems (range, engine cost & lifetime, safety).

For most, it's very hard to see a sustainable price as being anything near gasoline at ~$2 to ~$4 per gallon.

And it's hard to see how the candidate replacement fuel would become available in about the quantities that we now use as gasoline.

If gas or its equivalent costs $~10 to ~$20 per gallon, cars will still run, but it's easy to see that major disruptions in the lifestyles and the economies of First World nations will result.

Which is why these conversations keep circling back to oil, and to Saudi Arabia. Petroleum is just too darn useful as a fuel (and a chemical feedstock) for a lot of worries that its stocks will lose their value in the forseeable future. Barring some very unexpected developments.

Saudi Minister of Petroleum said that the Stone Age hadn't ended because lack of stones. That is, technological development, not petroleum shortage, will terminate the Oil Age, and countries with vast reserves (no matter what speculators' propaganda tells) might find someday that they are loosing value. That is the reason why Saudis have always tried to keep the barrel's price down

That plus the spread of Wahhabism around the world is how the Saudis are doing their best to keep us living in the past.

Of course, it's hard to blame them for wanting to maintain their exorbitant style of living. It's not so hard to blame us for cooperating with them.

#6

"For the Middle Eastern despots who have squandered the wealth acquired through oil sales, the end of their oil reserves will be an unmitigated disaster. Were the oil to suddenly disappear, Saudis would again become the street-sweepers in Cairo."

Why is this a problem for us? They have been the chief funders and sponsors of fanatical islamism. Without money, they will be a much less malign influence.

AMac (#11)

I agree. I am not talking about an abruptly end of the Oil Age. I am thinking in a place for petroleum such as today has coal. Important but not life threatening. Please note that oil replaced coal in ships begining in 1916, due to military reasons, but only started to do so in trains in the 1950's. It will be a very long process, spanning decades.

What for me are the key questions now is that scientifics are developing breakthrough technologies, such as Very High Temperature Gas Reactors, Iodine-Sulphur cycles, coal gasification, hydrogen distribution hardware, fuel cells, etc that pave the way to oil substitution in some segments of the energy market, and that there is a driving force (record high oil prices) to pour billions in those developments and start some pilot applications. With the barrel at $18 all this had no sense.

Probably the first applications of hydrogen obtained from nuclear sources may take place in the Japanese industrial sector, in order to obtain energetic independence in such a troubled neighbourhood. Once the technology is developed and applied, prices will go down and other segments will join. Transport might be the last on the reasons you say. What is needed (and what the Saudis wanted to avoid) is a first push.

If gas or its equivalent costs $~10 to ~$20 per gallon, cars will still run, but it's easy to see that major disruptions in the lifestyles and the economies of First World nations will result.

I think oil prices follow a psychological game. An important statement of it is something like that mankind may end without petroleum. This is true only for some oil producer countries' societies. In times of need mankind has always taken the next technological step, as Bosch and Haber fixed the nitrogen of air to make fertilizers in the begining of the 20th century, when world supply was threatened. Since the Stone Age the answer has been the same: technology. High oil prices only accelerate this process.

Joe A,

On this subject, two good web-log sources (with links to other sources) are Randall Parker (relevant 2003 post here) and Steven den Beste (link to part 4 of his 2002 5-parter here).

These two technically-savvy people represent close to the range of informed opinion on the overall scope of the U.S. energy challenge, in my opinion. I say that having just listened to my local NPR affiliate's characteristically Laputan Watermelon evangelism on biodiesel. Sigh.

For most, it's very hard to see a sustainable price as being anything near gasoline at ~$2 to ~$4 per gallon.

That is the price of a gallon of gas in the UK. It is not like the British have stopped using the car.

Probably the first applications of hydrogen obtained from nuclear sources may take place in the Japanese industrial sector

Why not use electricity instead of hydrogen. Much easier to deal with and less leakage. Besides they are already using electricity so no changeover costs

AMac (#15)

Yes, I agree again. It is needed a high density energy source. That is the reason why it has to be nuclear. I don't believe in biodiesel, bioethanol or wind energy, low density and quite often subsidized energy sources.

a (#16)

Why not use electricity instead of hydrogen. Much easier to deal with and less leakage. Besides they are already using electricity so no changeover costs

The (Japanese) idea is to build a 1 GW (thermal) very high temperature nuclear reactor, operating at 950C. Some of its coolant loops may provide heat to a Iodine-Sulphur cycle, in which hydrogen may be obtained with an efficiency of 50%. Other coolant loops, and the heat rejected by this cycle, would be conducted to a helium gas turbine with an efficency above 40%, to generate electricity. Thus hydrogen is obtained in a slightly more productive way, especially if it is used for heating. Other advantages are that can be stored, therefore production has not to match demand at any time, and some internal transport vehicles may be powered by it.

Some of this reactors may supply all the energy is needed in an industrial area around a city, decoupling its performance from oil prices.

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